# Notes on Retirement Saving and Investing

Investing for your retirement does not have to be overly complicated. In fact, adopting a simple saving and investing plan helps to ensure that you'll have enough for your retirement. Use Target Nest Egg Calculator - Compute Investment Amount Needed to Accumulate a Pile of Money and Equal Annual Payment Forever Calculator to help determine how much money you'll need to save.

After you know how much you need to save and invest to fund your retirement, you can start to develop and specific plan to ensure financial security.

The following discussion shows how to get started saving and investing in stocks for the future.

## Riding the Compound Interest Curve

Compounding is the way to make money grow over time because you receive interest on interest payments.

\$1,000 invested for 20 years given a 6% annual return grows to \$3,207.14.

\$1,000 invested for 30 years given a 6% annual return grows to \$5,743.49.

Watch your money grow through the power of compound interest.

## Save and Invest Regularly

The way to accumulate money through compounding is to execute a systematic long-term savings and investment program. Decide how much money you can afford to allocate to the program each month and do it. Then each month you can purchase additional shares of stocks you own (this called dollar-cost averaging) or buy new stocks.

You do not need thousands of dollars to save and invest. Even \$50 or \$100 saved and invested regularly can add up to significant amounts over time.

See Recurring Investment Calculator how money grows with regular savings.

One way to ensure that you save is to set up an automatic transfer from your checking account to a savings account. Then use the money in the savings account to purchase long-term investments such as stocks.

## Buy and Hold Stocks to Benefit from Compounding

Stocks of U.S. companies have collectively grown on average about 6% per year since 1900. The growth varies widely from year to year so a buy-and-hold strategy is necessary to offset the annual volatility of returns.

The 6% annual rate of return is achieved by the increase in the price of the stock plus the dividends that companies pay to shareholders. The growth component is 4% and the dividend component is 2%.

## Own Dividend-Paying Stocks to Help Increase Long-term Returns

Many companies pay dividends to their shareholders. A dividend is an amount of money that is paid to shareholders after all costs have been met by the company. Most dividends are paid quarterly (four time each year). Shareholders receive one dividend for each share of stock that they own. If you owned 100 shares and the annual dividend were \$2 per share, you would receive \$200 in dividends for the year. So your quarterly dividend would be \$50.

Dividend payments vary greatly from company to company and some companies do not pay dividends.

Over many years annual dividend payments add up to help attain a 6% annual return.

You may elect to receive your dividends in cash or reinvest them to buy additional shares of stock in companies you own. For a long-term investor dividend reinvestment is a must. By simply checking the dividend reinvestment option in your brokerage account you will automatically increase your number of shares. For example, if a stock priced at \$100 pays a \$5 dividend and you owned 50 shares, you would purchase 2.5 shares (50 * 5 / 100). So now you own 52.5 shares. Therefore the next time a dividend was paid you would get dividends on 52.5 shares. Shares pile up with many years of dividend reinvestment

## Own Dividend-Paying Stocks that Consistently Increase Dividends

Many U.S. companies regularly increase their annual dividends. Increasing dividends helps to keep up with ongoing inflation. For example, the Dividend Aristocrats have increased their dividends every year for 25 or more years. You can own  all of the Dividend Aristocrats by owning the S&P 500 Aristocrats ETF (NOBL), a dividend exchange-traded fund (ETF) that owns a minimum of 40 Dividend Aristocrats. NOBL pays a quarterly dividend and its dividend yield (annual dividend / current price) is around 2%. Invesco High Yield Equity Dividend Achievers ETF (PEY), another ETF, with a dividend yield around 3% include stocks with relatively high dividend yields and consistent dividend growth.

## Benefit from the Long-term Growth of the The U.S. Economy

A third ETF to own is the SPDR S&P 500 ETF Trust (SPY). It consists of the largest U.S. companies traded on U.S. stock markets. Some of these companies pay dividends and some do not. SPY's dividend yield is around 1.5%. Because SPY includes stocks from all economic sectors, you will benefit from the overall growth of the U.S. economy. Of course this means that the price of SPY fluctuates with economic cycles.

Think of NOBL, PEY and SPY as your core holdings never to be sold. Hold them for decades and let price appreciation, dividend growth and dividend reinvestment work their magic to increase the value of your holdings.

In addition to owning these ETFs you could own other ETFs or individual stocks. You could hold them or sell them in the short run.

## Establish a Roth IRA and Build Your Investment Portfolio

Open an Roth IRA account with an on-line broker. A Roth IRA allows you to deposit up to \$6,000 each year. The major benefit of a Roth IRA is that you never pay federal or state taxes on any gains from your investments. With other types of retirement accounts gains are taxed.

Once you have your account, make an initial deposit and you'll be ready to invest.

To start buy equal dollar amounts of SPY, NOBL and PEY using 50% of the cash in your account. The remaining cash is available for future purchases.

Be sure to select the dividend reinvestment option for all of your dividend-paying investments.

Check how to set up automatic monthly transfers from your checking account to your Roth IRA.

Check out how to make automatic monthly purchases in the Roth IRA.

If you can't automate the investing process, be sure you do it regularly.

If you are interested in buying individual stocks, be sure to research them before you buy.