The Motley Fool

Are you making this common retirement mistake?

Investing for retirement may not be an easy process. Finding the capital to buy shares, knowing where to invest it and holding on to those positions for the long run can be challenging.

However, starting to plan for retirement as early as possible could be the most important factor in determining your level of passive income in older age. It provides the greatest opportunity for compounding to have a positive impact on your returns.

Therefore, avoiding the common mistake of starting to invest for retirement when it is too late could be crucial. With the stock market being more accessible than ever in terms of its costs, and there being a wide range of opportunities available today, now could be the right time to start planning for retirement.

Impact of compounding

The past performances of indexes such as the S&P 500 and FTSE 100 show that an annual total return of around 8% is achievable for long-term investors. While that may not sound like an especially impressive return over a short time period, in the long run it could make a major impact on your retirement prospects.

In fact, over a 30-year time period, for example, an annual return of 8% would produce a total return of around 900% on capital invested at the start of the process. By contrast, capital invested over half that period of time would grow by a much more modest 220%. As such, investing for a longer period of time allows compounding to catalyse your portfolio, which could bring retirement a step closer.

Starting today

Despite this, many investors fail to give themselves adequate time to build a retirement portfolio. In many cases, this may be due to a high cost of living making it difficult to obtain capital with which to invest.

However, the falling cost of sharedealing over recent years means that it is easier than ever to invest modest amounts of capital on a regular basis. Many sharedealing providers, for example, have regular investment services that offer discounted commission rates. Similarly, tracker funds that mimic the returns on major indexes offer a low-cost entry point to the stock market for investors.

Furthermore, there are a wide range of buying opportunities on offer today for investors who have a long-term time horizon. Risks facing the world economy such as a trade war and political instability in Europe appear to have caused a reduction in the valuations of many shares. This could mean that they offer wide margins of safety that translate into more favourable risk/reward opportunities for the long run.

Therefore, starting to invest today could be a sound move. Not only could it mean that compounding has the greatest possible impact on your returns, the opportunities available could produce a more favourable investment outlook that improves your retirement prospects.

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