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Now let’s apply this to a real-world retirement situation. Under most circumstances, the most you can invest in an individual retirement account is about $6,000 a year. Let’s start with an initial $6,000 investment in, say, the S&P 500. Let’s assume that you are expecting a total return (price appreciation plus dividends) of 6% (that is about the historic average), compounded annually.
How much would you have after 10 years? You’d have $89,829. Here’s how it would look:
A 10-year investment ($6,000 invested each year, 6% return, after 10 years)
Money invested: $60,000
Return on investment: $29,829
That is a nearly 50% return on your money in 10 years. Not bad!
Wait, it gets much better. Now let’s look at what you would have after 20 years: $239,956. Your money doubles!