Are you expecting a refund this year? Make effective use of the opportunity.
In the tax year 2021, the average tax refund was $2,827, according to the IRS.
This is an extremely generous sum of money. And, if you use it intelligently, it could end up not only helping you with your money in the short term but also leaving you with a retirement investment account that is significantly greater than it would have been if you had not used it at all.
In fact, you’d be surprised to learn how large the tax returns you receive this year could grow to reach by the time you’re ready to retire from the workforce.
How your tax refund might potentially increase the value of your retirement account by $50,000
As a result, how can your tax refund help you add $50,000 to your retirement savings account? It’s a straightforward process. In the event that you receive a refund that is near to the average of $2,827 when you submit your 2021 tax returns in 2022, you can place the money in a safe investment and forget about it.
After 30 years, if you put $2,827 into an investment that generates 10 percent average yearly returns and leave the money alone, your initial $2,827 investment will have grown to $49,329, a return on your investment of 10 percent.
All told, that’s close to $50,000 in one single contribution! Furthermore, if you invest in an S&P 500 ETF, you may reasonably expect a 10 percent average yearly return, as the S&P 500 financial index has consistently provided this average return throughout time for long-term investors.
If you’re wondering how it’s possible to end up with such a large sum of money from a single investment, the answer is a straightforward one: compound interest.
The value of money invested over a long period of time can grow significantly because, year after year, you earn interest and dividends, which are reinvested and generate additional interest and dividends.
This is referred to as compound growth. Consider the force of a snowball sliding down a hill to get a sense of its magnitude. With each spin, it accumulates more snow and grows in size as well.
As that larger ball continues to roll, it gathers more and more snow on its own, without the assistance of anybody else. A tiny snowball — or a relatively small $2,287 investment — can grow into something much larger over a long period of time if it is allowed to accumulate.
In this case, as you will have less time to invest in your refund or if your refund is less, you will definitely end up with less money because there will be less time for compound growth to work its magic, or you will start with a smaller initial “snowball.”
However, no matter how large or small your tax refund from the IRS is, placing it into a quality investment and leaving it alone for as long as possible can be one of the most effective and straightforward methods to build a larger retirement nest egg.
The realization that a tax return refund might grow in value significantly over time should serve as a powerful motivation to put the cash to work for you in the future if you don’t need them for urgent emergency obligations today.
The larger nest fund that has grown as a result of your sensible investing in 2022 will put you a long way closer to enjoying the financial security that your senior self deserves when the time comes for you to retire.