Business 

The Most Important Retirement Chart Youll Ever See – The Motley Fool

The median amount of money that workers think they’ll need to retire is $500,000, according to a survey from the Transamerica Center for Retirement Studies. However, roughly one-third of survey participants expect to need more than $1 million to retire comfortably.

Building a million-dollar nest egg isn’t easy. However, by taking advantage of compound interest, you can let your money do most of the heavy lifting.

Older couple holding hands and dancing on the beach

Image source: Getty Images.

What is compound interest?

With compound interest, you’re not only earning interest on the amount you contribute to your retirement account — you’re earning interest on your contributions as well as all the interest that has already accumulated. That allows your savings to grow faster over time.

Compound interest is most effective when your money has as much time as possible to grow. So when you’re saving for retirement, starting as early in life as possible is key to building a robust retirement fund.

In addition, the earlier you start saving, the less you need to contribute to see exponential growth. And in some cases, you can retire with well over $1 million even if you’re only earning an average salary.

The median earnings in the U.S. is approximately $48,000 per year, according to the Bureau of Labor Statistics. Say you’re contributing 10% of that to your retirement fund, or $400 per month. Assuming you’re earning an 8% annual return on your investments, here’s approximately how much you could have saved by age 65 depending on the age you began saving:

Age You Began Saving Total Savings by Age 65
20 $1,855,200
25 $1,243,500
30 $827,100
35 $543,800
40 $350,900
45 $219,700
50 $130,300

Data source: Author’s calculations.

The more time you have to save, the easier it will be to save an extraordinary amount for retirement. Even if you don’t increase your contribution rate over the years, you can still create a hefty nest egg with help from compound interest.

What if you’re behind on your savings?

Compound interest is great if you still have decades left before retirement. But time is a luxury not everyone has. So what should you do if you’re falling behind?

No matter your age, it’s still smart to begin saving as soon as you can. Putting it off until you have more cash to spare will only make it harder to catch up later, so starting right now is ideal. You can always boost your savings later if you can afford it, but saving what you can now will give you a head start.

The only exception would be if you don’t have some savings set aside in an emergency fund. Unexpected expenses will pop up sooner or later, and withdrawing money from your retirement fund before you retire can result in some hefty penalties. By stashing around three to six months’ worth of savings in an emergency fund, you can leave your retirement fund alone and let compound interest do its job.

Whatever you do, remember that saving anything at all is better than ignoring the problem until it’s too late. The sooner you begin saving, the easier it will be for your money to reach its full potential.

Related posts

Leave a Comment