The earlier you start investing for retirement, the easier it is to build a substantial nest egg for it. There's one simple reason why that works: compounding. The sooner you start, the more time compounding will be able to work on your behalf.
With enough time, in fact, compounding can drive more of your returns than the amount of money you're able to sock away. It's thanks to its incredible power that even people of modest means can end up millionaires in retirement if they're able to start saving early enough.
Indeed, thanks to that outstanding ability to generate wealth over time, compounding is the one retirement savings hack that has created many millionaires and will continue to make more.
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Compounding's power in action
The first table shows how much you'll have to save each month to wind up a millionaire at retirement, depending on the rate of return you earn and number of years you have before you retire. The second table shows how much in total you'll have to save of that $1 million, with the rest provided by compounding.
|
Years to Go |
10% Annual Returns |
8% Annual Returns |
6% Annual Returns |
4% Annual Returns |
|---|---|---|---|---|
|
45 |
$95.40 |
$189.59 |
$362.85 |
$662.49 |
|
40 |
$158.13 |
$286.46 |
$502.14 |
$846.06 |
|
35 |
$263.40 |
$435.95 |
$701.90 |
$1,094.42 |
|
30 |
$442.39 |
$670.98 |
$995.51 |
$1,440.82 |
|
25 |
$753.68 |
$1,051.50 |
$1,443.02 |
$1,945.04 |
|
20 |
$1,316.89 |
$1,697.74 |
$2,164.32 |
$2,726.47 |
|
15 |
$2,412.72 |
$2,889.86 |
$3,438.57 |
$4,063.55 |
Data source: author.
|
Years to Go |
10% Annual Returns |
8% Annual Returns |
6% Annual Returns |
4% Annual Returns |
|---|---|---|---|---|
|
45 |
$51,516.00 |
$102,378.60 |
$195,939.00 |
$357,744.60 |
|
40 |
$75,902.40 |
$137,500.80 |
$241,027.20 |
$406,108.80 |
|
35 |
$110,628.00 |
$183,099.00 |
$294,798.00 |
$459,656.40 |
|
30 |
$159,260.40 |
$241,552.80 |
$358,383.60 |
$518,695.20 |
|
25 |
$226,104.00 |
$315,450.00 |
$432,906.00 |
$583,512.00 |
|
20 |
$316,053.60 |
$407,457.60 |
$519,436.80 |
$654,352.80 |
|
15 |
$434,289.60 |
$520,174.80 |
$618,942.60 |
$731,439.00 |
Data source: author.
The earlier you get started, the less you have to sock away each month and in total to wind up a millionaire by retirement. That holds true for any positive rate of return, and it makes starting as early as you can the most important thing you can do if you want a good shot of reaching millionaire status by the time you retire.
How to make investing a priority
As tough as it may feel like to come up with a little bit of money now to invest for your retirement, those charts make it clear that it only gets more expensive the longer you wait. If you can't come up with a little bit to invest every month now, what makes you think you'll be able to go from $0 to several times more than that that amount later in order to reach that same target?
The toughest part about being able to invest is to create a positive gap between your income and your costs. If you don't already have that gap in place, your first step should be to figure out how to create it. From the income side, you may be able to take on a second job, work overtime hours, negotiate for a raise, or figure out things you can sell to generate some one-time cash to help pay off debts.
From the costs side, the two most powerful tools you have to work with are prioritizing what really matters to you and paying off most debts you may have. When it comes to making priority calls, it's important to first recognize where all your money is going today. If you watch your money carefully, you might find that a decent chunk of it is being spent mindlessly on things you no longer care about or use.
Look for things like recurring subscription charges, absent minded purchases of things you don't really need, and costs that you could avoid with a little bit of pre-planning. Those costs are often the easiest to completely eliminate.
For costs you can't completely eliminate, look for ways to reduce your spending. Consider brewing your own coffee and brown bagging lunches instead of getting your morning brew at the coffee shop and always having lunch out. Other ideas include keeping your thermostat warmer in the winter and cooler in the summer and finding ways to keep your old car running longer instead of buying a newer one.
When it comes to debts, the debt avalanche method is the most efficient way to get your debts paid off. In essence, you line up your debts in order from highest interest rate to lowest interest rate. On every debt except the highest interest rate, you pay the minimums. On that highest interest rate debt, you put every penny you can, above and beyond that minimum, toward paying that debt off quicker.
Once it's paid off, then everything you had been paying toward it can be added to the payment amount of your new highest interest rate debt. Keep that up until you're either debt free of the debts you do have remaining are manageable and give you enough breathing room to invest.
Get started now
Regardless of where you are in your career, you will never again have more time before you retire than you do right now. That makes today your absolute best day to get started on your plan to put compounding to work for you.
Whether you're able to invest right away of whether you first need to create that gap between income and expenses, the sooner you begin, the longer compounding can work its magic. So get started now, and give yourself the most time possible to strive for that millionaire retirement.
