Retirement can feel like a lifetime, especially if you’re in your 20s or 30s. With decades left before you’ll be able to leave your full-time job, prioritizing retirement savings over today’s spending can be difficult.
But it’s important to remember that the money that goes into your retirement accounts doesn’t just sit there until you turn 67 — it continually grows through compound interest, which not only returns a return on your initial investment, but up the interest you accumulate earns .
If you extrapolate the growth in your retirement savings over many years and see how much your savings can grow, you can take the pressure off your monthly contributions and maybe even convince you to increase the amount of money you set aside from each paycheck.
CNBC Make It used a compound interest calculator to demonstrate how much you would have by age 67 if you saved $500 a month, starting at different ages. Keep in mind that these calculations are performed in a vacuum and do not take into account variables that may affect wealth growth over time, such as:
When you start saving at 25
- With a yield of 4%: $654,763
- With a yield of 6%: $1,140,756
- With a yield of 8%: $2,073,982
When you start saving at 30
- With a yield of 4%: $509,013
- At a 6% yield: $819,732
- With a yield of 8%: $1,367,255
When you start saving at 35
- With a yield of 4%: $389,643
- At a 6% yield: $581,735
- With a yield of 8%: $892,892
When you start saving at 40
- At a 4% yield: $291,879
- At a 6% yield: $405,290
- With a yield of 8%: $574,495
When you start saving at 50
- With a yield of 4%: $146,233
- At a 6% yield: $177,499
- At an 8% yield: $217,338
how to start
If you haven’t started saving for retirement yet, there are many ways to get the ball rolling.
First, sign up for your employer’s 401(k) plan and take full advantage of any deposit matching your company offers, doubling your investment for free each pay period. The maximum amount workers under the age of 50 can contribute to their 401(k)s in 2022 is $20,500.
When it’s time to withdraw your 401(k) earnings in retirement, you’ll pay taxes based on your tax bracket at that time. Since the account is funded with pre-tax dollars siphoned from your paycheck by your employer, it lowers your taxable income every year you contribute.
You can also sign up for a Roth IRA account that you can fund up to the $6,000 annual contribution limit for 2022 if you earn less than $129,000 per year. Roth IRA accounts give you a wide range of investment options, including stocks, bonds, and ETFs.
Roth IRA accounts are a good place to start investing because they are funded with after-tax dollars, so your investment grows tax-free. You can also withdraw the money you deposit at any time with no tax penalty, unlike 401(k)s, which typically charge you a 10% penalty if you access the money before retirement.
Outside of retirement accounts, you may also consider opening a taxable brokerage account. Although one option is to fund this account with individual stocks, experts like Warren Buffett recommend that most people invest their money in index funds, which are automatically diversified. In fact, the S&P 500, which includes companies like Amazon, Apple, and Microsoft, has outperformed inflation over the years.
“Consistently buy an S&P 500 low-cost index fund,” Buffett said in 2017. “Keep buying it through thick and thin, and especially through thin.”
But the most important thing you can do when saving for retirement is to start as soon as possible with the amount of money you can afford to set aside, even if it’s less than $500 are. That gives compound interest the most time to work its magic.
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