Retirement can feel like a lifetime, especially if you’re in your 20s or 30s. With decades before you can quit your day job, it can be hard to prioritize retirement savings over current spending.
But it’s important to remember that the money that goes into your retirement accounts doesn’t stay there until you turn 67 – it continually grows through compound interest, which not only pays off your initial investment, but also on the interest you accumulate. .
Extrapolating the growth of your retirement savings over many years and seeing how much your savings can grow can relieve you of your monthly contributions and may even convince you to increase the amount of money you set aside on each paycheck.
CNBC Make It used a compound interest calculator to demonstrate how much you’d be at age 67 if you put aside $500 a month starting at different ages. Keep in mind that these calculations are made in a vacuum and do not take into account variables that can affect wealth growth over time, such as economic factors, increases or decreases in interest rates, cash receipts or emergency expenses.
If you start saving at 25
- With a 4% rate of return: $654,763
- With a 6% rate of return: $1,140,756
- With a rate of return of 8%: $2,073,982
If you start saving at 30
- With a 4% rate of return: $509,013
- With a 6% rate of return: $819,732
- With a rate of return of 8%: $1,367,255
If you start saving at 35
- With a 4% rate of return: $389,643
- With a 6% rate of return: $581,735
- With a rate of return of 8%: $892,892
If you start saving at 40
- With a 4% rate of return: $291,879
- With a 6% rate of return: $405,290
- With a rate of return of 8%: $574,495
If you start saving at 50
- With a 4% rate of return: $146,233
- With a 6% rate of return: $177,499
- With a rate of return of 8%: $217,338
How to start
If you haven’t started saving for your retirement yet, there are plenty of ways to get started.
Start by enrolling in your employer’s 401(k) plan and take full advantage of any deposit matching offered by your company, which doubles your investment for free every pay period. The maximum amount that workers under 50 can put into their 401(k) in 2022 is $20,500.
When it comes time to withdraw your 401(k) income in retirement, you pay taxes regardless of your tax bracket at the time. Because the account is funded with pre-tax dollars diverted from your paycheck by your employer, it reduces your taxable income each year you contribute.
You can also sign up for a Roth IRA account, which 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 great place to start investing because they’re funded with after-tax dollars, so your investment grows tax-free. You can also withdraw the money you’ve contributed at any time without a tax penalty, unlike 401(k)s which typically hit you with a 10% penalty if you access the money before retirement.
Apart from retirement accounts, you can also consider opening a taxable brokerage account. While one option is to fund this account with individual stocks, experts like Warren Buffett recommend that most people put their money in index funds, which are automatically diversified. In fact, the S&P 500, which includes companies like Amazon, Apple, and Microsoft, has outpaced inflation over the years.
“Consistently buy a low-cost S&P 500 index fund,” Buffett said in 2017. “Keep buying it through thick and thin, and especially through thick and thin.”
But the most important thing you can do when saving for retirement is to start as soon as you can, with the amount of money you can afford to set aside, even if it’s less than $500. . This will give compound interest the most time to work its magic.