Seeing returns on your retirement savings doesn't have to be complicated or time-intensive. More than anything, it's about having time and patience. With those two attributes, you'd be surprised at just how much of the heavy lifting they do to make sure you see admirable returns on your investments.
Here's how you can 10x your retirement savings by barely lifting a finger.
Image source: Getty Images.
Time is your best friend
You'd be hard-pressed to find a better phenomenon or wealth creator in investing than compound interest, which occurs when the interest you make on an investment begins to earn interest on itself. It can't be overstated how powerful this is. However, to really reap the benefits of compound interest, the No. 1 thing you'll need on your side is time. The earlier you begin saving and investing for retirement, the better.
Let's imagine you have $10,000 to invest for retirement right now and your target retirement age is 67 (the age for full retirement set by Social Security for anyone born in 1960 or later). If you invest the full amount into an index fund that tracks the S&P 500 -- which historically returns about 10% annually over the long run -- here's the approximate amount you'd have accumulated by 67 at different starting ages (accounting for a 0.03% expense ratio charged by the fund).
| Starting Age | Years Until 67 | Annual Return (Including Fees) | Amount Accumulated by 67 |
|---|---|---|---|
| 25 | 42 | 9.97% | $541,400 |
| 30 | 37 | 9.97% | $336,600 |
| 35 | 32 | 9.97% | $209,300 |
| 42 | 25 | 9.97% | $107,600 |
Data source: Calculations by author.
In this scenario, as long as you have at least 25 years until retirement, you can expect 10 times your original investment -- with no additional work, just your one-time investment.
This table also illustrates the true power of time and compound interest. Although it takes 25 years to go from $10,000 to $100,000-plus, all it takes is an additional seven years to accumulate another $100,000.
Dividend reinvesting works wonders
In our example above, we operated as if the investment didn't pay out dividends. But if the same amount were to be invested in a dividend-paying asset, the effects of compound interest are enhanced. This is especially true if you enroll in a dividend reinvestment plan (DRIP), which takes the dividends you're paid and uses the money to purchase more company shares.
To really see the power of a DRIP, imagine we use the $10,000 to purchase 100 shares of a company at $100 each. If the company's dividend yield remained at 2.75% and the stock's price increased 10% annually, here's how much you would have approximately accumulated in the same amount of years from our nondividend example.
| Years Invested | Number of Shares Owned | Share Price | Investment Value |
|---|---|---|---|
| 42 | 282 | $5,476 | $1.54 million |
| 37 | 249 | $3,400 | $846,600 |
| 32 | 220 | $2,111 | $464,400 |
| 25 | 185 | $1,083 | $200,300 |
Data source: Calculations by author.
Of course, this is just a hypothetical example, but more than anything, it shows how dividend reinvesting and compound interest pair together to work wonders for your portfolio. A single $10,000 investment can more than 20x its value without any additional work in 25 years and can 10x its value after 20 years.
Utilize a Roth IRA if you're eligible
One of the best aspects of a Roth IRA is that you contribute after-tax money, so you won't owe taxes whenever you make withdrawals in retirement. This is different from other retirement accounts like a 401(k) plan or traditional IRA, where your tax benefits are up front and you pay income taxes on withdrawals. Being able to make contributions and letting them grow and compound tax-free can save you tens of thousands in retirement.
