How to Save Your Retirement Today

The stock market is down nearly 40% year to date, a fact that is painfully obvious to anyone who has checked their account balance lately.

Such a destruction of wealth has caused me some heartburn (not to mention heartache), and it may have done the same to you. But I'm not deterred in my course, because I believe in the power of the world's greatest get-rich formula. My colleague Brian Pacampara outlines the formula in detail, but here's the quick overview:

FV = PV * (1 + r + d) ^ n

Where:
FV = future value
PV = present value
r = rate of return from price appreciation
d = rate of return from reinvested dividends
n = time (or number of years)

Back to basics
At a time like this, it is critical to remember that four key drivers determine how much money you'll have at retirement (or "FV" in the formula). They are:

• The amount you save (PV)
• The capital appreciation of your investments (r)
• Your reinvested dividends compounded (d)
• How many years you have until you need the money (n)

While the capital-appreciation part of the equation may have recently backfired, even it should eventually return. In the meantime, any new cash you invest will still build your nest egg and any dividends you reinvest will compound all the more quickly when stock prices are low. As long as you have the time to let the overall process of saving for retirement work, you can emerge from this crisis with a wonderful retirement ahead of you.

The right perspective for success
Let's keep in mind all the things that have happened over the past twenty years:

• The Persian Gulf War
• The Asian Financial Crisis
• The Nasdaq bubble
• Sept. 11, 2001
• The Second Gulf War
• Gasoline above $4 a gallon
• The Wall Street Panic of 2008

But despite all these hiccups, investors have earned 8% annualized returns over those two decades, turning every $1,000 invested into nearly $4,000.

I believe the notion of dividend reinvestment is crucial to a successful retirement. While capital appreciation is certainly an important part of your long-run returns, stock prices fluctuate in ways that often differ -- drastically -- from underlying business values. But with a collection of steady dividend payers, you'll weather even significant shocks in the market like the ones listed above.

Examine the following table:

*Data from Yahoo! Finance as of Nov. 30, 2008.

Over a 20-year time horizon, look at how much money you'd have today -- even after the market's recent haircut -- if you'd let those reinvested dividends compound on your behalf, all from an initial $1,000 stake.

Now more than ever
This table actually understates the case for dividends. Over the history of the stock market, 50% of returns come from reinvested dividends. But even that number expands dramatically during market downturns.

According to Professor Jeremy Siegel, excluding dividends, $10,000 invested in the S&P 500 just before the 1929 stock market crash would have been worth about $10,700 by 1954 -- essentially the same as if the Great Depression had never occurred and the market remained flat over that timeframe.

Had there been no downturn, investors who reinvested their dividends would have had $22,700 by 1954.

But because the stock market fell faster than dividends during the Great Depression, dividend yields rose, giving investors the opportunity to reinvest at lower share prices. Those who reinvested their dividends over that catastrophic downturn ended up with $44,400 -- about double the amount had there been no Great Depression, and quadruple the amount had they not been reinvesting.

In other words, rising dividend yields during market downturns like the one give us the opportunity to get more bang for our reinvested dividends.

One year ago, the S&P 500 was yielding 1.7%. Today, that number is 3.1%, the highest it's been since 1995.

You can do it!
It's important to remember that even with all we've lived through over the past 20 years, investors have been rewarded if they've let the combined power of time, money, reinvestment, and growth work its magic for them. Of course, a one-time investment like the example I gave isn't enough to fund your retirement. But by making regular contributions over the course of your career, you can build a strong nest egg to get you through your golden years.

As tough as the recent market meltdown has been, a strong plan that's built on those four basic drivers of long-run success can get you back on track toward a successful retirement.

If you're trying to pick up the pieces that have been scattered by the crashing market, then Robert Brokamp and the Motley Fool Rule Your Retirement service can help you build the right long-term perspective with advice, insights, and investment ideas. If you're ready to get started, you can check out the service without obligation to subscribe free for 30 days.

At the time of publication, Fool contributor Chuck Saletta owned shares of General Electric. Pfizer and JPMorgan Chase are Motley Fool Income Investor selections. Pfizer is a Motley Fool Inside Value pick. Hasbro is a Motley Fool Stock Advisor recommendation. The Fool owns shares of Pfizer. The Fool's disclosure policy dreams of retiring to a tropical oceanfront home, preferably somewhere without hurricanes.