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The Most Important Retirement Chart You'll Ever See

By Katie Brockman – Updated Aug 7, 2020 at 10:25AM

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This chart may help kick your savings into high gear.

Saving for retirement is one of the biggest financial goals you can aim for, and it's not always easy to achieve. The average worker expects to need roughly $1.9 million to retire comfortably, a survey this week from Charles Schwab revealed. For millennials and Generation X, the number is $2 million, while Baby Boom generation members need about $1.6 million.

Accumulating that much cash can seem impossible, but it might not be as challenging as you think. The key is to start saving as early as you can, then let compound interest do the rest of the work for you.

Senior couple sitting on a bench at the beach

Image source: Getty Images.

How compound interest can supercharge your savings

Compound interest -- which is essentially when you earn interest on your interest -- is an incredibly powerful tool as you're saving for retirement. It allows your savings to snowball over time, so the longer you let your money sit in your retirement fund, the faster it will grow.

To get an idea of just how powerful compound interest really is, let's look at a hypothetical example. Say you have a goal of saving $1 million by age 65, and you're earning a 7% annual rate of return on your investments. Here's how much you'd need to save each month to reach that goal, depending on the age you started saving:

Age You Began Saving Amount Saved per Month Total Savings by Age 65
20 $300 $1.029 million
25 $425 $1.018 million
30 $615 $1.020 million
35 $900 $1.020 million
40 $1,325 $1.006 million
45 $2,100 $1.033 million
50 $3,350 $1.010 million
55 $6,100 $1.011 million
60 $15,000 $1.035 million

Source: Author's calculations

Thanks to compound interest, the earlier you begin saving, the easier it is to build a healthy nest egg. But put off saving for too long, and it becomes exponentially more difficult to create a robust retirement fund.

Saving for retirement when money is tight

As important as it is to begin saving for retirement as early as possible, if you're strapped for cash, you may be focused on more immediate financial needs. However, keep in mind that the longer you wait to start saving, the harder it will be to catch up. So even if you can only scrape together a few dollars per week to put toward retirement, that's better than nothing.

To find more cash to save, first map out your expenses. If you don't already, begin tracking all of your spending so you know where every dollar is going each month. Next, separate your expenses into different categories. The more specific you can be here, the better. For example, rather than lumping all your food-related expenses into one category, split them up into "groceries," "takeout," and "special occasion dinners."

Once you have your categories, start cutting back wherever you can. The first expenses to eliminate should be the unnecessary ones, like a gym membership you don't use anymore or subscription services you forgot you were paying for each month.

Next, cut back on the nice-to-have expenses, such as dining out or hobbies. You don't have to eliminate these costs altogether. In fact, you probably shouldn't. By keeping some nice-to-haves, it will be easier to stick to your budget. Budgeting, in a way, is similar to dieting: If you eliminate all your favorite things entirely, it probably won't be long before you fall back to old habits. But if you make healthy lifestyle changes while still allowing yourself to splurge every so often, you're more likely to stick to those changes over the long run.

What if that's still not enough?

Sometimes you can do everything to cut costs but still can't manage to save much. If that's the case, try not to get discouraged. Remember that saving anything at all is better than giving up because you think your savings won't amount to anything.

With compound interest, time is your most valuable resource. Even if you can't save much right now, keep saving anyway. Given enough time, those savings can amount to more than you think.

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