"A modest rate-of-return can accumulate a fortune over time.
You don't need to beat the market, do over-leveraging, or pick
the best stock to be rich. You just need to earn a decent
rate-of-return and let your money compound overtime."
-- Naved Abdali
Financial writer Naved Abdali nailed it. Becoming financially secure isn't as difficult as many people assume. We just need to learn a few basic principles about how money grows -- and then start saving and investing.
The most important retirement table you'll ever see
There are lots of important pieces of information related to retirement -- such as the average cost of healthcare in your later years (hint: it's high!) or how much you can contribute to a 401(k) each year (also a large amount -- up to $27,000 in 2022). I can't think of any more important piece of information, though, than a table showing how much you can amass over time.
Image source: Getty Images.
I credit such a table for giving me my own wake-up call. I saw it in my 20s, and it made me stop thinking about buying a fancy stereo system -- because I suddenly understood what else I could do with seemingly small sums.
Here's a powerful version of that kind of table, showing how much you might amass over time by investing various sums regularly, if you earn an average annual growth rate of 8%:
|
Growing at 8% for |
$10,000 Invested Annually |
$15,000 Invested Annually |
$20,000 Invested Annually |
|---|---|---|---|
|
5 years |
$63,359 |
$95,039 |
$126,718 |
|
10 years |
$156,455 |
$234,683 |
$312,910 |
|
15 years |
$293,243 |
$439,865 |
$586,486 |
|
20 years |
$494,229 |
$741,344 |
$988,458 |
|
25 years |
$789,544 |
$1,184,316 |
$1,579,088 |
|
30 years |
$1,223,459 |
$1,835,189 |
$2,446,918 |
Calculations by author.
Arguably the best route to long-term wealth is via investing in the stock market, which has averaged annual returns of close to 10% over long periods. There's no guaranteed return, though. Over your investing period, you might average 6% or even 12%. To earn roughly the market's return, you can invest in simple, inexpensive broad-market index funds.
The magic of compounding
What you're seeing in that table is the magic of compounding. With compounding, not only does your money grow, but the rate at which it grows increases, too.
You can see that in the five-year period between 10 and 15 years in the column for $10,000 annual investments. Your balance will grow from $156,455 to $293,243 -- an increase of $136,788. But in the five-year period between 20 and 25 years, the increase is a whopping $295,315. The amount by which your balance increased more than doubled -- all while you kept contributing that annual $10,000.
The phenomenal power of compounding can make you very wealthy -- even if you're only earning a schoolteacher's or nurse's salary. It just takes diligence.
Lessons from the table
Be sure to study the table closely. Take a look at how much more you can amass if you save $15,000 annually instead of $10,000 -- or if you can sock away $20,000 instead of $15,000.
Not all of us can save and invest such hefty sums, but you may be able to if you take on a side gig or two -- even for just a few years. Note that the sooner you do so, the better, because your earliest invested dollars can be your most potent ones, as they'll have the longest time in which to grow. Asking for a raise regularly might also pay off.
To put the sums in the table into perspective, consider the flawed but still useful "4% rule" -- which suggests that to make your nest egg last for around 30 years, you should withdraw 4% of it in your first year of retirement and then adjust future withdrawals for inflation. Let's say that you socked away $15,000 annually (that's $1,250 per month or about $288 per week). If it grew at 8%, you'd end up with $741,344 in 20 years. Applying the 4% rule, you'd take out $29,653 -- roughly $30,000 -- in your first year of retirement.
Think about how well that would work for you, along with any other income sources you expect in retirement, such as Social Security. If it doesn't seem like it will be enough, think about saving and investing more, or perhaps aiming to earn a higher growth rate.
If you need a wake-up call that it's time to start saving and investing for retirement, let the table above sink in. See that if you have sufficient time and can maintain the necessary discipline, you may well be able to save $1 million or even $2 million or more for your future. Applying the 4% rule, those sums would respectively generate $40,000 and $80,000 in your first year of retirement.
Much of your future financial security and comfort is up to you. Taking some steps now can make a big difference.
