It's hard to say with 100% certainty how much money someone will need for retirement, because different lifestyles will require different amounts. Regardless of how you plan to spend your retirement, I'm sure everyone can agree that it's much better to have too much money saved than not enough.
Strictly saving enough for retirement without investing is a tall ask for most people. Even if you could save $25,000 per year, it'd take you 40 years to get to $1 million if you just put the cash in a safe somewhere. Luckily, there's a phenomenon called compounding that can do a lot of the heavy lifting for you.
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Help your money grow faster
Compounding happens when the money you make on investments begins to make money on itself. For example, if you invest $1,000 and it earns 10%, you'll make $100. The next time you make 10%, it'll be on $1,100 instead of $1,000, so you'll earn $110. The next time, you'll earn 10% on $1,210 or $121, and so forth.
To really show the power of compounding, let's assume you invest $1,000 monthly into a fund that averages 10% annual returns (like the S&P 500 historically has long-term). Here's how much you would've personally contributed and the total value of your investments at the end:
| Years Invested | Personal Contributions | Total Value |
|---|---|---|
| 5 | $60,000 | $73,200 |
| 10 | $120,000 | $191,200 |
| 20 | $240,000 | $687,300 |
| 30 | $360,000 | $1.97 million |
| 40 | $480,000 | $5.31 million |
Data source: Author calculations. Rounded to the nearest hundred.
Above is the most important retirement table you'll ever see, and it has nothing to do with the specific numbers because those will vary based on how much you invest and your returns. It's the most important because it shows just how powerful time can be in creating wealth.
Notice above that investing for 20 years versus 10 years results in just over a $490,000 difference. Investing for 30 years versus 20 years results in just over a $1.28 million difference. Investing for 40 years versus 30 years results in a $3.34 million difference. In each scenario, the gap between the final value widens with time, even though the amount added each year stays the same.
Where you may lack in money to invest, you can make up for it by starting early and giving compound earnings time to work its magic.
Use a Roth IRA if you're eligible
One of the better retirement resources you can use is a Roth IRA, which lets you save and invest after-tax money and receive tax-free withdrawals in retirement. It can't be overstated how valuable it can be to take tax-free withdrawals in retirement after having your money compounded for (hopefully) years or decades.
For perspective, even if you only made a one-time $6,500 contribution to a Roth IRA -- the 2023 limit for people younger than 50 -- and didn't contribute another penny, you'd have over $113,400 if you averaged 10% returns over 30 years. And since the investment happened in a Roth IRA, every penny of it would be tax-free as long as you're at least 59 1/2 years old.
If we assume you fall into the 15% capital gains tax rate (most people do), using a Roth IRA could mean saving $15,000 in taxes per $100,000 in capital gains. Your tax savings could easily fall into the six-figure range depending on how much you make over time.
Roth IRAs have income limits for eligibility, so you should take advantage of it if you still can. One day you may cross the income threshold and not be eligible, although your investments will continue to grow until you take withdrawals.
Remain consistent
One of the most important things you can do as an investor is remain consistent. You should continue to invest through the bull markets, bear markets, and everything in between if you have the financial means. Even if you have to lower how much you invest, investing something is better than nothing.
There's a reason the saying "time in the market beats timing the market" has been echoed for decades: It's true. It may not always be easy to invest consistently during down periods in the stock market, but focus on the long term and keep your eyes on the prize.
