Is It Possible to 10X My Retirement Savings in 25 Years?

To be financially prepared for retirement, you shouldn't want to just save money; you should aim to grow the money you're saving. And what better way to do so than investing?

Investing for retirement doesn't have to be hard, nor should it be. By following conventional wisdom and focusing on the long term, you can be in a great financial position when it's time to enjoy the fruits of your decades of labor. With at least 25 years on your side, here's how you can put yourself in a position to possibly 10x your retirement savings.

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Compounding is the name of the game

There are few phenomena in investing, if any, quite like compounding, which happens when the money you make on your investments begins to make money on itself. To see how compounding really works, let's imagine you invest $1,000 into a stock that returns an average of 10% annually.

After the first year, you would have earned $100. Assuming you reinvest the $100, you'll earn 10% on $1,100 in the second year, making $110. In the third year, you'll be earning 10% on $1,210, making $121, and so forth. It's a moneymaking cycle that's responsible for the vast majority of wealth generation in the stock market.

When someone asks legendary investor Warren Buffett where his success and wealth come from, he won't hesitate to tell you compounding. He says his wealth "has come from a combination of living in America, some lucky genes, and compound interest." Its power can't be overstated.

Time rules all

For compounding to have the most impact, it needs time -- one of the greatest assets on any investor's side. It can do a lot of heavy lifting and make up for the lack in lump sums of cash to invest.

Take an exchange-traded fund (ETF) like the Vanguard S&P 500 ETF (VOO 1.95%), for example. The S&P 500 is the stock market's most popular index, and historically it has returned around 10% annually over the long run.

Past results don't guarantee future performance, but if we assume this trend continues, here's how a one-time $10,000 investment would look over different time spans (using the Vanguard S&P 500 ETF's 0.03% expense ratio).

Data source: author calculations

A one-time investment can more than 10x in value in 25 years averaging 10% annual returns, thanks to compounding. Most people won't bank on a one-time investment to set them up in retirement, but it shows the heavy lifting that time can do.

The investment adage "Time in the market beats timing the market" has held true through over the years, and there's no reason to believe this will change.

Reinvest your dividends

A dividend reinvestment program (DRIP) is when your brokerage uses the dividends you're paid to automatically buy more shares of the stock that yielded them. Instead of taking your dividends as cash, reinvesting them to increase your total shares can be very lucrative and add to the effects of compounding.

Receiving quarterly cash dividends isn't bad by any means, but they can be more powerful if you wait to receive cash payouts until retirement.

Suppose two investors invest $500 monthly in a fund with 10% average annual returns and a 2.5% dividend yield. Here's how the values would stack up in 25 years, with one person reinvesting dividends and the other receiving them as cash throughout that time.

Data source: author calculations.

The person receiving dividends as cash payouts would have made money over those 25 years, but it wouldn't be anywhere close compared to the more than $274,000 difference by reinvesting them. A DRIP can noticeably shorten the time it may take to 10x your retirement savings.