Are you at least thinking about funding your retirement? Congratulations! Most people don't even do that much. Plenty of people simply do what they can when they can, and then hope for the best. Many of them end up disappointed in their golden years.
A great starting point in making a retirement plan is just figuring out what's possible, and what's clearly out of reach. One possibility that's surprisingly within reach is multiplying a current wad of cash held in a retirement account by a factor of 10 in only 25 years. Here's how that's a relatively likely feat.
How to 10X your retirement savings
It's true. It is possible to 10X a seemingly small nest egg now in just 25 years... a little less than 25 years, in fact. The key is compounding.
If you're not familiar with the idea, compounding (within the investing arena, anyway) just means you're earning more and more money on your previous returns. Since each year's gains make the starting yearly stash a little bigger than the previous year's beginning amount, the average size of the gains on your savings grows every year. In mathematical terms, compounding is the same as exponential growth -- each year's growth is greater than the prior year's progress.
The image below illustrates the idea, presuming you're starting out with a cash stash of $20,000 held in a retirement account invested in a simple S&P 500 (^GSPC 0.02%) index fund. While the index doesn't dish out this degree of gain every single year, for the purpose of our illustration we'll assume the S&P 500's average annual gain of 10% will be the actual yearly return, with any dividends paid along the way being reinvested in more shares of the same fund. Within 25 years, the position is worth nearly $217,000.
Data source: Calculator.net. Chart by author.
Notice how much bigger the yearly gains are nearer the end of the 25-year stretch than they are at the beginning. That's compounding. You've got a little bit more invested every year because the investment grew a little bit each year. After a while, the "little bits" end up being a lot.
Just start somewhere... anywhere
There are a couple of important footnotes to add here.
First, while the S&P 500's average gain really is right around 10%, it rarely achieves this actual result in any given year. Sometimes it's only up 5% in a calendar year. Other times it advances on the order of 20%. In still other years, it loses ground. You really need long-term investment timeframes to smooth out this volatility and achieve the typical long-term average gain of 10%.
Second, remember that while the net gains in our hypothetical retirement account above aren't taxed as the position grows, these funds may be taxed as they're withdrawn from the account. Plan accordingly.
Even so, the fact that it's possible to turn a relatively small sum of money into a markedly larger one in less time than most people usually devote to a career should excite you.
The trick, of course, is getting your hands on $20,000 (or whatever amount now will get you to your retirement goal then) to start the compounding process at least 25 years before you retire. A few people can do it, but a lot of people can't.
That's OK, though. See, what the growth model above doesn't consider is the annual contribution you very likely will be able to make while you're working. Even if you can only start out with $2,000 and then only add $2,000 to the effort per year, you'll still end that 25-year stretch with a stash of a little more than $218,000.
Data source: Calculator.net. Chart by author.
This should be encouraging to anyone who may feel they can't save enough now or later to matter. The nickels and dimes do add up in time.
So, if you haven't done much -- or anything -- yet to build your retirement savings, start today even if that start is small. The more thought and effort you put into it, the easier it gets to scrape together a couple thousand bucks (or even more) every year. It's certainly worth the work knowing you'll be entering your golden years with a healthy nest egg.
