Retirement planning can seem stressful, but it doesn't have to be. Planning for a financially stress-free retirement starts with understanding your finances and ways to best maximize them as you go through your career. It doesn't take earning millions per year or becoming an investment guru; it can often come down to consistency.
If you want a table that can put retirement investing in perspective, look no further.
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The most important retirement table you'll ever see
| Years Invested | Personal Contributions | Total Value | Capital Gains |
|---|---|---|---|
| 5 | $60,000 | $73,200 | $13,200 |
| 10 | $120,000 | $191,200 | $71,200 |
| 20 | $240,000 | $687,300 | $447,300 |
| 30 | $360,000 | $1.97 million | $1.61 million |
| 40 | $480,000 | $5.31 million | $4.83 million |
Data source: Author calculations. Rounded to the nearest hundred.
This isn't the most important retirement table you'll ever see because of the specific numbers in it. The numbers can (and likely will) vary widely based on factors like investment amount and returns. The reason it's the most important is that it shows the true power of compounding.
Compounding is a tale of two worlds in finance. With debt, it can add insult to injury and spiral out of control before you know it. With investing, compounding can be one of -- if not the -- greatest force on your side. It's when the money you earn on investments begins to earn money on itself.
Investment returns can help you grow your money beyond what you initially invested, but compounding widens this gap with time. In the table, at 20 years invested, the difference between value and personal contributions is roughly $447,300. Add 10 years, and this difference is around $1.61 million. Add another 10 years, and the gap jumps to $4.83 million.
Take advantage of the time on your side
Regarding time, you can learn a lot from the table by looking at just how much the investment values jump with each increment of years added.
Notice that investing for five years versus 10 years is about a $119,000 difference; investing for 20 years versus 10 years results in just over a $490,000 difference; investing for 30 years versus 20 years creates around a $1.28 million difference; and investing for 40 years versus 30 years results in a $3.34 million difference.
The more time you give yourself, the better because it gives a chance for compound earnings to work their magic. Time and consistency work wonders.
It's fairly easy to remain consistent with your investments during bull markets when prices are rising, but it's a bit tougher when the market is in a downturn. One way to help yourself remain consistent is using dollar-cost averaging, which involves making set investments at set times, no matter what.
Use a Roth IRA if you're eligible
A Roth IRA is a retirement account that can be a perfect complement to compound earnings. Contributions to a Roth IRA are made post-tax, so all future compounded growth and withdrawals in retirement are completely tax-free.
If the investments in the above table were made in a regular brokerage account, you'd owe taxes on the capital gains. Assuming you fall into the 15% or 20% capital gains rate (most folks do), here's roughly how much you'd owe in taxes:
| Capital Gains | 15% Capital Gains Rate | 20% Capital Gains Rate |
|---|---|---|
| $13,200 | $1,980 | $2,640 |
| $71,200 | $10,680 | $14,240 |
| $447,300 | $67,095 | $89,460 |
| $1.61 million | $241,500 | $322,000 |
| $4.83 million | $724,500 | $966,000 |
Data source: Author calculations
Conversely, if those investments were made in a Roth IRA, all of the money would be yours tax-free in retirement.
Roth IRAs have income limits for eligibility, so it's best to take advantage of them if you're eligible. One day you may cross the income threshold and become ineligible, but your investments will continue to grow until you take withdrawals.
In retirement, every dollar counts. Do yourself a favor and try to keep as much of yours as possible instead of giving a chunk to Uncle Sam.
