The Most Important Age Chart You’ll Ever See

According to a survey by the Transamerica Center for Retirement Studies, the median amount workers will need to retire is $ 500,000. However, around a third of respondents expect more than $ 1 million to comfortably retire.

Building a million dollar nest egg isn’t easy. However, when you take advantage of compound interest, you can let your money do most of the heavy lifting.

Image source: Getty Images.

What is compound interest?

With compound interest, you not only earn interest on the amount you pay into your retirement account, but also interest on your contributions as well as any interest that has already accrued. This allows your savings to grow faster over time.

Compound interest is most effective when your money has as much time as possible to grow. So when saving for retirement, it is important to start as early as possible in life to build a resilient retirement fund.

In addition, the sooner you start saving, the less you need to contribute to achieve exponential growth. In some cases, you can retire on well over $ 1 million even if you are only making an average salary.

The median income in the US is about $ 48,000 per year, according to the Bureau of Labor Statistics. Let’s say you donate 10% of that to your retirement fund, or $ 400 per month. For example, let’s say you are earning an 8% annual return on your investments. How much could you have saved up to the age of 65, depending on the age at which you started saving:

Age at which you started saving Total savings after age 65
20th $ 1,855,200
25th $ 1,243,500
30th $ 827,100
35 $ 543,800
40 $ 350,900
45 $ 219,700
50 $ 130,300

Data source: author’s calculations.

The more time you have to save, the easier it is to save an extraordinary amount on retirement. Even if you don’t increase your contribution rate over the years, you can create a hefty nest egg with the help of compound interest.

What if you are behind on your savings?

Compound interest is great when you have decades before retirement. But time is a luxury that not everyone has. So what should you do when you fall behind?

Regardless of your age, it is still smart to start saving as soon as possible. If you put it off until you have more money to spare, it will only make it harder to catch up later. So it is ideal to start now. You can always increase your savings later if you can afford it. However, if you save what you can now, you will have a head start.

The only exception would be if you don’t have any savings in an emergency fund. Unexpected expenses will crop up sooner or later, and withdrawing funds from your retirement fund before you retire can result in significant penalties. Keeping three to six months’ worth of savings in an emergency fund can leave your retirement fund alone and let compound interest do its job.

Whatever you do, keep in mind that it is better to save something than to ignore the problem until it is too late. The sooner you start saving, the easier it is for your money to reach its full potential.

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