Think only superheroes have superpowers? Think again. Albert Einstein once called it "the most powerful force in the universe," and you can harness its power to boost your retirement savings.
Did you know you can tap into a superpower that can turbocharge your retirement savings?
You might have heard of "compound interest," but don't let the ordinary name fool you into thinking it's unworthy of awe. Albert Einstein once called it "the most powerful force in the universe."
Compound interest works like this: You contribute to a retirement account or a savings account, and the accumulated interest is added to the principal, thereby growing the principal and giving you even higher returns.
Of course, with retirement accounts, there's no guaranteed rate of return. To some, stocks might seem volatile and risky. But as reported by CNN Money, over the last 200 years stocks have had an average return of up to 7 percent, while bonds on average have barely yielded 1 percent, according to Wharton finance professor Jeremy Siegel. Despite ups and downs, it's important to take a long-term view when it comes to retirement savings.
Waiting will cost you
Putting off saving for retirement by just one year can cost you more than you probably think.
The blog All Financial Matters created a chart to illustrate the power of compound interest, showing that someone who starts saving at age 23 would have to save an extra $204 every year until age 65 just to catch up with someone who started at age 22! If he or she waits until age 27, it'll cost an extra $1,255 per year.
The earlier you start, the more time compound interest has to grow your money, adding new interest on top of interest already earned. Time is the key to unleashing the power of compound returns.
What if you don't have money to save?
As with most goals, every little step you take matters. You don't have to max out your 401(k) and your IRA every year to save for retirement. While doing that would be great, it's not feasible for many people. Contribute as much as you can, though. Just because you can't max out your accounts doesn't mean you shouldn't save anything.
As J.D. Roth of Get Rich Slowly writes, it's important to start saving today:
I know that retirement seems a long way off...But this is important. Force yourself to save for retirement. It may hurt, but it's not going to hurt for long. And when you're old like I am, you'll be glad you made the decision. If you will just invest $2,000 per year for 20 years starting at age 20, you'll set yourself up for life!
Investing $2,000 per year works out to $167 per month. That's not a lot of money considering that you'd have $1.4 million by age 65 (assuming a 10 percent annual return). The earlier you start saving for retirement, the harder your money works for you and the more likely it is that you'll have enough savings to retire.
How to get started
If you have an employer match, be sure to always invest enough to get the match. As any financial expert will tell you, not doing so is throwing away free money.
Also, unless you earn a lot of money (more than $95,000 filing singly or $150,000 filing jointly), consider opening Roth IRA. You can open a Roth IRA even if you have a 401(k) or other type of retirement account, and you can withdraw your contributions without penalties. But if you withdraw earnings before age 59-1/2, those withdrawals are subject to taxes and possibly a penalty fee. One exception? You can withdraw up to $10,000 of your earnings to buy your first home.
No matter what type of accounts are right for your situation, the most important thing you can do is to start saving today to put the compound interest superpower to work. It's too expensive to let another year go by!