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If you don’t have a lot of money to invest, you need to make your money work for you. Learn how you can do that by taking advantage of compound growth.
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The average 401(k) balance is around $30,000 for people who are under 35. Balances go up from there, with those ages 65 to 75 boasting an average 401(k) balance of $426,000, according to data from Northwestern Mutual.
While that may seem like a good amount of money, the reality is that a retiree with this average balance would only get about $17,040 in annual income from it. This assumes they withdrew 4% from their brokerage account in their first year of retirement and increased withdrawals by inflation each year — which is what many experts recommend in order to avoid running out of money.
The fact is, many Americans simply have too little saved for retirement — and that’s understandable since it can be hard to find extra money in your bank account to invest. The good news, though, is that there is a way to retire with the financial security that you deserve even if you aren’t rich. Here’s what it is.
Compound growth can be the key to a secure retirement
If you want to make sure you have the money you need to enjoy your later years instead of spending your retirement worried about how to pay the bills, you need to take advantage of the magic of compound growth.
Compound growth refers to the way your money grows once you invest it and your investments start producing for you. The returns you earn are money that you don’t have to personally work for that can be reinvested. Since your investment account balance grows bigger effortlessly thanks to compound growth, you can earn larger returns each year even without doing anything extra.
Here’s how compound growth can guarantee you a secure retirement
Compound growth can go a long way toward growing your nest egg — especially if you give it a lot of time to work. In fact, the table below shows just how effective it is in helping you achieve retirement security.
The table assumes you earn 10% average annual returns on your invested funds, which is a reasonable expectation, as the S&P 500 has consistently produced this rate of return over the last 50 years.
As you can see, you aren’t investing particularly large sums here — especially if you’re investing only $1,000 or $2,500 a month. But you can still end up with a substantial amount of money by the time you reach retirement, thanks to the profits that you make and the fact that your money earns more money for you.
And as the table makes clear, the more you invest and the earlier you begin investing, the more time compound growth has to work its magic. If you don’t have tens of thousands of dollars to invest, simply investing small amounts consistently over a long time could still give you the funds you need in your senior years.
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So, starting early and saving consistently are ultimately the best steps you can take if you want retirement security and you won’t have a fortune handed to you.
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