Personal Finance

Here’s the one tip you need to know when saving for retirement

If there’s only one concept you need to know when saving for retirement, it’s this: compound interest. With compounding, you make money on your money. You make interest on your interest.

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Now let’s apply this to a real-world retirement situation. Under most circumstances, the most you can invest in an individual retirement account is about $6,000 a year. Let’s start with an initial $6,000 investment in, say, the S&P 500. Let’s assume that you are expecting a total return (price appreciation plus dividends) of 6% (that is about the historic average), compounded annually.

How much would you have after 10 years? You’d have $89,829. Here’s how it would look:

A 10-year investment ($6,000 invested each year, 6% return, after 10 years)
Money invested: $60,000
Return on investment: $29,829
Total: $89,829

That is a nearly 50% return on your money in 10 years. Not bad!

Wait, it gets much better. Now let’s look at what you would have after 20 years: $239,956. Your money doubles!

A 20-year investment ($6,000 invested each year, 6% return, after 20 years)

Money invested: $120,000
Return on investment: $119,956
Total: $239,956

And from here, the numbers get much bigger. After 30 years, you have $508,810. After 40 years, $990,286!

With compounding, it’s not just the length of time that makes a big difference. The return is also critical, and just as with time, changing this variable by as little as one or two percent can result in huge differences in returns over long periods.

Let’s go back to that 20 year return at 6%. Suppose we change the parameters and say we make only 4% a year, or up it to assume we make 8% a year.

A 20-year investment
($6,000 invested each year, after 20 years)
4% return: $302,537
6% return: $239,956
8% return: $191,815

Look carefully: the difference between a 4% return and an 8% return with the same amount of money invested is more than $110,000 over 20 years.

Want to try this on your own? One of the simplest compounding calculators is run by the Securities and Exchange Commission.

We’ll be LIVE with
Bob Pisani
from the floor of the New York Stock Exchange talking the retirement crisis, how to make the most of compound interest, markets and more! You can tweet
with your questions for Bob. Tune in Friday, May 17 at 12 p.m. ET on



Check out 5 Money Lessons Everyone Should Know by Age 30 via Grow with Acorns+CNBC.

Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.

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