Want to retire with $1 million? Expert reveals how simple tip can help turbocharge your savings

Millions of Americans could miss out on retirement savings if they don’t take advantage of the simple power of compound interest, experts warn.

Being on the right side of this phenomenon can help you build wealth, but the key is to take advantage as early as possible, says financial planner Georgia Lord.

Simply put, compound interest is the interest you earn on interest.

For example, if you invest $100 and earn 5 percent interest each year, you will have $105 at the end of the first year. This larger amount will then earn 5 percent interest, bringing your total at the end of the second year $110.25 comes.

Over the years, this will continue to evolve and increase at an increasingly rapid pace as you earn interest on an ever-increasing account balance – and could even reach a million by the time you retire.

Lord, a financial planner at Corbett Road Wealth Management, says starting early is the key to getting the most out of compound interest, no matter how much money you’ve saved.

“It’s never too late, but it’s never too little either,” she told DailyMail.com.

“The biggest problem when it comes to putting this all together and understanding it is the idea that people don’t think they have enough money to start or enough to invest.

‘It’s something I see in many of my younger clients, as well as my friends and peers. People think they need $10,000, $50,000, or $100,000 before they can even start investing.

‘Even if you start with €100, get into the habit of saving and investing.

“Don’t fall into the trap of saying, ‘I’ll get started as soon as I save $10,000.’ Make it a habit as soon as possible. You can only benefit from it.’

For example, imagine you invest a lump sum of $100 at an interest rate of 7 percent.

Every month you invest another € 300. Over 45 years, you will reap the benefits of building your retirement savings, ultimately reaching a retirement savings of more than $1 million.

However, in the first twenty years it will only grow to $147,970.74.

This is because the math of compounding becomes more difficult the more time you spend on it.

“Compounding goes hand in hand with long-term investments and long-term results,” Lord said.

“It’s almost like a snowball going up the hill. It starts small, but gradually becomes bigger and bigger.’

But, she noted, while making recurring contributions will of course make your money grow faster, the act of compounding isn’t dependent on that.

She recommends using a compound interest calculator, such as the one from Bank rateto calculate how much you can save for your pension.

“People think it’s too good to be true,” she said. “But it’s important that people understand it, because then they can play with the numbers.”

You can also work backwards, Lord said, by putting a number on how much you want to have saved by a certain age.

You can then calculate how much you would need to save per month or per year to reach that goal using compounding.

Some experts recommend that Americans invest in a mutual fund or exchange-traded fund (ETF) that tracks the S&P 500.

This index of the 500 largest companies in the US has historically returned an average of between 9 and 10 percent per year.

“One of the better decisions people can make is to start with an index-based fund that tracks the S&P 500, because it works,” says Todd Rosenbluth, head of research at financial advisor VettaFi. CNBC.

But Peter Gallagher, director of Unified Retirement Planning Group, urges Americans to be cautious.

“My advice is to have a plan and stick to it,” Gallagher told DailyMail.com. “Based on the rally so far in 2024, it could be a very volatile year because it is an election year.

“If the market goes down – and it will – it makes it a little bit easier if you have a plan because you have to have a long-term view and your assets have to be diversified so that you can ride it out.”

Bonds are traditionally seen as a safer option for long-term investing, but Gallagher adds that there are more than 100 different asset classes to choose from.

Lord added: “While the S&P 500 delivers decent returns on average, it is not the only investment option when it comes to compounding.

“If I were to invest in a particular technology stock that is doing well and continue to pump money into it every month, I would still see the effects of compounding.”

It comes after experts uncovered how much workers of each age group would need to save in their 401(K) to reach $1 million by the time they retire.

According to the personal finance site The motley foola 22-year-old would have to save $325 a month throughout his career to retire with $1.01 million by the time he turns 62.

If a worker didn’t start saving in his 401(K) until age 27, he would have to set aside $500 a month to reach $1.03 million by the same age.

The figure rises to $750, $1,200 and $1,900 for a 32-year-old, 37-year-old and 42-year-old respectively.

The analysis assumes that the investments generate an average annual return of 8 percent, slightly lower than the average 10 percent return generated by the stock market.

The number of savers with $1 million in their retirement accounts also grew by about 100,000 people by 2023 – thanks to a booming stock market.

About 349,000 401(K) owners and 339,000 workers with an individual retirement account (IRA) ended the year with a seven-figure balance, according to Fidelity Investments.

Caroline Eby told DailyMail.com how she’s getting closer to the $1 million mark by starting early – despite never making more than $80,000 in her life.

The Washington, DC-based finance worker said, “I started saving at age 25, when I was making $22,000 a year in manufacturing.

‘Every year I increased my contribution by 2 percent if I could afford it. I have maximized my contribution at about 12 percent.”

She added: “I have never married and have always been completely self-sufficient. I am so happy and proud of myself for the sacrifices I made 30 years ago.

“Like everyone told me, slow and steady wins the race.”

It comes after experts uncovered how much workers of each age group would need to save in their 401(K) to reach $1 million by the time they retire.