When it comes to saving money for retirement, time is one of your biggest allies. When you’re in your 20s or 30s, it may seem like retirement is a lifetime away. Everybody goes through the period where their career is just getting started and they’re making an entry-level salary. During this time, it may be difficult to justify stashing money away that you won’t need for several decades when you need every dime just to get by in the moment. But every little bit helps, and the sooner you start saving, the more your money will have the opportunity to grow over time. Compound interest, which includes returns on both principal and accumulated interest, can play an important role in long‑term investing. Let’s get into it.
The Power of Compounding
Here’s a real-life hypothetical example of the impact compounding can make:
Katie started saving $83 per month ($996 per year) at age 21. After 10 years, she stopped contributing, but her money continued to earn an 8% annual return, compounded monthly. By the time Katie reaches age 65, she will have accumulated nearly $250,000.
Meanwhile, Matt started saving $83 per month at age 35 and continues to do so for the next 30 years until he reaches age 65. Assuming an 8% annual return, compounded monthly, Matt will have saved approximately $135,000.
This example illustrates why compounding can play such a vital role in your life. Even though Katie contributed to her plan for only 10 years and Matt contributed to his plan for 30 years, Katie’s plan is worth $100,000 more than Matt’s simply because she started earlier and her money had more time to grow.
Social Security Isn’t a Single Source Solution
Some would-be investors make the mistake of believing they don’t have to save for retirement because the Social Security benefits they’ll receive will cover their expenses once they stop working. The heard truth is that Social Security was designed only to be a supplemental source of income in retirement, not a single source. In fact, it replaces only about 40% of your annual pre-retirement earnings, which can vary depending on your situation.* You will need to supply the rest of the money needed to live the type of lifestyle in retirement that you have been used to living in your working years. The best way to do that is to start saving early and take advantage of the power of compounding. Personal savings are designed to complement the Social Security benefits you will receive.
If you would like to get an idea of how much Social Security will pay you in retirement, go to the Social Security Quick Calculator at ssa.gov/OACT/quickcalc/
Getting Started
If we’ve convinced you that it’s time to start saving for retirement but you don’t know where to start, it’s best to ask your employer if they offer a 401(k) plan for employees. Many companies offer 401(k) matching – meaning they will match a certain percentage of what you contribute – and it’s important to take advantage of that perk. It’s also a good idea to begin searching for a financial advisor you trust to help guide you along the path to retirement. If you don’t know where you find a financial advisor, ask family, friends, and co-workers who they use for financial guidance, how long they have been working with that professional, and how their relationship with that person has unfolded since the relationship began. If a certain financial advisor gets a rave review, particularly from more than one person, he or she would be certainly worth exploring further.
Article provided by Robert Cleary, Senior Vice President/Investments, with Stifel, Nicolaus & Company, Incorporated, member SIPC and New York Stock Exchange, who can be contacted at Stifel’s 3 Bryant Park office at (212) 847-6517.
Source:
*“Retirement Ready – Fact Sheet For Workers Ages 18-48,” Social Security Administration, April 2025.
