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A person should think about retirement upon entry into the workforce. Many people cite the lack of money as the primary reason for their inability to start retirement savings. These same people are able to afford items that are not necessary for comfortable living. They usually also purchase items on credit, effectively making the power of compounding interest work against them.

People have heard the phrase, “pay yourself first,” but they fail to do it properly. Buying luxury items and going on vacation after receiving a promotion or bonus is a common misinterpretation of this adage. A correct interpretation encourages people to pay themselves first in a similar way that they are currently paying others. People should consider contributions to retirement savings as a bill that they charge themselves. “I need to add to my retirement savings,” should be said with as much force, necessity, and urgency as the phrase, “I need to pay my gas bill.” Retirement surely deserves to be as important.

Receiving $1,000,000 after contributing just $160,000 over forty years may seem too good to be true, but it is attainable through the power of compounding returns. The power of compounding returns works over time, so starting early will allow it to be more effective.

The retirement calculator that is presented below can aid retirement planning. It shows that a person who is twenty five and contributes $4,000 (the maximum IRA contribution at time of writing) every year until the retirement age of 65 will contribute $160,000. The S&P 500 has historically returned 10%, and the assumed rate of returns is adjusted for the annual inflation rate of 2%. The value of this person’s retirement savings grows to $1,036,226 through forty years under an average annualized return of 8%. For every year in the 20 years after retirement, the application shows that the person receives a retirement disbursement of $105,541. The total of all retirement disbursements will be $2,216,380.

Of course, past performance might not have any effect on future returns, but the decision to sock away $160,000 for the opportunity of receiving $2,216,380 should be somewhat easier to make after some study of the power of compounding returns.