Saving for retirement is not the easiest thing in the world to do, especially with your income as limited as it is. In fact, a majority of people cannot earn enough money over a lifetime to retire without taking on some kind of investment risk. While those that do not like to take risks find that high risk investing is outside their comfort zone, it can pay off.

Nonetheless, the individuals saving for retirement that don’t like any degree of risk tend to make the mistake of keeping a majority of their cash in bank accounts. They do this because the accounts are safe and they are insured. They are not protected against inflation, though. In order to keep up with inflation, a person needs to receive a return of at least 3% and we all know that not all banks offer that kind of return, so this entails a search.

However, imagine this: You have a pretty decent job and can live on your income quite comfortably. This comfortable living allows you to save some money on the side with every paycheck. If you do this for a long enough period of time, you reduce your need to take on risk as you near retirement. If you are making sure your money is compounding throughout the years, you reduce that need even more.


Compounding your cash is the key to success. This can start with good tax management, such as putting money aside in a Roth IRA or a 401(k). However, the key to retirement success is not reliant on the stock market. Stocks do matter in a portfolio, but you can’t count on a perfectly timed bull market. That is a bad way to address the retirement issue, which is something that today’s retirees have learned.

So how does compounding work? Well, it goes a little something like this:

If you have a dollar and you invest it, it is going to grow. If you receive a 6% return on that dollar, you are going to have $1.06 after a year. This is how you make money work for you. Keep in mind that the extra six cents is growing too. Let that six cents grow for 30 years and you’ll have over $7 just from that six cents. While $7 is not a lot of money, imagine that being $20,000. If that $20,000 grew at 7% for 30 years, the amount would become $40,000 after 10 years and $162,384 at 20 years. By the time you hit 30 years, you have over $321,000. This is what would happen if you saved $20,000 and did not save another penny. However, that is not how it is going to go. You are going to keep saving and the money is going to keep growing. You just have to make sure the money is in a high interest bearing account.

How Much You Need

But how much money do you need to retire? This number is not that hard to come by, but it can be a discouraging number. If you want to have a retirement income of $50,000 per year and you want that income to last around 15 years, you will need $750,000 saved up by retirement. But with people living longer and longer as the years go by, it is safe to have 20 years worth of income, which is $1 million. You also have to entertain the idea that you could live to be 100, so that means continuing to keep money in the bank and living comfortably based on needs and not always wants. With Social Security slated to run dry in 2033, you know you can’t count on that. It is good to assume that you can only count on yourself for retirement income.

Hitting Your Retirement Number

If you are wondering how you are going to hit your retirement number, it is time to do some math. If your number is $800,000 and you have 25 years to make it, you will have to save around $12,000 a year. And it is true that many people do not make that kind of money. That’s where you save as you can and then you make the decision to assume some investment risk as you near retirement age. A financial adviser can advise you on how much risk you must take to receive the largest returns and how you can balance your portfolio to hedge your risk. There is also the fact that a 401(k) can contribute to the amount of money that you need to put away each year. 401(k) plans and IRAs exist so you are not destitute when you retire.

Returns after Retirement

Even after retirement, it is good to continue investing since you have no idea how long you are going to live. Plus, inflation is going to keep happening as you age. You can lower your cost of living, invest responsibly, and compound returns by re-investing them. As you reach a comfortable dollar amount, you can still remain invested to some degree, but you can cut down on your risk and you can invest less of your money.

So it is possible. Even a couple in their 50s can use savings and a 401(k) to save an average of $50,000 a year without that much actually coming out of their pockets. It is best for you to explore all of your options and not become too worried if you are only 20, 15, 10, or even 5 years before retirement age without enough to retire on. There is always a way, even if you have to retire 5 years later. It is very possible that the retirement age may increase anyway in order for the government to preserve some of the entitlement programs that are slated to run bone dry within the next 20 to 30 years. Even if they preserve them, it is still ideal to pretend like they will not exist so you can be prepared for anything.

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