The most important retirement table you will ever see

I’m sure many people would agree that they’re in no rush (they’re already moving too fast if you ask me), but they’re looking forward to when they can retire and enjoy the fruits of their years of hard work. Retirement is the perfect time to pursue your lifelong dreams and embrace whatever aspects of life bring you fulfillment.

A key to maximizing your retirement is making sure you are as financially prepared as possible. This looks different for different people, but the one common factor is that the earlier you start, the better. To give you some perspective on the importance of starting early, take a look at the most important chart you’ll see in retirement.

Investment totals rounded down to the nearest hundred.

Image source: Getty Images.

Why this is the most important retirement chart you’ll ever see

This table shows what happens when you invest $500 monthly and average 10% annual returns over different periods. It is not important because of the specific numbers inside it (these will vary according to investments and time); it is important because it highlights the power of compounding earnings.

When it comes to investing, compounding gains occur when the profits you earn from your investments begin to earn returns of their own. You can think of it like a snowball rolling down a hill and getting bigger as it picks up more snow. In this case, snow is money.

For example, imagine you invest $1,000 and earn 10% in one year, giving you $1,100. If you earn another 10%, you will receive $110 in interest. It’s a cycle where the interest you earn each year grows without any extra work.

Achieving retirement goals without compounding earnings is difficult

For most people to reach an amount they can live on in retirement, strict saving will not do.

Imagine if your goal is to save a million dollars. Even if you could put away $25,000 a year — which is not feasible for many given the average US income — it would take 40 years to reach that level. That’s why investing and compounding earnings are so important.

Compound earnings can take relatively small investments and multiply them over time. In our table above, notice how the difference between what you personally invest and your total investments increases the longer you have. After 10 years, the difference is only around $35,600; after 20 years, it’s over $240,000; after 30 years, it’s a staggering $800,000.

While hitting the $1 million mark can be overkill through strict saving, it’s quite attainable as long as you take the time to take full advantage of the compounding earnings. Investing $1,000 monthly and averaging 10% annual return over 25 years can help you beat that level.

Of course, you can’t predict what profits you’ll see coming in, but the bigger point is the importance of timing.

Make sure you use the resources you have access to

Retirement accounts are your best friends when saving and investing for retirement. It’s a two-for-one: You’re setting yourself up to be financially stress-free in retirement (or close to it), as well as getting a tax break while you’re at it.

The most common type is the 401(k) because it’s offered through employers, but IRAs are also great options that you can open on your own.

Traditional IRAs are similar to 401(k)s in that you get tax relief up front. You can deduct your traditional IRA contributions, depending on your income, filing status, and whether you and your spouse have an employment-sponsored retirement plan. Roth IRAs are unique because they give you tax breaks in retirement. Contributions to an IRA are made with after-tax money, and then you take tax-free withdrawals in retirement.

Using retirement accounts ensures that you can keep as much money as possible for yourself when saving for retirement. Every dollar counts.