Building your retirement savings? 1 easy trick to help you gain exponential wealth

You’ve probably come across your fair share of retirement advice. It can feel overwhelming with so many moving parts. But perhaps the most troubling part is wondering if your money will grow enough to support a comfortable retirement.

Here’s the deal: Saving alone probably won’t get you to your target number, which for many people is around $1 million or more. The real mover and shaker? Composition. It is one of the most powerful investment tools. Even legendary investor Warren Buffett swears by it.

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The power of combination never goes out of style

The term “composition” has been around for centuries, but you may not fully realize how powerful it is. In simple terms, it’s the beauty of watching your interest earn interest and your dividends earn dividends. Compounding is the secret that can turn small savings into a substantial nest egg over time.

Let’s break it down. Imagine starting your retirement savings with $10,000. You can store this money in different places — at home, a savings account, a retirement plan or a brokerage account. If you hide that $10,000 under your mattress and leave it there for 10 years, guess what? You’ll still have $10,000 — no more, no less. In this scenario, you lose the benefits of growing and combining altogether. Your money is simply on an extended vacation, not working for you at all.

Now, let’s say your money grows by 5% every year, but isn’t compounded. That means $10,000 will earn $500 in interest the first year, $500 the second, $500 the third, and so on. Your savings would grow from $10,000 to $10,500 to $11,000 to $11,500. It seems like a better deal, but the combination is much sweeter.

With compounding growth, your money works even harder. After the first year, you would have $10,500 left. In the second year, you’ll earn interest on the $10,500, bringing your total to $11,025. By the end of the third year, your savings will grow to $11,576.25. As you can see, compounding allows your money to grow faster each year.

Let’s take it a step further

You can really see the power of compounding kick in when you invest in the stock market. But keep in mind that it’s not foolproof — market swings can cause your portfolio to drop when things move in the opposite direction.

For example, let’s say you invest your retirement savings in S&P 500 index, which tracks the 500 largest publicly traded companies in the U.S. Historically, the S&P 500 has delivered an average annual return of about 10%, so we’ll use that for simplicity. At that rate, here’s how your $10,000 portfolio could grow through the power of compounding, assuming you reinvest your profits each year:

Calculations by author. Figures rounded to the nearest dollar.

This is an example of how your money could grow if you make a lump sum investment in an account and don’t add any additional funds. In reality, you will likely make regular contributions to your retirement savings throughout your career. So if the numbers above aren’t too interesting, take a look at how the power of compounding can take you to the million dollar mark if you contribute and invest consistently over the long term, assuming the same 10% return.

Data source: author’s calculations via investor.gov.

There are many popular Warren Buffett quotes floating around the internet, but one that stands out is, “Time is your friend; impulse is your enemy. Take advantage of compound interest and don’t get carried away by the siren song of the market.” This quote teaches us that if you start early, avoid the noise, and let compounding work its magic, you could enjoy a handsome payoff later. The market won’t always behave the way you want, but compounding can still help you build exponential wealth over time.