How Compound Interest Can Help You Retire a Millionaire -- Even on a Modest Income
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One of the easiest tools at investors' disposal for building wealth isn't how good they are at stock picking, their knack for flipping houses, or jumping on the cryptocurrency trend....
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cryptocurrency
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July 21, 2025
06:15 AM
The Motley Fool
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One of the easiest tools at investors' disposal for building wealth isn't how good they are at stock picking, their knack for flipping houses, or jumping on the cryptocurrency trend
Instead, it's slowly and methodically their money
Compound interest has helped investors substantially increase their retirement account over time as their original investment earns money and then continues to earn money on top of the new balance, year after year (an important development)
If you're new to the idea of how compounding interest works, here's a quick overview and how it can help you retire as a millionaire, even while earning a modest income
Nevertheless, At the same time, Image source: Getty Images
Additionally, How compound interest works The basic idea of compound interest is that you continually earn money on your earnings, not just on the original amount you invested (which is quite significant)
Moreover, Furthermore, For example, let's say you invest $1,000 and earn 10% interest on that investment
Moreover, In contrast, At the end of the year, you'd have $1,100
That's a good return, to be sure
Furthermore, So now you have $1,100 starting your second year of, instead of the $1,000 you started with, in today's market environment
If you earned 10% again in the second year you'd have $1,210 at the end of the second year
Moreover, This may not seem a significant increase initially, but as your earnings continue to increase, so does the magnitude of their earning potential
Take a look at these results, based on an initial $10,000 invested, no additional out-of-pocket contributions, and compound interest going to work, considering recent developments
Starting amount Years Invested Annual Return Ending Amount $10,000 5 10% $16,105 $10,000 10 10% $25,937 $10,000 15 10% $41,772 $10,000 20 10% $67,275 $10,000 25 10% $108,347 Calculations by author via investor, given the current landscape
Additionally, Additionally, As you can see, your initial investment of $10,000 starts to see significant benefits from compounding interest very quickly
Furthermore, This demonstrates that re are two things to note here
Additionally, The first is that we're assuming a 10% annual return because that's been the historic average for the S&P 500 over the past 60 years, given current economic conditions
Meanwhile, Some years your investments will earn more, and sometimes they'll earn less; that's normal
Additionally, these totals don't factor in any additional contributions you make to your retirement account
Nevertheless, Furthermore, Most people don't just put a lump sum of money into their retirement account and let it sit there for years
Instead, they make regular contributions to their investment account, a low-cost Vanguard S&P 500 exchange-traded fund (ETF), given the current landscape
Below, we'll factor in these regular contributions to see just how large a nest egg can grow from a modest beginning
However, Here's how compound interest can help you retire a millionaire Everyone's idea of what a modest income is can vary, but let's use the median household income reported by the 2023 U (an important development)
Census Bureau, which is $80,000, amid market uncertainty
Most financial planners recommend saving 15% of your income for retirement each year, in this volatile climate
If we assume $80,000 in household income and don't make any changes to that salary over time, then the annual savings amount is $12,000, or $1,000 per month
Assuming you earn the average annual return of 10% (again, this will vary over time), here's how much your investments will earn with compounding interest over time: Starting Amount Monthly Contribution Time Invested Annual Return Ending Amount $1,000 $1,000 25 years 10% $1. 19 million $1,000 $500 30 years 10% $1 million Calculations by author via investor (something worth watching)
Moreover, Furthermore, As you can see, time works very much in your favor for letting compound interest work its magic
The more time you have, the less you have to invest to reach your goal of $1 million
Conversely, if you have less time to invest, then you can catch up by more into your retirement account each month
It's also worth mentioning that reaching $1 million doesn't have to be the retirement goal for everyone
Many people have far less and have perfectly good retirements (noteworthy indeed), in today's market environment
Just keep in mind that some retirement experts recommend retirees have 55% to 80% of their annual preretirement income to maintain their current lifestyle
Chris Neiger has positions in Vanguard S&P 500 ETF
The Motley Fool has positions in and recommends Vanguard S&P 500 ETF
What the re reveals is Motley Fool has a disclosure policy.
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