1 Retirement Savings Hack That Has Created Many Millionaires and Will Continue to Make More

When you imagine yourself in retirement, what do you picture? A lifestyle where you're pinching pennies or one where you have enough money to do all of the things you've always wanted?

Hopefully, you're in a place where you're able to picture the latter scenario. But the ticket to being able to retire comfortably is to save well during your working years.

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Here's some good news, though: You don't necessarily need to part with a fifth of your paycheck every month to build up a solid nest egg. All you need to do is start saving for retirement early enough and let compounded returns do the rest of the work.

When small contributions to a retirement plan go a long way

Financial experts will often tell you to try saving 15% to 20% of your pay for retirement, but that may be unrealistic. And it may also be unnecessary.

The truth is, if you start funding a 401(k) or IRA from a young age and load up on stocks from the get-go, you might end up with a lot of money by the time retirement rolls around -- even if you're not parting with a huge chunk of your paycheck month after month. The reason you can get away with that is the power of compounded returns.

Once you start investing and your 401(k) or IRA starts increasing in value, gains in your account stay in your account, allowing you to reinvest those gains for added growth. It's a concept known as compounded returns and could work wonders for your nest egg if you have a lengthy savings window.

Let's say you're only able to sock away $350 a month for retirement. If you start saving and investing that sum at age 25 and retire at 65, that gives your money 40 years to grow. And if your portfolio is able to generate an average annual 8% return, which is a notch below the stock market's long-term average, you'll end up with almost $1.1 million.

Even more impressively, that $1.1 million nest egg will come at a cost of just $168,000 in contributions to a retirement account you're making yourself. That means you'll be enjoying almost $1 million in gains, thanks to the power of compounded returns.

Don't delay

Taking advantage of compounded returns in your 401(k) or IRA could set the stage for a glorious retirement. But don't wait to start funding your retirement account.

In the example above, starting to save that $350 a month just five years later will reduce your total balance to about $724,000, assuming that same 8% return. That's still a lot of money, but it's several hundred thousand dollars less than what you'd have with an extra five years of gains on your side.

Even if you have to start off by putting just $50 or $75 a month into your 401(k) or IRA, do it now. You'll thank yourself for making the effort later on.

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