In this economic climate of uncertainty many people are concerned about how they will be able to live out their sunset years. Current retirement standbys like pensions and Social Security may not be there in the future. Those in the workforce now are expected to plan for their own retirements using Individual Retirement Accounts (IRA's) and 401K plans. As the human lifespan grows it is possible to be in retirement for over thirty years. The thought of saving that much money can be daunting. However, you can do it much more easily through the power of compounding stock returns.

One of the best ways to describe the power of compounding stock returns is as a get-rich slow strategy. Instead of following the newest investment fad in the hope of good performance, you diversify and build up your investments. Any income you receive from your investments, for example, dividends or capital gains, is reinvested. One way to do this is to regularly invest the same sum of money. This could be from an IRA contribution each quarter, or a sum deducted from each paycheck and placed in your 401k.

To get the most out of compounding stock returns you need to start investing young. Consider the example of two people of the same age trying to save for retirement. The first saves $2000 every year since they are 19. The second saves the same amount starting at age 27. With an annual return of 10% in a tax deferred account, the first person would have $25,159 saved up at age 26, just as the second one starts saving.

In the first example, if you were to stop making additional investments at the age of 27, someone who just started at that age would still have less money than you, even if they invested $2000 per year for the next 39 years. You will have $1,035,161 from a $16,000 investment while the other person would only have $883,185 from a $78,000 investment. This is simply an example to illustrate the power of compounding stock returns, and should not indicate that you should not make regular investments.

The key to understanding how this is possible is that at age 26, our first person will actually earn more on his investments than he or his counterpart will add to their portfolios. He will continue to make money every year on these investments. Despite continued investing the second person will never catch up.

It is important to reiterate that all investment income is reinvested. Neither principle nor income is ever spent. Saving money may be less fun than spending but the power of compounding stock returns is a simple way to secure your retirement.