When it comes to retirement planning, getting started early is the best policy. People starting in their 20s will usually have a much easier time building wealth than those who start in their 40s or 50s. Even starting five or ten years earlier can make a huge difference because of the power of compound interest.

The Power of Compound Interest

Investment returns are a great source of passive income, but this is not the best characteristic of investment returns. Interest and dividends also compound. This means that any dividend earned can go toward buying more shares, and these shares will start making more dividends. In other words, interest and dividends will earn even more interest and dividends. Over time, small investments can really start to grow, and the growth rate will start to grow ever more rapidly. 

Open an IRA

The vast majority of Americans can qualify to open an individual retirement account, better known as an IRA, which allows future retirees to save in a tax-advantaged account. IRAs provide investors with the opportunity to choose where they put their money to work. There are contribution limits that vary by age, and they tend to go up with inflation. A person who decides to max out her IRA in her 20s can take advantage of compound interest to build a substantial nest egg by the time penalty-free withdrawals can start at age 59 1/2. 

Invest in Real Estate

Getting started with real estate investing at an early age is another great way to prepare for retirement. Putting some money down and then allowing other people to pay off the mortgage over time is a great way to build wealth. Those who purchase a rental home or two in their 20s will likely have them paid off by the traditional retirement age. Then, every rent payment will provide some passive income. 

Those who start to plan for retirement in their 50s are already behind the curve. Getting a start in your 20s is a much better plan. This allows more time for compound interest to work its magic. Those who invest in real estate or stocks will see some high passive income as long as they start early enough.