From
Your Perspective:
Early bird retirement investing
Power of compounding
Compounding is one of the primary reasons time can be an investor’s
most important ally. Compounding means that you’re paid
interest and dividends on your investment earnings, allowing your
account to increase in value faster than if you only accumulated
earnings on your principal,
or your original contribution to the account.
And the earlier you start investing for retirement,
the more you’ll benefit from compounding and the tax deferral
offered by most retirement plans. Look at the following examples
of three investors who opened 401(k)s at different points in their careers. Each contributed $5,000
every year and earned 8% annual return.
Investor
A
Investor
B
Investor
C
Age
when account was opened
45
35
25
Years
contributing
20
30
40
Total
amount contributed
$100,000
$150,000
$200,000
Total
401(k)
value at retirement
$247,067
$625,122
$1,464,284
Investor A had more than twice what she put in by the time she retired, which seems pretty good. But Investor C wound up with more than seven times what she started with. For an extra $100,000 spread out over 20 years, she earned $1.2 million dollars more than Investor A.
This is just a hypothetical situation, and if you experienced a lower rate of return, your results would be different. Returns on investing are never guaranteed.
