The sooner you start saving and investing for retirement or any other goal, the more time you’ll have to take advantage of the power of compounding. And compounding is simply too good to put off.
What is a compounding investment?
Compounding happens when earnings on your savings are reinvested to generate their own earnings, which in turn are reinvested to create more earnings, and so on. Over time, compounding can add a lot of fuel to the growth of your savings.
Compounding happens when earnings on your savings are reinvested to generate their own earnings, which in turn are reinvested to create more earnings, and so on. Over time, compounding can add a lot of fuel to the growth of your savings.
Getting an early start on savings can pay off in a big way. Let’s look at Kate and Andy, both saving and investing for retirement. 1
Each saves $30,000 over 20 years—$1,000 annually for the first 10 years, and $2,000 annually for the second 10 years, with contributions made at year-end. Each achieves a hypothetical 6% annual investment return. Kate starts saving at age 25 and stops at 44. Andy starts at 45 and stops at 64. Look at how much Kate and Andy have in their respective retirement nest eggs by age 65:
Although Kate and Andy both save the same total amount and earn a 6% return on their savings, Kate ends up with over $110,000 more in retirement savings than Andy. Why? Because her money enjoys up to 40 years of growth from the power of compounding, compared to up to 20 years for Andy’s money. Since Andy starts saving later, he would need to save more than three times as much money as Kate to end up with the same size nest egg at age 65.
| Scenario
Kate starts saving at 25, stops at 44 | Total Amount Saved
$30,000 | Retirement Savings at Age 65
$160,300 |
| Scenario
Andy starts saving at 45, stops at 64 | Total Amount Saved
$30,000 | Retirement Savings at Age 65
$49,970 |