The Power of Compounding: Time Is on Your Side

There’s no time like the present to start saving for retirement. We’re going to show you why you are a more powerful saver today than you will ever be again.

It’s about time and the power of compounding.

Compounding: Your money works for you

Compounding refers to how you can make money on an investment and then make more money on your profits. Let’s say you have an Individual Retirement Account (IRA) and begin by investing $5,500, the annual maximum that people younger than 50 can contribute to a Traditional or Roth IRA for 2018. If that account hypothetically returns 5% year after year, your account balance would grow by $275 during the first year. Each year after that, you’d start with a larger balance, so the 5% hypothetical return would generate more dollars. In the second year you’d collect almost $289 and in the third year, over $300. At an annual return of 5%, $5,500 would compound into $8,959 in 10 years, $14,593 in 20 years and $38,720 in 40 years.

You will hopefully keep adding to your retirement account year after year. This illustrative chart shows how an annual contribution of $5,500 that returns a steady 5% a year could produce a nest egg of nearly $700,000 after 40 years.

Embrace your long horizon

Pat yourself on the back if you can contribute to a retirement account now, regardless of how much you are able to contribute. 10 or 20 years from now, you may have a lot more money to set aside, but you will also have 10 or 20 fewer years for it to potentially grow. The dollars you put in an IRA now can have the potential to grow for more years than dollars you will set aside later on.


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