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The Power of Compound Interest

Investor Economic and Financial Education

If you had the ability to double your investment every month and you started with only one penny...

Penny growth in years Amount of money earned
After 1 year $40.96
After 2 years $167,772.16
After 3 years $687,194,767.36

Of course it is essentially impossible to find such an investment but we can use the math the same way for a more realistic scenario...

If a couple each contributes $2000 annually to a tax deferred retirement plan for 40 years the total contributions to the plan would be $160,000.
Assuming a 10% rate of return the total account value would be $2,251,945.
The couple could then withdraw $21,792 per month for 20 years.

It's Best to Start Early

Time can be a powerful ally. You should begin investing for retirement as soon as possible, because the longer your money has to grow, the better.

Consider the example of Jane and Mary. Jane began investing in her IRA at age 21 and stopped at age 30, but left her money in her account. Mary waited until she reached age 35 to invest but continued funding her account until she reached age 65. Even though Jane contributed much less, her account would probably be more at retirement because it had a longer time to grow.

Note: This is a hypothetical example and is not intended to represent the results of an actual investment. There is no assurance that contributing less money over a short time period will result in receiving more money than one who invests more money over a large period of time.

Investors in 401ks, IRAs and other retirement plans should be particularly diligent about making early contributions in as large an amount as possible.



 








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