Compounding: Save Early and Retire with More
When you start saving for retirement, few things are more impactful than saving early. Even if you can’t put a lot of money aside at first, those savings and investments can grow exponentially over time due to the magic of compounding.
You may be familiar with compounding when it comes to bank interest, but it’s also an important factor in the earnings on stocks and bonds, dividends, and other gains in your tax-deferred 403(b) account.
Compounding is what happens when the earnings on your investments are reinvested, and eventually you get earnings based on those earnings. It’s a snowball effect that gets more powerful the longer your money stays invested. And it’s particularly helpful in tax-deferred retirement accounts like RPB’s 403(b) plan because your compounded earnings aren’t being reduced by taxes every year.
Pending favorable market performance, over a long enough period of time, the compound earnings growth can dramatically build on the contributions you and/or your employer make to your retirement account.
Let’s look at the hypothetical scenario of a 25-year-old who saves $250 a month until she’s 65 years old. Assuming an annual return of 5%, compounded annually, her assets will amount to $372,141 by the time she’s ready to retire.
By contrast, if she waits until she’s 35 years old to start saving, her savings would have totaled $204,674 when she turned 65. While she made $30,000 less in contributions in the 10 years she delayed saving, she missed out on $167,000 in additional growth!
This is why it’s so important that you look at your financial situation and contribute as much as you can, as early as you can.
Interested in learning more? Use this calculator provided by Alerus.