Think of your retirement investment as a little snowball that starts rolling from the top of a hill. At first, it will roll slowly gathering momentum as it collects more snow. By the time it reaches the bottom of the hill, this humble snowball is much larger than when it began. Start with more snow, use a longer hill and your snowball could be even larger than expected. The same is true with your retirement investment, the sooner you start, the more momentum your account will gain with compound interest as it rolls into your retirement years.
The benefits of compound growth take time
Principal, interest, and time are three components of investing for retirement that everyone should learn. The principal is money that you earn and choose to invest. Interest is the money that you earn from investing your principal. Compound interest works by taking earned interest and adding it to your principal, along with any new contributions, allowing your account to earn a little more every month. Time is the final factor that will determine how much savings will grow from your investment; the longer, the better
Over time, investment earnings often exceed your contributions
The same principle applies to your retirement savings. If you’re putting away $100 or $200 a month, in the first few years you might look at your account value and feel discouraged. But time is often the key component in compound interest calculations. If you stick with it, the payoff is usually found at the end—exactly when you need it most.
Consider the following four people who save the exact same amount: $50 per week. They also all retire at age 65. And they all earn the same rate of return on their investments: 7%.
|Age when savings start||25||30||35||40|
|Account balance at retirement||$537,362||$372,095||$254,262||$170,249|
Because she was saving for the longest amount of time, Jasmin saved more of her own money. But the majority of her final account balance has little to do with the money she saved from her paycheck. Instead, her account’s growth was primarily a result of earnings from investments:
|Total amount contributed by the individual||$104,000||$91,000||$78,000||$65,000|
|Amount earned from investments||$433,362||$281,095||$176,262||$105,249|
Jasmin saved $13,000 more of her own money than Kayla over the course of their careers. But that difference turned into more than $150,000 when both retired at 65, simply because Jasmin’s account had five more years to grow while earning the 7% return.
Get started today
PERA members can save even more for retirement with PERAPlus 401(k) and 457 accounts. It’s OK if you can’t contribute large amounts. The time you have is perhaps even more valuable. To get started today, click here.