Compounding accelerates the growth of your savings over time. Returns are calculated not only on your principal balance invested but also on previous earnings.
By: Leanne Kampeter
Senior Vice President, LPL Financial Advisor
When I was a senior in college, one of my accounting professors impressed upon me the importance of saving early for retirement. She, a highly educated individual in her early 50’s, begged my class of 1995 to begin saving for retirement with that first paycheck. She said, “Even if you only save $50 each paycheck, please, please, please save it. I didn’t save early enough and I’m trying to catch up and I’m paying for it now.” She probably had no idea how much impact that statement made on my life.
Although she didn’t specifically use the term “compounding”, my professor was living proof that starting to save early for retirement is significant.
Compounding accelerates the growth of your savings over time. Returns are calculated not only on your principal balance invested but also on previous earnings. There are lots of calculators on the internet to demonstrate this phenomenon but let’s look at a simple example of 2 savers – one that started early in life and one that did not.
Bailey – age 25
Starting with $5,000 to invest
Assumes 5% annual return
Invested for 40 years
Monthly savings of $200 – also earning 5%
- Future value (at age 65) – Bailey’s balance is $709,836.63
Billy – age 50
Starting with $50,000 to invest (10x more than Bailey)
Assumes 5% annual return
Invested for 15 years
Monthly savings of $1,000 (5x more than Bailey) – also earning 5%
- Future value (at age 65) – Billy’s balance is $473,195.28
It’s evident that Bailey will be in a much better position than Billy when she turns 65 years old. By starting early, Bailey will not only garner a higher account balance by age 65 but she will also not put pressure on her monthly budget and “playing catch up” when preparing for retirement.
It’s never too late to start saving for retirement, however, make it easier on yourself and “please, please, please, save at least $50 per paycheck.”
Category: Retirement
The hypothetical examples shown are demonstrating mathematical principles. This hypothetical example, based upon the above referenced assumptions, is for illustrative purposes only and does not represent the performance of any specific investment, and is not a guarantee of future results. These examples do not reflect investment fees or taxes due which, if deducted, would reduce the investment's performance. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss.
