Compounding. Compounding. Compounding. Just as with location in real estate, compounding is the key to retirement money growth over time. If you ask the best time to start saving for retirement, the answer most people will give you is “Now!” Or better yet, yesterday.
That’s because your money earns even more money the longer it sits gathering interest. Compounding (where accumulated interest also grows along with principal) is almost magical. And when the money is in a tax-deferred account, where all your interest earnings get to keep compounding … well, even better!
Retirement money growth charts
Below you’ll find two charts. The first one shows how much money you will have when you retire at either 65 or 70 years of age if you start saving at either age 25, 35, 45, or 55. This example uses $5,000 invested annually just to give you an idea of the compounding effect on whatever you are able to invest.
I’ve also chosen an average growth rate of 5% for this example (see Chart #1), which includes compounding and no taxes until you withdraw the funds (tax-deferred accounts). This way the interest also earns interest and grows.
Why 5%? Good investments actually can grow at a higher rate than that over time (although at any given time the market can be down). But since diversification is a smart way to invest, I’m leaving room for higher and lower risk investments for this example. Again, your own results will vary.
Chart #2 is simply there to show you how little money you’d wind up with if you just put the same amount away each year. But in this case, you are not earning interest or getting the benefit of compounding.
Retirement money chart #1
[CLICK CHART TO VIEW ON SEPARATE PAGE]
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Retirement money chart #2
[NO INTEREST COMPOUNDING]
[CLICK CHART TO VIEW ON SEPARATE PAGE]
Why this matters to your career
Having savings that increase over time is about more than just retirement money growth in and of itself. There are times in any career where it helps to know you have money socked away just in case things go wrong with your job.
Of course, you don’t want to use retirement savings if you don’t have to. You will probably need way more than you think when the time to stop working actually comes. And any money you use before retirement will also lose interest compounding potential to take care of you when you truly retire.
But there is a psychological benefit to knowing you’ll be able to retire one day … with ample savings to help you live comfortably, even as prices continue to rise. Plus, having rainy day money is always good for not feeling pressure to take a job you don’t want. Or the freedom to leave a job you can’t stand.
A few more thoughts
The main point of this article is to encourage you to start your retirement savings as early as possible. It’s easy to think “Oh. I’m still young. I can always start later.”
But look again at a full page view (click on the chart) to clearly see the difference compounding makes when you start at an earlier age. In his case, time really is money.
Even if you don’t have much to begin with, it will add up over the years. And when you can, you simply stat adding more. Trust me … you’ll thank yourself for this one day!
Some posts to help
How Much Money Do You Need To Retire?
Retirement Reality: What Happened To The Dream?
Why Are You So Afraid To Retire?
Life Plan Retirement Community (CCRC) Questions
How To Create a Cash Flow Spreadsheet
How To Create a Budget Plan Spreadsheet
Advantages of SEP IRA Plans for Freelancers
Why Diversified Investing Is So Important
I Want To Learn To Invest in Stocks
Roth IRA vs Traditional: What’s the Difference?
When Should I Use My IRA If Out of Work?
Investing Your Money: Do You Need a Stockbroker?
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