Build Retirement Savings with Compounding Interest

Let’s take a look at numbers to see what compounding interest is. For example, let’s say a new college graduate puts away $10K per year in his or her 401k account, starting at age 22 and does that consistently each year until retirement at age 67. So, $10K goes into that 401k every year, applying an average rate of return of 7%, which is expected when keeping your money invested in a diversified portfolio. After 45 years of consistently investing $10K in your 401k, at a 7% rate, you can expect to have over $2.8M. 

What if you missed the boat and you’re in your early 40s and are just now starting to invest? If you invest the same amount for 25 years, until the Social Security retirement age (67), instead of $2.8M, you’d have $632K. With this, we can see how much a delay of 20 years can cost your retirement. 

In an even worse scenario, say you are now 62 and still want to retire at age 67, but only started saving now. When the time for retirement comes around you’d only have $57K in your 401k. If at age 62, if you decide you still want to retire with $2.8M in your 401k account, you’d have to save $487K each year for the five remaining working years. This is clearly not a feasible option for most people. 

As you can see, starting to save early and compound interest are your best friends. Therefore, any amount that you can save at an early age is going to compound its growth over time, so it’s better to start small and early, than big and later.

Have more questions? Contact Us

Missie Beach, CFP®, CDFA®
Senior Financial Advisor, Wiser Wealth Management

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