Compounding and the cost of waiting

One of the best ways to make your money work hard is to start now. 

The power of time  

Why is time of the essence? The sooner you begin saving – even small amounts – the better your chance of reaching your retirement goals. Consider the following example that shows how much waiting to invest can cost. 

Putting time on your side

Investor A invested $1,000 per year for 10 years, beginning at age 30. Investor B also invests $1,000 per year, but began at age 45 and did so for 20 years. Even though Investor A saved less money – half as much as investor B, Investor A had more money – over 50% more – at the time of retirement, all because of starting earlier. 

How does time impact your retirement savings? 

Investor A put away $1,000 per year for 10 years ($10,000) beginning at age 30. Investor B put away $1,000 per year for 20 years ($20,000) beginning at age 45. See what kind of impact time had on each investor's retirement savings.

 

Based on average rate of return of 6% and compounded annually. The results presented are hypothetical and may not reflect the actual growth of your own savings or investments. These values assume all dividends and earnings are reinvested and no withdrawals are made. The chart does not factor in fees or taxes, which would reduce the overall value.

What’s the secret?

Although Investor A invested significantly less than Investor B, the extra years of compounding interest are what boosted Investor A’s bottom line. Investor B will now have to save considerably more to catch up. This is the cost of waiting, a cost that quickly adds up. It doesn’t matter what age you are – more time is on your side if you start saving for retirement today.

What you can do next

Use a savings calculator to see compounding in action and how little changes to your spending can have a big impact on how much you can save for retirement. Better yet, commit to increasing your ongoing contributions to your 401(k) or IRA.