Compounding: Save Early and Retire with More
When it comes to saving for retirement, few things are more impactful than saving early. Even if you can’t put a lot of money aside at first, those savings and investments can grow exponentially over time due to the magic of compounding.
You may be familiar with compounding when it comes to bank interest, but it’s also an important factor in the earnings on stocks and bonds, dividends, and other gains in your 403(b) account.
Compounding is what happens when the earnings on your investment, along with the original investment, are reinvested. Eventually you generate earnings on the investment's reinvested earnings. It’s a snowball effect that gets more powerful the longer your money stays invested. And it’s particularly advantageous in retirement accounts like RPB’s 403(b) plan because your compounded earnings aren’t being reduced by taxes every year.
Depending on market performance, over a long enough period of time, the compound earnings growth can dramatically build on the contributions you and/or your employer make to your retirement account.
Let’s look at a hypothetical scenario. Susan, a 25-year-old, saves $250 a month until she’s 65 years old. Assuming an annual return of 5%, compounded annually, her assets will amount to $372,141 by the time she’s ready to retire.
If Susan waits until she’s 35 years old to start saving, her savings will total $204,674 when she turns 65. While she will make $30,000 less in contributions in the 10 years she delays saving, she misses out on $167,000 in additional growth!
The benefits of compounding and tax-deferred growth are worth the efforts of contributing as much as you can, as early as you can.
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