Contributing Now Matters!

If you don’t contribute to a 401(k), IRA or other qualified retirement plan you could be missing out on a potentially large benefit – compounding. Simply put, compounding is potential earnings on your interest or gains over time. So, the earlier you begin saving, the earlier interest will add up and compound. The same principle applies to retirement plan contributions. The earlier you begin contributing, the more time you give your retirement portfolio to potentially grow. Following are three hypothetical examples that demonstrate how time and compounding work.*

Great Start

Melissa wants to save for retirement early, so she contributes $200 per month to her company 401(k) plan. That’s $2,400 per year, which she keeps up for 10 years — at which point her money has grown to about $32,881. She never contributes another dime to the retirement plan, but after another 30 years, her balance has grown to $198,889.

Plan Interrupted

Jake is a Millennial like Melissa and starts off contributing the same amount for five years to build a $13,993 balance. He gets married, has a family and stops retirement plan contributions for the next 30 years. Even so, his balance grows to $84,640. He then restarts contributions for another five years before retiring, when his account will have grown to $128,242.

Late Start

Anthony is 57 and, unfortunately, never contributed to a retirement plan. Better late than never, so he begins making $200 per month contributions to his plan. At his retirement age of 67, his balance will only amount to $32,881. If he doubles his contributions, he will still only have $65,762 after 10 years. As these three examples show, compounding works best with time. Even if Anthony quadruples his contribution, he will barely accumulate more than Jake does and much less than Melissa will.

The moral of this story? Time matters. Talk to your financial professional to learn more.

*Each example, courtesy of investor.gov, is based on hypothetical earnings of 6% compounded daily. It is not representative of any specific investment strategy or combination of investment strategies. Actual results will vary.