Here is an example which consists of three people who experience the same annual return on their retirement funds:
A: Susan, who invests $5,000 per year only from ages 25 to 35 (10 years).
B: Bill, who also invests $5,000 per year, but from ages 35 to 65 (30 years).
C: And Chris, who also invests $5,000 per year, but from ages 25 to 65 (40 years).
Question: Who would end up with the most money at 65 years old?
Rank in order of A,B, and C who would end up with the most money at 65 years old.
Have you done so?
Are you ready for the answer?
Intuitively, it makes sense that Chris would end up with the most money. But the amount he has saved is astronomically largely than the amounts saved by Susan or Bill.
Interestingly, Susan, who saved for just 10 years, has more wealth than Bill, who saved for 30 years.
That discrepancy is explained by compound interest.
You see, all of the investment returns Susan earned in her 10 years of saving is snowballing, big time. It’s to the point that Bill can’t catch up even if he saves for an additional 20 years.
Key takeaway: The longer you wait to start saving for retirement, the more you miss out on the benefits of the incredible power of compound interest.
This article first appeared on JP Morgan Guide to Retirement 2014
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