Simply saving our way to a comfortable retirement can be a challenge. To close the gap between what we save and what we will need, we must take advantage of the power of compound interest.
As a quick refresher, compound interest is about earning interest on top of interest, repeatedly, over time. Here’s an example: you invest $1,000 at 8% annual interest. And let’s say you don’t add any additional funds — you just let it sit there, earning interest.
- After one year, you have $1,080.
- The next year, you are earning 8% interest on top of the $1000 + $80 interest, so instead of earning another $80, you earn $86.
- And by the end of 10 years, you’ve DOUBLED your investment to over $2,000.
And it’s all because of compound interest. Time is the key. The earlier you start saving, the greater your long-term gain. With a $1,000 annual investment earning 8%, after 40 years you’ve earned almost $280,000.
But if you delay starting by only five years, you’d only have $186,000. You don’t lose your first five years of earnings growth; you lose the last five — almost $94,000.
When it comes to compound interest, “save early” is more important than “save often.” You can download this simple calculator to determine what you need for retirement.