A Tale of Two Cases
By Nick Schafer
We all have learned about compounding interest in our high school or college math classes (or from credit card balances), but few have recognized the power of it from an investing standpoint. Let me show you two cases to prove my point.
Earl, a hardworking accountant, has put off his investing until age 35. He decides to start contributing $100 a month into an IRA averaging 7% interest annually until he retires at the age of 65. This gives him 30 years to accumulate his contributions. When Earl turns 65, he’ll have about $122,000 in his IRA to draw from.
John, also an accountant, is very proactive and has just started investing at the age of 25. He too is contributing $100 a month into an IRA averaging 7% interest annually until retirement at age 65. This gives him 40 years to accumulate his contributions. When John turns 65, he’ll have about $262,000 in his IRA to draw from.
As you can see the extra 10 years that John had resulted in a retirement balance over double of what Earl accumulated, even though John only had 25% more time.