The Power of Time
Remember your mid-twenties when retirement seemed like a lifetime away, and living paycheck to paycheck was not only the norm, but your reality. ‘If only I knew then what I know now’ can be heard echoing throughout offices in banks around the country. So we’re here to heed that warning and help you understand the magic of compound interest in long-term savings, before it’s too late.
Most financial professionals want to get across the importance that saving early is the key to long-term financial success. When you start saving early, your money has more time to grow due to interest, but what the public is often misinformed about is the power of compound interest. Compound interest allows for your savings to grow beyond the amount originally set aside - the principal amount - to have exponential growth period over period.
What exactly is compound interest? Compound Interest is essentially interest earned on interest. It is the result of reinvesting interest, rather than paying it out, so that interest in the next period is then earned on the principal sum plus previously the accumulated interest.
This week we conducted a number of 401(k) participant education meetings. Here is our favorite chart illustrating the importance of savings and compound interest.
This illustration assumes pre-tax contributions, 25% federal tax rate, 7% annual rate of return compounded monthly, with 26 pay periods per year. This chart is for illustration only and is not intended as an indication or guarantee of future performance, nor does not mirror any particular investment option or insurance product. Your retirement savings will depend on how much you contributed and your investment earnings. Taxes and fees have not been taken into consideration for the purposes of this illustration.
“The most powerful force in the universe is compound interest” ~ Albert Einstein