The power of saving while you're young
We recently found a really strong example that demonstrates the immense power of compound interest.
It comes from the 2014 "Guide to Retirement" from J.P. Morgan's Asset Management division and compares the savings habits of three individuals — Susan, Bill and Chris.
Here's the breakdown.
Susan invests $5,000 per year from ages 25 to 35, a 10-year period during which she saves a total of $50,000.
Bill invests $5,000 per year as well, but he waits until age 35 and invests until he's 65, a 30-year period during which he saves $150,000.
Chris also invests $5,000 per year, but he starts at age 25 and goes until 65, a 40-year period during which he saves $200,000.
All three individuals experience a 7% annual rate of return.
Here's who did the best:
What's notable is that Susan came out with $61,329 more than Bill in the end, despite the fact that she only invested for 10 years.
That's because she started saving at a younger age than Bill, giving the investment returns she earned during that decade plenty of time to snowball.
Obviously, Chris is the big winner here. He has more than $1 million in savings.
How did he do it? He followed all of the rules.
Not only did Chris save more than Bill or Susan, he started early at age 25, which is one of the best things you can do for your retirement.
The 40-year period in which Chris saved gave compound interest the chance to do its magic.
He also never stopped contributing and never touched the money.
And though it's only speculation, Chris likely had a portfolio that was heavy with stocks. (Check out our story on 401(k) millionaires: Their secret to saving a fortune .)
The major point is that the earlier we start saving for retirement, the longer we let the incredible power of compound interest do its work.
And since the days of the pension plan are long gone, we need all the time we can get to save.
We're now responsible for our retirements.
But if we can emulate the savings habits of hypothetical Chris, we'll all get closer to building that $1 million nest egg.
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