Time Is Money: The Magic of Compounding
When it comes to investing, there’s an old saying: “Time is money.” There is some truth to it, especially when you take an investment concept called compounding into consideration.
What is compounding?
Compounding is what happens when the money you save (in a savings account, a mutual fund or an employer-sponsored retirement plan) grows—and that increased amount remains in your account to be reinvested to earn even more. Over time, if your savings continue to grow, compounding can play a more important role as your total account balance increases. That’s because your account may be earning more on a larger amount of money.1
The Important Role That Time Plays
The longer your money is invested, the greater its chance to compound. Given enough time, even small investments can grow to impressive amounts. Here’s an example: Assuming an average annual 6% rate of return, if you are age 30 and your retirement account has a balance of $20,000, after 35 years (assuming no additional contributions), your account balance has the potential to compound to $153,722 when you’re ready to retire at age 65.2 That’s more than seven times the amount of your account balance at age 30.
The Earlier You Start Saving, The Better
Regardless of your age, the longer your money is invested, the greater the chance it has to grow. Financial professionals advise that, for every 10 years you delay starting to save for retirement, you will need to save a good bit more—just to catch up on the lost potential earnings.
Put Compounding To Work For You
Investing in your employer-sponsored retirement plan is an ideal way to harness the power of compounding for your financial future. Why? Because any money that your contributions earn will be automatically reinvested in your account. Keep in mind that the more you contribute to your retirement account, the more you’ll boost your account balance. Together, your contributions and compounding can help you build a more secure retirement.
Learn More About The Power of Compounding
For personal assistance or to learn more about the important role that compounding—in tandem with your own contributions—can play in helping you to achieve a more financially secure future, you may wish to consult a financial professional or a Certified Prudential Retirement® Counselor.3 Simply call 1-877-PRU-2100 toll free, Monday through Friday, from 8 a.m. to 6 p.m., ET.
1 The compounding concept used here is for illustrative purposes only.
2 Source: Investment Returns Calculator. This compounding concept is for illustrative purposes only and is not intended to represent performance of any specific investment, which may fluctuate. No taxes are considered in the calculations. Assumed 6% rate of return for a portfolio that includes variable investments. Based on a hypothetical rate of return of 6% annual interest compounded monthly. Please keep in mind that it is possible to lose money by investing in securities.
Many of Prudential Retirement’s Personal Retirement Services Retirement Counselors carry the distinct designation of Certified Retirement Consultants, an advanced certification available through the International Foundation for Retirement Education (InFRE). Certification includes mastery of retirement plan design, investment strategy, retirement income management, and retirement readiness and counseling.