#1 Reason To Start Investing Early:
COMPOUND INTEREST
The secret is out! Starting to save for retirement while still in your twenties offers several advantages, but the biggest and most important one is that doing so allows you to maximize your compound interest.
Compound interest may seem a little difficult to wrap your brain around at first, but the concept is really quite simple. The main distinction lies in whether or not you take out interest earned so you can spend it on other things or reinvest it back into your account.
- If you take out the interest earned every year, your principal amount stays the same. In this case, the interest earned will always be based off of your initial investment amount, yielding the same amount of interest every year.
- If you take the interest earned and reinvest it into your account, you increase the principal amount. Your interest earned will now be based off your new principal amount, which means it will be greater than the year before. This is when compounding occurs.
Compound Interest Can Accumulate Exponentially
Essentially, compounding means that you keep rolling your earnings into the account. Given time, compound interest can accumulate in massive quantities. Consider this example:
John sets up a retirement savings account at the Lake of the Ozarks when he is 23 years old with an initial investment of $5,000. He earns compound interest at an annual rate of 5%. By the time he retires at age 65, his account will have grown to $38,807.94 if he reinvests the interest earned every year.
John's earnings do not have to stop there. If he were to invest an additional $1,000 every year at the start of each compounding period, his account will have grown to $180,801.28 in that same amount of time.
John's earnings do not have to stop there. If he were to invest an additional $1,000 every year at the start of each compounding period, his account will have grown to $180,801.28 in that same amount of time.By making deposits in addition to reinvesting the interest earned, John increases his principal amount much faster. At the start of each compounding period, the interest amount is calculated based off the new principal amount. It is easy to see how, given time, these investments have the power to grow exponentially.
Compound Interest Has To Have Time To Work
Compound interest can be very powerful, but it has to have time to work. We have seen that John's account can grow up to $180,801.28 over the course of 42 years, but what would happen if he were to wait longer before he began investing? (For the sake of the comparison, we will assume that his initial investment amount is always $5,000, he always reinvests the interest earned as well as contributing an additional $1,000 every year, his interest rate is always 5% compounded annually, and he always retires at age 65.)
- If he begins investing at age 30, he will have $122,416.40.
- If he begins investing at age 35, he will have $91,370.50.
- If he begins investing at age 40, he will have $67,045.23.
- If he begins investing at age 45, he will have $47,985.74.
- If he begins investing at age 50, he will have $33,052.13
Obviously, the longer John waits to begin investing, the less money he will have to support himself in retirement.
Contact First Bank Of The Lake To Set Up Your Retirement Savings Account!
Hopefully these examples make it easy to see why it's so important to begin investing at an early age. Even if you do not have much money you can afford to invest now, every little bit helps. You can always increase your additional contributions down the road.
To learn more about saving for retirement at the Lake of the Ozarks, visit our website about our IRA accounts in Osage Beach MO. We would be honored to help you plan for retirement!
First Bank of the Lake - Striving For Excellence
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Located at the entrance to the Osage Beach Premium Outlets!
4558 Osage Beach Parkway
Suite 100
Suite 100
Osage Beach, MO 65065
(573) 348-2265
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