Helping You Reach Retirement

The Magic of Compounding Interest

In your retirement account, the money or interest you make can continue to earn MORE. This is the concept behind "Compound interest." And that’s the whole point of investing for the long term.

Here’s a simple illustration to show you how it works. Let say I have $1000 in my account and it earns 10% which equals $100 in year 1. Now I have $1100 invested in year two. My original $1000 is earning more in year 2 and so is the $100 I earned in year 1. If this continues, you can see that in later years the return on the $1000 dollars I first invested has earned money, too. This can add up to be a huge deal over the long term.

This illustration shows how the contribution I made in year 1 earned a compounded return over many years. If I continue to contribute to my account every year as I would in my 401(k), then each of these contributions will have the potential to compound as well. You can see why it’s a really good idea to start saving as early as you can in order to have as many years ahead of you for the magic of compound interest to work for you.

Remember, this is just an educational illustration and not an investment recommendation or guarantee of investment performance. If you have questions about your personal savings path, reach out to talk to us. We’re here to help.