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.
ABG of Michigan (ABG MI) is a full-service retirement plan consulting and administration firm headquartered in Bingham Farms, MI. The firm was founded in 1969 and from day one has specialized in designing and servicing qualified and non-qualified retirement plans.
ABG is one of the largest defined contribution retirement plan administrators in the country; providing administration services to over 13,000 plans representing over 1 million participants and over $51 billion in assets.
Main Office: (800) 875-7510
Fax: (248) 540-5318
30100 Telegraph Road 170
Bingham Farms, MI 48025
Employee Hotline: (866) 253-6767
Plan Sponsors & Advisors: (248) 540-5300
Voice Response System: (866) 858-3863