The Perks of Compound Interest

Retirement is one of those unique financial goals where you can benefit by saving less earlier, compared to saving more at a later date. By maximizing on the most valuable element, time, you can ensure that even a little savings will go a long way. To help illustrate the capabilities of time, and the interest it compounds, Exchange Bank of Northeast Missouri would like to share a simple story:

 

We start with two people, Jane and John. Jane starts saving for retirement at 25, contributing $5,000 a year into her IRA or 401(k) until age 45, when she stops adding funds to the account. Jane chooses to retire 20 years later at age 65. John, on the other hand, starts saving for retirement at 37, contributing $10,000 a year in his IRA or 401(k) until age 65 when John chooses to retire.

 

In this scenario who do you think saves the most? Jane does!

 

While John certainly puts more of his money into his retirement savings account, Jane took advantage of retirement’s biggest helper, time.

 

Here’s how each situation works:

 

Jane contributes a total of $100,000 towards her retirement over the course of 20 years and allows it to continue growing interest for another 20 years. Her account yields a final amount of $1,151,790.61 based on an 8 percent compound interest rate. Jane earned $1,051,790.61 in interest over the course of 40 years.

 

John contributes a total of $200,000 towards his retirement over the course of 28 years yielding a final amount of $1,029,659.36 based on 8 percent compound interest rate. John earned $749,659 in interest over the course of 28 years.

 

While you can make a great retirement savings strategy at any age, the earlier you begin, the better! If you’re curious how you can take the first steps on your journey to financial security, stop by your nearest branch and speak with one of our personal bankers today.

 

Exchange Bank of Northeast Missouri

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