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Starting Early: The Difference It Makes
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How do you create monetary momentum? Start early!
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Imagine two employees, Robin and Roger. Both contribute $2,000 over the course of each year to their DC plan during a 25-year period. Both Robin and Roger receive an 8% annual return on their investments. By age 60, Robin has more than $328,000 saved. Meanwhile, Roger, who also is 60, has only $152,000. The big difference? Robin started contributing at age 25; Roger started at age 35. Even though Robin stopped contributing at age 50, by age 60 her money had benefited from 10 more years of compound interest than Roger's.
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Compound interest is the interest you earn on an investment that is added to the original amount of the investment. In the future, interest payments are then calculated and paid on the increased value of the investment. In other words, you are receiving interest on your interest. For example, if you invested $10,000 at 8%, you would earn $800 in interest in the first year. In the second year, you would earn an additional $64 in interest on the $800 interest earned in the first year. The $64 is called the compound interest.
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