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| The Magic of Compounding |
| If participation
in your DC plan is voluntary–as it is in 401(k)s
and 403(b)s–it makes sense to jump in as soon as
possible. Getting an early start can make a huge
difference in the amount of money you have for retirement. |
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| Why? The almost magical effects of
"compounding." As you contribute to your
account, your investments gain interest. Over time,
you also earn interest on that interest. This allows your account to grow at a much faster rate than simple interest. With simple interest, you earn interest on your original principal only. |
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| Here's how compounding works–let's say you put $10,000 in your 401(k) and it earned 8% every year. That first year your principal will have grown to $10,800 ($800 earned interest). In the second year that principal would have increased to $11, 664 ($1,664 in earned interest–$64 more than year one because of compounding). In 20 years your principal will have grown to $46,609.57–all thanks to the magic of compound interest. |
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