The Power of Compounding


When you’re just starting in your career, you can feel strapped, earning a small salary and trying to make ends meet.  You might not feel like there is any money left over at the end of the month and that’s why some people decide to wait to start saving for retirement. However, the power that time has on your money can’t be understated.

I recently had an opportunity to meet with a long-time client’s daughter.  The goal of the meeting was to give some timely financial advice as she embarks on her new career after college. One of the key points I made was the power of compounding dollars over time.    

Using Time to Compound Money

For instance, if a 25 year old were to save approximately $4,500 a year compounding at 7% she would have close to 1 Million dollars by age 65. But, if she decided to wait to start saving for retirement until she was making more money at age 45, she would need to save $21,904 a year to accomplish the same result. That’s a staggering 486% increase in the dollars she’d need to save compared with the 25-year-old saver.

Knowing Your Benefits

To help with your retirement savings, it’s very important to fully understand your employer benefits before you begin employment.  Many employers will offer qualified retirement savings programs like a 401(k) or 403(b). If these plans exist and the company offers a match on your contributions, you should do everything you can to make sure you at least get the matching dollars.  For instance, in the case of our 25 year old, we know the potential of a $4,500 a year savings and earning 7% on that money. Now, if we factor in an employer match of $2,250, that same 25 year old would have accumulated approximately $1,350,000 over that same time horizon.

The longer you wait to start saving, the more you are going to have to put away. In other words, the pain could be much worse the later you wait.

Matthew Trujillo, CFP®, is a Certified Financial Planner™ at Center for Financial Planning, Inc. Matt currently assists Center planners and clients, and is a contributor to Money Centered.

This is a hypothetical illustration and is provided for illustration purposes only and is not intended to reflect the actual performance of any particular security. Future performance cannot be guaranteed and investment yields will fluctuate with market conditions. C14-022060