When it comes to saving for retirement, small amounts can add up to significant sums. Time really is money.
The reason is compounding—the snowball effect that occurs when the earnings on your investments begin to generate their own earnings. Over longer periods, it potentially can have a substantial impact on the growth of your savings. Consider the following hypothetical example1:
Twenty-five-year-old Eve is an early bird saver. She puts $100 a month into her retirement plan every year until she’s 35. After contributing $12,000 for those 10 years, though, she never adds another dime.
Paul, on the other hand, is a procrastinator. He doesn’t tuck anything away until he’s 35. He also saves $100 a month for 10 years, and then doesn’t add another dime, totaling $12,000 in contributions.
At an annual return of 6% for both plans, who wins? Despite saving the same amount, Eve maintains a substantial edge—almost 45%—over Paul. Her extra 10 years of compounding substantially pays off in the long run.
Eve, the early investor, comes out $42,524 ahead in 40 years.
This chart assumes a fixed annual rate of return of 6%, on a tax-deferred basis, with earnings reinvested.
This hypothetical example is not intended to show the performance of any Oppenheimer fund for any period of time, or fluctuation in principal value or investment return. At withdrawal, taxes must be paid on the amount withdrawn. Periodic investment plans do not ensure a profit or protect against loss in declining markets.
Many retirement plans offer savings on a pre-tax basis. That means contributions you make come out of your paycheck before taxes, resulting in a lower taxable income and a decreased tax burden. When you elect to make pre-tax retirement savings contributions, you may hardly notice the difference in your take home pay.
Use this retirement income calculator to help determine your retirement income needs and see if you are on track with your retirement savings.
1The persons portrayed in this example are fictional. This material does not constitute a recommendation as to the suitability of any investment for any person or persons having circumstances similar to those portrayed, and a financial advisor should be consulted.