The Power of Compounding: Time Is on Your Side

There’s no time like the present to start saving for retirement. We’re going to show you why you are a more powerful saver today than you will ever be again.

It’s about time and the power of compounding.

Compounding: Your money works for you

Compounding refers to how you can make money on an investment and then make more money on your profits. Let’s say you have an Individual Retirement Account (IRA) and begin by investing $5,500, the annual maximum that people younger than 50 can contribute to a Traditional or Roth IRA in 2017 and 2018. If that account hypothetically returns 5% year after year, your account balance would grow by $275 during the first year. Each year after that, you’d start with a larger balance, so the 5% hypothetical return would generate more dollars. In the second year you’d collect almost $289 and in the third year, over $300. At an annual return of 5%, $5,500 would compound into $8,959 in 10 years, $14,593 in 20 years and $38,720 in 40 years.

You will hopefully keep adding to your retirement account year after year. This illustrative chart shows how an annual contribution of $5,500 that returns a steady 5% a year could produce a nest egg of nearly $700,000 after 40 years.

Embrace your long horizon

Pat yourself on the back if you can contribute to a retirement account now, regardless of how much you are able to contribute. 10 or 20 years from now, you may have a lot more money to set aside, but you will also have 10 or 20 fewer years for it to potentially grow. The dollars you put in an IRA now can have the potential to grow for more years than dollars you will set aside later on.

Honest Dollar by Goldman Sachs

Honest Dollar is a digital retirement savings provider. Since 2015, we’ve worked to deliver an easy way for individuals to set money aside for the future. Honest Dollar offers easy-to-use and low-cost retirement savings options, so you can save whatever amount is right for you. Honest Dollar benefits from Goldman Sachs’ 148-year history of financial experience, risk management and customer service.

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Goldman Sachs & Co. LLC (“GS&Co.”) does not provide accounting, tax or legal advice. Nothing communicated to you on this website should be considered tax advice. You should consult an independent tax professional regarding your personal circumstances. This material is provided solely on the basis that it is educational only and will not constitute investment advice. GS&Co. is not a fiduciary with respect to any person or plan by reason of providing the material or content herein.

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