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The Power of Compounding
The Power of Compounding
Many people don't realize the power of compounding and the effect of time.
Preparing for retirement is best done early in life rather than later.
Consider the hypothetical case of three people -- Aaron, Bob and Carl. Aaron begins
to save for retirement at age 20 and saves only $2,000 per year for 10 years. Carl
doesn't begin saving for retirement until age 40 and contributes $2,000 each year
until he reaches age 65. Bob begins saving at age 30 and continues adding $2,000
each year until age 65.
Neither of the last two will have as much at retirement as Aaron, thanks to the power
of compounding.
Assuming a growth rate of 8 percent each year, as the chart below shows, both Bob
and Carl will contribute considerably more than Aaron, but will end up with from
about $100,000 to $300,000 less at age 65 -- and Aaron can stop contributing at age
30. The reason is the power of compounding. It pays to begin saving early.
©1999 United Church of God, an International Associtaion
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