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Time Value of Savings

The earlier you start saving the better

The time value of how savings can grow is quite impressive. Albert Einstein is quoted as saying, "The most powerful force in the universe is compound interest." Well when it comes to building wealth, it sure can be.

An easy way to see what Einstein was talking about is to look at a one-time investment of $1,000 and see how its value grows over 10, 20, 30, and even 40 years of time. In the following chart, you can see how just $1,000 becomes worth so much more as earnings, dividends, and/or interest are continually reinvested and the growth of this money "compounds." In 40 years, that $1,000 invested grew to be over $20,000 – that's more than 20 times larger.

$1,000 invested with 8% annual return See how compounding can really make a difference for you

This example compares how a one-time investment of $1,000 can grow over time assuming an 8.0% fixed annual rate of return. Your account may earn more or less. This is a hypothetical example only, and not a guarantee of future returns. Actual experience will vary with portfolio selections and changing market conditions. The total account balance does not take into account federal and state income taxes, which will be due upon withdrawal. Assets withdrawn before 59½ may incur a 10% tax penalty.

That is the power of compounding and why it's such an advantage to start saving your money as soon and as young as possible. It's hard when you're young to commit even a little towards a retirement account. It seems so far away and it often feels like there is plenty of time to catch up later. Well, as you can see in the chart, it just makes it a lot harder.

Are you getting a late start?

It's not too late. Sure, it will be tougher. You'll need to save more and that's where 401(k) plans can give you extra help. 401(k)s allow people who are 50 years of age or over to contribute more than those who are younger. In 2017, a person age 50 or over can contribute $18,000 annually plus an additional "catch-up" contribution of $6,000.

To learn more about saving smart for retirement, check out the following guides:

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