The Power of Compounding

Though it's never too late to start saving for retirement, time is truly your greatest ally. Unfortunately, many of us don't spend much time planning for retirement, especially since it may be many years from now.


There's one good reason why you should take advantage of having time on your side - the power of compound interest. Simply defined, compound interest helps your savings grow even faster. That's because you're earning interest on the money you're saving, plus you're earning interest on the interest.


Let's look at compound interest this way. Say, for example, you decide to save $1 every day for a year. That adds up to $365. If you put that money in a savings account or investment that earns 5% a year, it would grow to $465 by the end of five years. At the end of 30 years, it would be $1,577.


That's how regularly saving small amounts of money over time can help your retirement income grow to a large sum, especially when your contributions have tax-saving advantages. For instance, let's compare Al and Ellen. Although Al and Ellen both contribute the same amount of money to their Alcoa Savings Plan each year, look how much more Al will have at age 65 simply because he started saving earlier. If they both contribute $1,000 per year with a 6% average return, Al will have $118,121 and Ellen will have $83,802 at age 65. You'll quickly see what a difference five years can make.


Age Chart