Investor A invests $2,000 a year for 10 years, beginning at age 25. Investor B waits 10 years, then invests $2,000 a year for 31 years. Compare the total contributions and the total value at retirement of the two investments. This example assumes a 9 percent fixed rate of return, compounded monthly. All interest is left in the account to allow interest to be earned on interest.
| Age | Years | Investor A | Investor B | ||
|---|---|---|---|---|---|
| Contributions | Year End Value | Contributions | Year End Value | ||
| 25 | 1 | $2,000 | $2,188 | $0 | $0 |
| 26 | 2 | 2,000 | 4,580 | 0 | 0 |
| 27 | 3 | 2,000 | 7,198 | 0 | 0 |
| 28 | 4 | 2,000 | 10,061 | 0 | 0 |
| 29 | 5 | 2,000 | 13,192 | 0 | 0 |
| 30 | 6 | 2,000 | 16,617 | 0 | 0 |
| 31 | 7 | 2,000 | 20,363 | 0 | 0 |
| 32 | 8 | 2,000 | 24,461 | 0 | 0 |
| 33 | 9 | 2,000 | 28,944 | 0 | 0 |
| 34 | 10 | 2,000 | 33,846 | 0 | 0 |
| 35 | 11 | 0 | 37,021 | 2,000 | 2,188 |
| 36 | 12 | 0 | 40,494 | 2,000 | 4,580 |
| 37 | 13 | 0 | 44,293 | 2,000 | 7,198 |
| 38 | 14 | 0 | 48,448 | 2,000 | 10,061 |
| 39 | 15 | 0 | 52,992 | 2,000 | 13,192 |
| 40 | 16 | 0 | 57,963 | 2,000 | 16,617 |
| 41 | 17 | 0 | 63,401 | 2,000 | 20,363 |
| 42 | 18 | 0 | 69,348 | 2,000 | 24,461 |
| 43 | 19 | 0 | 75,854 | 2,000 | 28,944 |
| 44 | 20 | 0 | 82,969 | 2,000 | 33,846 |
| 45 | 21 | 0 | 90,752 | 2,000 | 39,209 |
| 46 | 22 | 0 | 99,265 | 2,000 | 45,075 |
| 47 | 23 | 0 | 108,577 | 2,000 | 51,490 |
| 48 | 24 | 0 | 118,763 | 2,000 | 58,508 |
| 49 | 25 | 0 | 129,903 | 2,000 | 66,184 |
| 50 | 26 | 0 | 142,089 | 2,000 | 74,580 |
| 51 | 27 | 0 | 155,418 | 2,000 | 83,764 |
| 52 | 28 | 0 | 169,997 | 2,000 | 93,809 |
| 53 | 29 | 0 | 185,944 | 2,000 | 104,797 |
| 54 | 30 | 0 | 203,387 | 2,000 | 116,815 |
| 55 | 31 | 0 | 222,466 | 2,000 | 129,961 |
| 56 | 32 | 0 | 243,335 | 2,000 | 144,340 |
| 57 | 33 | 0 | 266,162 | 2,000 | 160,068 |
| 58 | 34 | 0 | 291,129 | 2,000 | 177,271 |
| 59 | 35 | 0 | 318,439 | 2,000 | 196,088 |
| 60 | 36 | 0 | 348,311 | 2,000 | 216,670 |
| 61 | 37 | 0 | 380,985 | 2,000 | 239,182 |
| 62 | 38 | 0 | 416,724 | 2,000 | 263,807 |
| 63 | 39 | 0 | 455,816 | 2,000 | 290,741 |
| 64 | 40 | 0 | 498,574 | 2,000 | 320,202 |
| 65 | 41 | 0 | 545,344 | 2,000 | 352,427 |
| Value at Retirement | $545,344 | $352,427 | |||
| Less Total Contributions | ($20,000) | ($62,000) | |||
| Net Earnings | $525,344 | $290,427 | |||
Note that Investor A, who invested much less than Investor B, has a much higher nest egg at retirement age, because of a 10-year head start. As you can see from this example, compound interest is especially magical when money is steadily invested and left to grow over a long period.