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.