It can be scary to think about retirement. Once you stop working, you have to live on your savings or pension for the rest of your life. That’s why it’s so important to save every penny you possibly can, during your working years.
Luckily, compounding interest helps your retirement account grow. When your interest compounds, that means you earn money not just on your contributions, but on the interest those contributions earn. In other words, your money continues to multiply as long as you hold the account!
For example, let’s pretend you set aside 1,000 dollars in an account with a 5 percent annual compounding interest rate. After the first year, your account balance is $1,050. But after the second year, your balance is $1,102.50. You earned $50 in interest the first year, but $52.50 the second year, because you earned interest on your interest! It’s easy to see how your money can multiply over a 30-year career.
Of course, that’s just a theoretical example. You can’t predict your rate of return from one year to the next, but one thing is certain: Your interest will earn interest. You can rest assured that every penny in your retirement account is working hard for you.
Now that you understand how compounding interest works, you can see why beginning to save early in retirement is so important. It’s also important to leave that money in your retirement account, rather than borrowing it for any reason. When you take an early withdrawal, you cost yourself not only the amount you withdraw but also the interest that would have compounded on that money.
Compounding interest helps your retirement account grow. But remember to keep contributing as much as you can each year, so that you can work to ensure a healthy retirement fund at the end of your career.
If you have questions or need assistance, feel free to contact our office. We’re here to help!
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