Despite being raised believing that Andre the Giant was the eighth wonder of the world, it turns out it was actually compound interest.
I was fortunate to be smitten with it upon someone first showing an example of the difference in can make in meeting your retirement goals. In case there are those that have not come across any such examples, today is your lucky day.
Here is a graph demonstrating the powerful effect of starting to save early.
This chart tracks the growth of two different savings strategies, both assuming a 9% annual return:
- The Early Starter (Blue Line): Saves $15,000 per year for only 10 years, from age 21 to 30.
- The Late Starter (Orange Line): Starts 10 years later at age 31, but saves $15,000 per year for 35 years, right up until age 65.
The Results at Age 65
As you can see, the head start makes an enormous difference, even though the “Late Starter” invested far more money, they still end up with over a million dollars less.
- Early Starter (Starts at 21):
- Total Invested: $15,000/year x 10 years = $150,000
- Value at Age 65: ~ $4.65 million
- Late Starter (Starts at 31):
- Total Invested: $15,000/year x 35 years = $525,000
- Value at Age 65: ~ $3.24 million
Key Takeaway
By starting just 10 years earlier, the “Early Starter” invested $375,000 less but ended up with ~ $1.41 million more. This is because the money from the first 10 years had 35-44 years to grow, allowing compound interest to work its magic. The light blue shaded area (ages 21-30) shows the short period of contribution that fueled all that growth.
It’s normal to be skeptical. I gave the numbers to Gemini AI to create the graph and calculate the results. Then after seeing the final totals, I didn’t even believe it and had to double check the calculations. They were correct. I’m the one who is trying to convince you that compound interest is great and it’s even still unbelievable to me how important it is
That’s it, one of the most important lessons you can be taught. While I prefer to use a lower annual return rate in my future projections, that is roughly the historical average from the S+P 500. Even with a lower percentage return, saving early will always beat starting late, and starting late will always beat never starting at all*.
But What Do I Invest In?
*Unless you invest for one year, the stock market drops and you pull out all your money…in that case, it would have been better to never have started investing at all.