Why time is your ally in retirement

When it comes to saving for retirement, the sooner you start, the better off you’ll be. Why? Because of compounding.

The idea behind compounding is simple: When your investment earns money, those earnings are reinvested in your account and have the potential to earn interest of their own. Over time, the ability for your earnings to generate earnings of their own can significantly increase the growth potential of your original investment.In fact, the sooner you start investing, the less you may need to save to reach the same savings goal.

Consider the example below. If you contributed just $200 to your retirement account at the beginning of each month, the chart below shows how much you might accumulate if your account earned an annual return of 5%. See how the earnings portion of your account is an ever-increasing share over time? In thirty years, your earnings would represent more than half of your account balance. That’s because of compounding!1

Why time is your ally table with contributions and earnings

As you can see, the longer you’re invested, the more compounding can work for you. That may explain why some people who start investing early in their careers accumulate more money than people who start later. Years of regular plan contributions, potential investment earnings, and compounding can help you build the balance you'll need to retire comfortably and confidently.

Keep it going

Remember, compounding can only work if you give it time. Stopping your contributions for a period of time or borrowing from your plan (if your plan permits loans) can slow things down. So keep those contributions coming! If you are starting later than you wanted, that’s okay.  You can still use the power of compounding to help build on the money you are saving now. You can still benefit from compounding, even if you’re only a few years from retirement. What’s most important is that you start as soon as you can and save as much as you can for your future.

Compounding with every paycheck

Your employer-sponsored plan is one of the most convenient ways to make compounding work for you. Every paycheck is a new opportunity to add to your retirement savings. For 2020, you may be able to contribute a maximum of $19,500 over the course of the year, though check with your employer, because some organizations may impose lower limits. If you are age 50 or older, you may also have the opportunity to save up to $6,500 more. Even if you cannot afford to invest the maximum amount, save as much as you can. Remember, you can always increase your contribution later. To see if you’re saving enough for the retirement you want, go to Equitable’s retirement calculator.


1This is a hypothetical example used for illustrative purposes only. It is not representative of any particular investment vehicle. It assumes a monthly contribution of $200 and a 5% annual return compounded monthly. Your results will be different. Tax-deferred amounts accumulated in the plan are taxable on withdrawal, unless they represent qualified Roth distributions. 

Important Note: Equitable believes that education is a key step toward addressing your financial goals, and we’ve designed this material to serve simply as an informational and educational resource. Accordingly, this article does not offer or constitute investment advice and makes no direct or indirect recommendation of any particular product or of the appropriateness of any particular investment-related option. Investing involves risk, including loss of principal invested.  Your needs, goals and circumstances are unique, and they require the individualized attention of your financial professional. But for now, take some time just to learn more.

This article is provided for your informational purposes only. Please be advised that this document is not intended as legal or tax advice. Accordingly, any tax information provided in this document is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer. The tax information was written to support the promotion or marketing of the transaction(s) or matter(s) addressed and you should seek advice based on your particular circumstances from an independent tax advisor.

Equitable Financial Life Insurance Company (New York, NY) issues life insurance and annuity products. Securities offered through Equitable Advisors, LLC, member FINRASIPC (NY, NY 212-314-4600), Equitable Financial Life Insurance Company and Equitable Advisors are affiliated and do not provide tax or legal advice.

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GE-2958486 (02/2020) (Exp. 02/2022)