Compound interest

Compound Interest Graph, March 2016

In its Guide to Retirement 2016, JP Morgan Asset Management included a powerful illustration of how compound returns lead to huge differences between investors who start young and those who wait until later in their careers to save seriously. .

JPMorgan presents the results of four hypothetical investors who invest $ 10,000 per year at an annual rate of return of 6.5% over different periods of their lives:

  • Chloe invests all his professional life, 25 to 65.
  • Lyla starts 10 years later, investing from 35 to 65.
  • Quincy put money aside for only 10 years at the start of his career, ages 25 to 35.
  • Noah records from 25 to 65 like Chloe, but instead of being moderately aggressive with his investments, he simply holds cash at a 2.25% annual return.

pretty graph exponential curve

JP Morgan Asset Management

The differences are remarkable: Chloe, who has invested her entire career, ends up retiring with nearly $ 1.9 million. Lyla, who started just 10 years later, has only about half of it, at $ 919,892.

Surprisingly, Quincy, who only invested 25 to 35 years, ends up with $ 950,588, a little more money than Lyla, who has invested for 30 years. This is how important early capitalization is for investing.

Noah, who had a much lower rate of return than the other three investors, ended up with the lowest total, $ 652,214.

Now, as the fine print at the bottom of the chart shows, this is essentially a thinking experience and not a real investment plan.

But it shows the power of exponential compounding – the earlier you start investing, the sooner you start to get returns on your investments.

And then if you reinvest those returns, you get returns on those returns, and so on.

So the sooner you can start investing for your retirement, the better.