You hear it over and over: saving early pays off! But does that really apply to retirement?
Yes, through the magic of compounding!
There are many examples of how compound interest works. The case of Stephanie and Fred provides a particularly persuasive one.
Stephanie saves 1 000 $ a year for 10 years from age 25. She stops saving at age 35 but lets interest compound on her capital. Her total investment is therefore 10 000 $.
Fred starts saving 1 000 $ a year for 25 years from age 40. His total investment is therefore 25 000 $.
Assuming a 5% rate of return, Stephanie will have accumulated 7 000 $ more than Fred at age 65. It's the magic of compounding in action! Amazing, no?