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

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.