Ask a financial planner to name a wonder in the universe, and he might say compounding. Compounding may not rate that type of hype, but it is an amazing phenomenon in the investing landscape, and one that can work for you.
Compounding is the earnings on both your original investment and any interest and dividends your investment earns. The earlier in your career you start saving for retirement, the more compounding can benefit you. But don’t despair if you’re near retirement. Starting late is better than not saving at all. Compounding still works, even over the short term, especially in tax-deferred programs like GuideStone’s retirement plans.
Three times the benefit
Compounding in tax-deferred plans has a triple effect: you get the growth of your contribution, the growth of those earnings and the growth of the money that otherwise would have been taken out for taxes.
Since taxes are deferred on your retirement portfolio, your investments grow faster than they would if they were in a taxable account. All your earnings are reinvested without being reduced by current income taxes. The result is that interest income and dividend reinvestments keep compounding, and your portfolio’s growth accelerates over time.
The early bird’s benefit
The earlier you start, the more time your money has to grow. And your contribution can be relatively small at first. For example, if you have 20 to 30 years before retirement and contribute regularly to your tax-deferred savings plan account, compound growth may provide up to half or even more of your total account balance at retirement.
Consider two investors, one starting at age 25, the other starting at age 35. Both want to accumulate a retirement account balance of about $500,000 by age 65.
| Age to start investing |
Monthly Investment |
Total Invested Until 65 |
| 25-year-old |
$143 |
$68,640 |
| 35-year-old |
$335 |
$120,600 |
- The 25-year-old investor would need to invest $143 each month to attain about $500,000 by age 65. During the course of his investment life, he would contribute $68,640 to his account, and the remainder would be from growth on his investments.
- The 35-year-old investor would need to invest $335 each month to attain about $500,000 by age 65. During the course of his investment life, he would contribute $120,600 to his account, and the remainder would be from growth on his investments.
Based on your retirement income needs, you may need to invest to have more than a half-million dollars by age 65, but the point is still clear. The 35-year-old, by only waiting a short decade, needs to invest more than twice as much per month as the 25-year-old to attain the same goal.
Because you’ll actually need to save less over a working lifetime, you’ll have more disposable income for your current lifestyle. If you start contributing a small amount early in your career, try to build up over time to the maximum allowed. When you retire, you’ll probably thank yourself for starting early and sticking with your program.
At GuideStone, we offer a variety of retirement programs for ministers and other church workers. Visit our newly designed retirement web pages to learn more about the retirement plans available to you, as well as resources GuideStone makes available to make retirement planning a simpler process. Or, as always, call us at 1-888-98-GUIDE (1-888-984-8433) to talk to one of our customer service specialists who can help you get started.