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Investing in yourself: the benefits of starting early

Time and compound interest work hand in hand

Ask financial planners to name a wonder in the universe, and they might say compounding. And it’s one that can work for you.

Compounding is the earnings on both your original investment and any interest and dividends your investment earns. That means that you can earn interest on interest you’ve already earned, multiplying it exponentially. 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.

Because 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 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 this by age 65, but the point is still clear: The 35-year-old 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 increase those contributions annually to the maximum allowed. When you retire, you’ll probably thank yourself for starting early and sticking with your program.

Ask your employer for a simple form to increase your contributions today. And if large increases seem out of reach, plan manageable annual increases until you reach your contribution goal.