Caroline & Audrey: 2 Sisters & the Power of Compound Interest

 

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When it comes to saving up for retirement, especially the nitty-gritty of what kinds of accounts to fund and open, people tend to procrastinate to avoid delving into the complexities of what could potentially be the best investment of their lives. So, to illustrate by analogy and narrative — often times the most efficient way to inspire and teach –, I will tell you a story.

This is the story of two sisters: Caroline and Audrey.

Caroline began saving $2K a year in her 403b retirement account at 20 years old and contributed that same amount consistently for 20 consecutive years. At the end of the 20 years, she stopped contributing but kept her money in the 403b to grow. It grew at a rate of 10% on average per year. As I love to say, she let her money make money.

Now, Audrey started contributing to her 403b retirement account when she was 40 — just after her sister stopped. She also contributed $2K a year every year and earned 10% on her investments. However, Audrey invested money for 25 years, rather than Caroline’s 20 years. Audrey contributed more money over a longer period of time. When she’s 65 years old will she be ahead of her sister who’d started contributing earlier but for a shorter amount of time?

Let’s take a look. What are the values of their respective accounts now that they are both 65 years old? Well, Caroline has $1,365,227, and Audrey has $218,364.

Inputting all of the above information into Bankrate calculator, this is why:

Caroline:

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Audrey:

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And that is the magic of compound interest! That’s why young women owe it to themselves to begin adding to their retirement early. $2K a year is only 10% of $20,000. You could do that, couldn’t you?

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