In its 2016 Retirement Guide, JP Morgan Asset Management included a powerful illustration of how compounding returns lead to huge differences between investors who start young and those who wait until later in their careers to save seriously.
JPMorgan shows the results of four hypothetical investors who invest $10,000 per year at an annual rate of return of 6.5% over different periods of their lives:
- Chloe invests throughout his professional life, 25 to 65.
- Lyla starts 10 years later, investing from 35 to 65.
- Quincy puts money aside for only 10 years at the start of his career, for ages 25 to 35.
- Noah save from 25 to 65 like Chloe, but instead of being moderately aggressive with his investments, he simply holds cash at a 2.25% annual return.
The differences are remarkable: Chloe, who has invested her entire career, ends up retiring with nearly $1.9 million. Lyla, who started just 10 years later, only has about half that, at $919,892.
Surprisingly, Quincy, who only invested 25-35 years, ends up with $950,588, a bit more money than Lyla, who invested 30 years. This is how important early capitalization is for investing.
Noah, who had a much lower rate of return than the other three investors, ended up with the lowest total, $652,214.
Now, as the fine print at the bottom of the chart shows, this is essentially just a thought experiment and not an actual investment plan.
But it shows the power of exponential compounding: the sooner you start investing, the sooner you start getting returns on your investments.
And then if you reinvest those returns, you end up getting returns on those returns, and so on.
So the sooner you can start investing for your retirement, the better.