Question

A 35-year-old person who wants to retire at age 65 starts a yearly retirement contribution in the amount of $5,000. The retirement account is forecasted to average a 6.5% annual rate of return, yielding a total balance of $431,874.32 at retirement age.If this person had started with the same yearly contribution at age 20, what would be the differences in the account balances?

Answer 1

If the person had started with the same yearly contribution of $5,000 at age 20 instead of age 35, the account balance at retirement age of 65 would be significantly different due to the effects of compound interest.

Assuming the same 6.5% annual rate of return, the account balance at retirement age of 65 would be $1,208,206.72 if the person started contributing at age 20 instead of age 35.

The reason for this difference is that the earlier contributions have more time to grow and compound over time, resulting in a much larger account balance at retirement age. In fact, the earlier contributions have more than twice the amount of time to grow and compound than the later contributions, which is why the difference in account balances is so significant.