The Remarkable Power of Compound Interest
It is a remarkable fact that funding a retirement plan for just a few years early in one's career and then ceasing payments can lead to a higher final accumulation than that obtained by delaying funding initially and then funding for many years until retirement.
Our applet below illustrates this point. Bob is a saver. As soon as he starts his career at age 25 he begins investing a fixed amount each month into a retirement account. He continues this plan for several years, at which time he is disabled and can not work any longer. However, the money in his retirement fund continues to accumulate interest until age 65.
Tom, who is the same age as Bob and began working at the same time, is a spender. He doesn't save anything for several years, and then just at the point that Bob stops funding his plan, Tom begins his, investing the same fixed amount each month that Bob did, which he continues until his retirement at age 65.
The applet Spreadsheet allows you to vary the parameters of our scenario. That is, enter the annual interest rate, the number of years that Bob pays in (which is equal to the number of years that Tom pays nothing), and the amount of the monthly payment. Click the Update button to calculate the amounts in Tom's and Bob's retirement funds at age 65. Up to 5 sets of parameters can be entered.
The Graph tab will plot the fund accumulations over Tom's and Bob's careers. Bob's fund is represented by a solid colored line, Tom's fund is the same color line with black squares.
For a given interest rate, try to estimate how many years Bob has to pay in so that both funds are equal at age 65?
| Rate % | Years | Payment | Bob $'s | Tom $'s |