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The effect of time on your retirement account

There is no greater benefit to the growth of a retirement account than time. See how starting early can have a big impact on your future retirement accounts. 

The material provided on this website is for informational use only and is not intended for financial or investment advice. Khan Academy assumes no liability for any loss or damage resulting from one’s reliance on the material provided. Please also note that such material is not updated regularly and that some of the information may not therefore be current. Consult with your own financial professional when making decisions regarding your financial or investment options.

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  • aqualine tree style avatar for user SnowyTheWolf
    It seems like retirement planning is nothing but a stressful and upsetting process. I'm not saying it's bad; in fact, I do believe it's good to have a retirement plan which is quite apparent. Sadly, it feels like this requires not just critical thinking, but luck in order to have a lot of money in your account once you retire. Is there any possible way to ensure that the outcome of the money you have in your retirement plan will be at least good enough?
    (1 vote)
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    • aqualine tree style avatar for user David Alexander
      The principle of "early and steady" applies. When I was learning about this, I saw a comparison of two sisters, one of whom started at about age 20 putting away a small amount into a retirement account every week. The other waited, spending everything, but then at around 40 began putting a LOT of money away each month for retirement. But she never caught up with her younger sister who had been "early and steady" in saving a small amount each week. So, snowythewolf, I advise that you begin as soon as you start earning anything to put a certain percentage of it away "for retirement", and not touching it until you retire.
      (3 votes)
  • winston default style avatar for user Luoqi Wang
    Could one major financial crisis wipe out your all decades' savings?

    Is the chance of get at least one crisis during 20-40 years almost 100%?
    (2 votes)
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  • blobby green style avatar for user cjones
    (1 vote)
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    • aqualine tree style avatar for user David Alexander
      Your retirement account is earning interest while the money sits in deposits or investments. The money itself is doing the work to grow. The longer you leave it there before starting to take and use it, the more time it has to grow. At some point along the line, the amount it gains every year in interest will be greater than the amount you have actually put into it. This happened for me.
      (1 vote)

Video transcript

When you're young, you're in one of the best positions you'll ever be in to start planning for retirement. It might seem strange to think about retiring from a career you probably just started, but setting aside even a small amount of money in a retirement account now, can have a big impact on your savings several decades down the line. That’s because time can be your best ally when it comes to investing for retirement. Let’s take a look at what happens if you start investing just a small amount for your retirement in your early twenties, say, $10 a week over the course of 10 years in a tax-deferred retirement investment account, like a traditional 401(k) or IRA. Now, when we say tax deferred, that means you’d pay taxes later, generally in retirement. And, for example, a contribution to a traditional IRA could be eligible for a tax deduction, depending on your income and whether you are participating in an employer plan. In any case, let’s say that these hypothetical investments grow at a rate of 7% per year. Now, 7% has historically been a pretty decent return on investments over long periods, but it certainly isn’t guaranteed. There could be years when your investments perform really well, and the return is even higher. And there could be years when your investments don’t do as well, and you actually lose money. Unlike a deposit account at a bank, an investment account is not FDIC insured and is not bank guaranteed. But for the sake of this hypothetical example, let’s say that your money does grow at an average constant rate of 7% per year. Setting aside $10 a week, every week for 10 years, adds up to $5,200 of principal. But over the course of this time, if your investments have had the opportunity to grow at a rate of 7% each year, that could come out to a total of about $7,700. So that would be an extra $2,500 that you could theoretically earn in your first 10 years of making steady contributions of $10 a week. Now, you might think that isn’t much after 10 years, and hey, you could use that money to save for an awesome vacation instead. But let’s take a look at what happens to that $7,700 over the next 10 years. Even without contributing any more money to your account, which you’d hopefully still be doing, at a 7% annual rate of return, that $7,700 could grow into about $15,150. And over 20 years, about $29,800. And after 30 years, which could be around the time you start thinking about retiring, it might’ve grown to about $58,600. $58,600 is a substantial amount that could come from an initial investment of just $10 a week for 10 years. That’s $53,400 that was earned of an initial investment of $5,200 in this scenario. Now of course, this example is hypothetical. It doesn’t take into account inflation, which will also have a substantial effect on the value of your funds over time. And there’s no guarantee that you can get a 7% return. And in a tax-deferred account like a traditional 401(k), you’ll need to pay taxes on what you withdraw when you retire. There may also be expenses associated with your investment account. As well as expenses and fees associated with individual investments. And all of these things can have an impact on the performance of your account over time. To learn more about your particular account, you can speak to an investment professional. But getting back to our example: Over time, these investments have had the opportunity to grow, and in addition to that growth, any money you might earn from your investments, when reinvested, can provide the potential to earn even more. While it’s never too late to start contributing toward retirement, setting aside just a few extra dollars now can give your retirement plan a great start.