Every 25-year-old in America needs to see this chart right now
In their 2016 Guide to Retirement, JP Morgan Asset Management included a powerful illustration of how compounding returns lead to huge differences between investors who start out young and those who wait until into their careers before seriously saving.
JP Morgan shows outcomes for four hypothetical investors who invest $10,000 per year at a 6.5% annual rate of return over different periods of their lives:
- Chloe invests for her entire working life, from 25 to 65.
- Lyla starts ten years later, investing from 35 to 65.
- Quincy only puts money away for ten years at the start of his career between the ages of 25 and 35.
- Noah saves from 25 to 65 like Chloe, but instead of being moderately aggressive with his investments, simply holds cash at a 2.25% annual return.
The differences are remarkable: Chloe, who invested over her entire career, ends up retiring with nearly $1.9 million. Lyla, who started just ten years later, only has about half of that, at $919,892.
Astonishingly, Quincy, who only invested between the ages of 25 and 35, ends up with $950,588, slightly more money than Lyla, who invested for thirty years. This is how important early compounding is to investing.
Meanwhile, Noah, who had a much lower rate of return than the other three investors, ended up with the lowest total of $652,214.
Now, as the fine print shows at the bottom of the chart, this is basically just a thought experiment and not a real investment plan.
But it does show the power of exponential compounding: The earlier you start investing, the earlier you start getting returns on your investments.
And then if you reinvest those returns, you wind up getting returns on those returns, and so on.
So the sooner you can start investing for retirement, the better.
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