For younger MSU employees, creating a comprehensive retirement savings plan may not be a top priority. Why should you plan for your retirement now when that day is 30 to 40 years in the future? But the young have a huge advantage when it comes to saving money for retirement: more time. This additional time allows the young to potentially benefit the most from compounding, which may lead to greater savings down the road.

How Compounding Works
Compounding basically means allowing an investment to earn money while continually reinvesting those earnings over time. The more time you have, the smaller your original investment may need to be. In the hypothetical example below, a 25-year-old starts saving $5,000 annually ($416 per month) and a 40-year-old starts saving twice as much but waits until age 40 ($833 per month). 

The 25-year-old ends up contributing less money over time – $200,000 versus $250,000 – but ends up with a higher balance: $798,735 versus $566,317. In other words, the 25-year-old contributes $50,000 less but ends up with $232,000 more than the 40-year-old who waited to save.

As this example shows, younger investors may benefit from saving as much as possible as soon as possible. MSU offers two voluntary savings plans: the 403(b) Supplemental Retirement Plan and the 457(b) Deferred Compensation Program. Starting to save earlier in either plan means contributing a smaller percentage of income and potentially earning more than if you wait until you’re older to contribute. So while retirement may be a long way off, the choices you make today can have a dramatic, long-lasting difference.

You can learn more about MSU’s voluntary savings plans on the HR website, including information about how to enroll or make changes to your retirement plan contributions. MSU employees can change their contributions at any time throughout the year. Reference this Retirement Plan Comparison document to see the differences between the 403(b) Supplemental Retirement Plan and the 457(b) Deferred Compensation Program.

Of course, remember that investment returns are not guaranteed and will fluctuate — in some years you may have gains, and in other years you may have losses. But over time, any investment that has a net gain will have benefited from compounding.

Important Information: Please note, the example above is a hypothetical illustration only and is not intended to represent the past or future performance of any investment. The example assumes contributions are made monthly at a 6% annual effective rate, compounded monthly. and no withdrawals. Actual performance will vary with market conditions. Investing involves risk. There is no assurance that the goals will be met or that the solution or strategy will be successful.

Questions? We’re here to help! Contact the Solutions Center at SolutionsCenter@hr.msu.edu or 517-353-4434.

This article was written in partnership with TIAA.