How A 25-Year Old Can Make A $Million

Anyone who is 20-25 right now will not be able to count on a generous pension to ease their retirement. They are, however, in the best position to do something about that. Fresh out of college or trade school every 20-something should embrace this mathematical concept: compounding interest.

Compounding interest is the simple formula that increases wealth rapidly. It occurs when the interest that accrues to an amount of money, in turn, accrues interest itself. It is at the heart of how institutions make money, and if you know this, you can cash in—especially at your age!

JP Morgan Asset Management has released “2014: A Guide to Retirement” ** and it outlines this and other concepts. 20-somethings—probably thinking “here we go again”—should challenge themselves to read on, and see if this is easy enough to understand.

Imagine 3 individuals who are able to invest at the same interest rates.

Susan, Bill and Chris each invest $5,000 per year towards their retirement. Susan starts when she is 25 and stops when she turns 35 (10 years of depositing $5,000 annually). Bill starts when he turns 35 and continues until 65 (30 years). Chris begins his investments at 25 and continues to 65 (40 years).

Who makes the most in the end?

This is a no brainer. It was Chris, who invested $5,000 annually for the longest period of time. He will retire with $1,142,811 (his total cash investment over his lifetime was $200,000). This does not include salary earned—remember, this is only invested money. This would be an ideal scenario for any current 25-year old, but what of the other two investors? In the real world, this type of investment may not be feasible for everyone.

The Interesting Part

This is the interesting part of this comparison. Susan is ahead of Bill because she began investing at a younger age. She also invested $5,000 for a third as many years (10) and a third as many dollars ($50,000) as Bill. Yet, when she retires, she will do so with $602,070. This emphasizes that WHEN you start investing is almost as important as HOW MUCH you invest.

Compare that to Bill, who comes in last, with $540,741 after 30 years of investing $5,000 annually ($150,000 total deposit). Even after 30 years of depositing, he cannot catch Susan who only invested for 10 years, but started at age 25.

Compounding interests lets you accumulate wealth over time more rapidly than someone who invests 3 times as much, over three times as many years. The time that you start investing can make a real difference—hundreds, if not thousands of dollars difference!

AMLA Members can take advantage of savings vehicles that utilize compounding interest at rates many financial institutions will find too generous. That’s one of the reasons being a member of the AMLA is so beneficial. An AMLA Annuity or IRA with compounding interest is just a phone call away: call the Home Office at 216-531-1900.

**To see the entire JP Morgan 2014 Guide to Retirement, visit https://www.jpmorganfunds.com/cm/Satellite?UserFriendlyURL=gtrbrowseslides&pagename=jpmfVanityWrapper
The AMLA is not affiliated with JP Morgan or JP Morgan Asset Management. This information is shared to inform the AMLA membership with no real or implied recommendations intended.
The AMLA does not offer financial planning advice.


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