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Helping Your 403(b) Plan Account Grow

When it comes to investing for retirement, as the old saying goes, “Time is on your side.” Getting an early start can be the secret to building a secure financial future. The reason? The earlier you begin putting away money in your retirement accounts, the longer you can benefit from the power of compounding — using investment income and interest to produce more earnings as they’re reinvested.

In fact, compounding can dramatically boost your accumulations over the long term. Ben Franklin said that “a penny saved is a penny earned.” But through compounding, and given enough time, a penny saved is two pennies earned. For example, at 6% interest, $1 saved today will be worth $2 in 12 years and $4 in 24 years.

How Compounding Works
If you’re a young investor, you’re in a good position to reap the benefits of compounding. Consider the example of Maria and Gary. Maria starts contributing $3,000 a year to her employer-sponsored 403(b) retirement plan at age 30, does so for ten years, then stops — for a total contribution of $30,000. Meanwhile, Gary begins putting money into his plan at age 40, investing $3,000 a year until age 65, for a total of $75,000 in contributions.

Assuming Maria’s and Gary’s investments earn 6% annually, when Maria reaches age 65, she will have accumulated more in her account ($179,894) than Gary will when he turns 65 ($174,469). This is true even though Gary contributed more than double the amount that Maria did — and for 15 years longer. The reason for the difference? Maria began investing earlier, giving her a greater benefit from the power of compounding.

As this example shows, if you’re a younger investor you can really benefit from investing in your retirement plan now. When you’re young, you can contribute a smaller percentage of your income and reap more in earnings than if you wait to begin contributing later in life. So while retirement may seem like a long way off, getting an early start with your retirement plan can have a dramatic — and long-lasting — difference.

Older investors who wait a little longer before starting their investment plan can also get a boost from compounding. Take John, a 45-year-old who only now has decided to contribute to his employer-sponsored supplemental retirement plan.

Assume John contributes $4,000 a year to his account for 10 years until age 55, earning an average annual rate of 6%, for a total contribution of $40,000. At age 65, John’s account will grow to $100,084 — more than double his contributions. So even with a late start, John can still benefit from compounding.

How Compounding Can Work For You
Say you put $1,000 in an investment that earns 6% annually for five years. After the first year, you’ll earn $60, increasing the value of your investment to $1,060. But in the second year, the 6% in earnings is added to your $1,060 account balance, increasing your earnings for that second year from $60 to $63.60. As the chart below shows, your earnings will continue to compound for the rest of the five-year period.

Year Investment Amount Annual Earnings Added
1 $1,000.00 $60.00
2 $1,060.00 $63.60
3 $1,123.60 $67.42
4 $1,191.02 $71.46
5 $1,262.48 $77.75

In addition to compounding, maintaining a regular investment plan, such as by making monthly contributions to a 403(b) plan, is also a crucial step toward building accumulations. The chart above assumes that you invest $1,000 one time and never add another penny. The chart below shows how your initial investment can grow if you add to it regularly. It assumes an initial investment of $1,000 at age 25, with an additional $200 added each month until age 65, at an annual return of 6%.

Age Total Contribution Accumulation
25 $1,000 $1,000
35 $25,000 $34,444
45 $49,000 $94,336
55 $73,000 $201,595
65 $97,000 $393,678

The bottom line? Contribute as much as you can, as soon as you can, and let the power of compounding assist you in reaching your goals.

Please read the prospectus and consider the investment objectives, risks, charges and expenses carefully before investing.
The illustrations used in this article are hypothetical. The returns are for illustrative purposes only and do not represent the actual performance of any investments available from the Johns Hopkins University retirement plans.

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