Saturday, November 04, 2006

Savings Rate Illustration

This chart provides a simple, powerful view into the importance of saving as much as is feasible, particularly if a comfortable retirement is an objective. It also furthers the point about the power of compounding.

The chart reflects the difference between saving $15,000 per year, which is the current maximum 401k contribution limit, and saving $7,500 per year. Each assumes a horizon of 20 years, and an 8% growth rate. After 20 years, $7,500 per year becomes $343,215. Over the same period, $15,000 per year grows to $686,429. The thirty year period is even more powerful, as compounding has that much longer to work: $7,500 per year becomes $849,624 and $15,000 per year becomes almost $1.7 million.


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