How Much Will I Have at Retirement?
If I am 25 years old and want to have a million dollars by the time I am 65, how much should I be willing to invest each year if my investments (e.g., mutual funds) pay an average of 12% per year?
Answer: $1304, or a little over $100 per month.
The above example is based on the power of compounding, where interest is calculated on the initial principal and subsequent accumulated interest payments (interest on the interest). Using the numbers from the above example, a person who invested $1304 at 12% interest would have $1460.48 (1304 x 1.12) at the end of the first year; $1635.74 (1460.48 x 1.12) at the end of the second year; etc. Naturally, the earlier you get started investing, the larger the amount of money you will acquire in your lifetime.