Year-by-Year Breakdown
| Year | Contributions | Interest | Balance |
|---|
The Power of Compounding
Albert Einstein allegedly called compound interest the eighth wonder of the world. He probably didn't, but the math is real. When you earn interest on your investments, that interest then earns its own interest. Over decades, this effect is enormous.
Example: $10,000 invested at 8% with no further contributions becomes $21,589 after 10 years, $46,610 after 20, and $100,627 after 30. You do nothing, and your money multiplied 10×.
Realistic Return Assumptions
- S&P 500 historical: ~10% nominal, ~7% real (inflation-adjusted)
- Balanced portfolio (60/40): ~6-7% nominal
- Bonds: 3-5% nominal
- High-yield savings: 4-5% in 2026
- Real estate (REIT index): ~9% long-term
When in doubt, model with 7% nominal. It is conservative and matches long-term equity returns after inflation.
The Rule of 72
Divide 72 by your annual return to see how many years it takes your money to double. At 8%, it doubles every 9 years. At 10%, every 7.2 years. At 4%, every 18 years. This is a quick way to check if a "guaranteed return" pitch is realistic.
Start Early — Like, Really Early
Consider two investors:
- Amy invests $5,000/year from age 22 to 32 (10 years, $50,000 total), then stops.
- Ben invests $5,000/year from age 32 to 65 (33 years, $165,000 total).
At 8% return, Amy ends up with $615,580 at age 65. Ben ends up with $790,635. Amy contributed $115,000 less and came within 25% of Ben — starting 10 years earlier. That gap would flip if she kept investing.
Where to Put Your Money
- 401(k) up to match — free money, always first.
- HSA max (if eligible) — triple-tax-advantaged.
- Roth IRA max — $7,000 in 2026 ($8,000 if 50+).
- 401(k) to max — $23,500 in 2026.
- Taxable brokerage — index funds.