Let us assume that both accounts yield a 7% annualized rate of return and that Stan and Ollie work for 45 years. At retirement, which brother will have the larger IRA?
Stan’s contributions totaled $50,000, and when he ceased contributing to his Roth IRA it was worth $69,082. Ollie’s Roth contributions amounted to $175,000. Upon retirement, Stan’s Roth will have grown to $737,000 while Ollie’s will be worth $691,000. Intuitively, it seems that this cannot be true.
With a 7% rate of return, an account will double in about 10 years. When Stan stops his contributions, enough years remained for his account to double three times. By the time Ollie has made $50,000 in contributions, he is 25 years from retirement and his IRA has time to double only twice. As we can see from this simple example, compound growth rewards early contributions more than later, more frequent ones.
When growing rich slowly, it’s the last doubling that puts you over the top.