Growing Your Account over Time
Once you've decided on an allocation, it's important to add to your retirement portfolio on a regular basis to help build upon the assets in your account. You might do this by having money automatically deducted from your paycheck, transferring money from your savings or checking account, or designating money you receive through gifts or work bonuses.
In addition, reinvesting helps you take advantage of compounding, which occurs when you add earnings to your principal, forming a larger base upon which future earnings can accumulate.
The earlier you begin investing, the more compounding can help grow the value of your account. For example, if Investor A begins saving at age 22, investing $150 each month into a tax-deferred retirement account, and Investor B begins saving at age 42, investing $300 per month into a tax-deferred retirement account, each will have invested $72,000 by age 62. However, if both accounts provided a hypothetical 8% annualized return, Investor A's investment will have grown to $527,142, while Investor's B will have grown to only $177,884. This is because Investor A took advantage of compounding for 20 additional years.