Consider the concept of compounding as you prepare to make your defined contribution (DC) account asset allocation. It occurs when the value of an investment increases over time. Simply put, compounding is the ability to generate earnings from previous earnings.

For example, when you open a savings account, your bank agrees to pay you an interest rate for choosing to save with them. The monthly interest the bank pays you accumulates on top of your initial deposit and any ongoing contributions. If you earn interest on your account for the month, the bank pays you interest on interest.

You may want to meet with a financial advisor to see what savings options are best suited for you based on your retirement goals.

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Key investment terms:

• Asset allocation – A strategy used to distribute funds among various types of investments.
• Diversification – A strategy designed to reduce exposure to risk by combining a mix of investments.
• Risk – The likelihood of a reduction or increase in the value of an investment.
• Return – The increase or decrease in the value of an investment.