“Compound interest is the secret sauce of strategic wealth-building strategies. The sooner you start taking advantage of the magic of compounding, the more money you’ll have at retirement time.”- Scott Self
If you want to create a stable, less stressful, and ultimately more satisfying retirement, you will need to take some critical actions. First, you need to remove as much debt as possible, and then you need to invest in the right assets to achieve your financial goals. Most of all, you need to start the process of retirement planning as soon as possible to access the true potential of compound interest.
You’ve probably heard the term compound interest many times. But how does compound interest work? Why is it so crucial to retirement success? You can think of compound interest like a snowball you’re rolling down a mountain. Your snowball might have started the size of a baseball. But, as it rolls further down the mountain, it gains momentum and picks up more snow until it becomes enormous.
To better illustrate this snowball effect, let’s say you have $2,000 earning 5% per year adjusted for 3% inflation. At the end of the first year, that $2,000 has grown to $2,100. That’s your original investment plus the 5% interest. The following year, you would have $2,205 because you’ve now earned interest on top of your interest. At the end of five years, your account balance would be $2,431.01. After 30 years, your original $2,000 has grown to $8,232!
If you add just $200 per year to your account starting in year one, that number will grow to well over $20,000. That amount may not seem like a lot for thirty years of saving. However, bear in mind those numbers are for an investment into a low-interest vehicle with no additional money. Imagine what could happen if you contributed only a few more dollars.
Compound interest causes your savings to increase exponentially, so the more you invest and the earlier you begin, the more time your account has to grow. You also have longer to recover from potential market downturns or an economic crisis. Planning retirement early in your career might also allow you to pursue riskier alternate investments with potentially higher returns, such as real estate or precious metals.
The bottom line: When potential clients ask me, “When is the best time to start saving for retirement?” I tell them, “As soon as you get your first paycheck.”
When it comes to planning for retirement, it is never too early to start. By investing early and staying invested, you will “make money on your money” as you take advantage of compound earnings. Certain types of retirement vehicles may enhance your compounding success by offering tax advantages, such as tax deferral. In addition to time, the keys to any successful retirement are a focus on the future, consistency, and a balanced, sensible portfolio. Be sure to partner with your advisor to ensure you have everything you need now and in the future.