Ben Franklin said it (reportedly); “The Eighth Wonder of the world is compound interest.”
And it’s true! Take $100,000, at 3% compounded for just five years; that amounts to $ 115,927. That’s a 15.9% gain.
Now take $100,000 at 3% simple interest for five years; that amounts to a flat $115,000. A flat 15% gain.
More dramatic, ten years, compounding gives you $134,392 or a 34% gain. With simple interest. It’s $130,000, or a 30% gain.
Now, unless you consider that difference crumbs, that can add up to serious money.
This, of course, assumes that you earn consistently, 3%, both in the compounding and simple interest scenarios.
But what happens if you lose money along the way? Well, if you were earning compound interest, that immediately stops obviously. If you repeatedly go forwards, and backward-basically treading water- you are only CONSISTENTLY growing money for your financial advisor or broker. Why? Because he gets paid even when you are losing money.
What is happening to our Stock market currently? As of today, the S&P 500 is down over 500 pts. (Most financial experts use the Standard & Poor’s 500 stock index as a more accurate guide as the measure of our nation’s market instead of the Dow Jones Industrial Average’s 30 stocks.).
Why? Well, take your pick.
Worries over North Korea, worries over a trade war, worries that the Federal Reserve will further raise interest rates (retirees want that right?), Worries over Russia, and, well, you fill in the blank.
The fact of the matter is that experts have been saying for the past several years that the market is way overvalued, that it was just a matter of time. Did you believe that “What goes up, KEEPS going up”? No, what goes up, WILL come down, especially when talking about the stock market. It always has and always will. It’s a game of musical chairs that isn’t so bad when you’re young, but when you are IN or close to retirement when the music stops, you had better be firmly seated in your chair, or the results could be disastrous for the next 25 years of your retirement.
Again, when you are young, you can and should take some risk because you have plenty of time to ‘find a seat’ when the music stops. You can weather the storm because you have time to recover. But when you are in retirement or about to retire, you must be sure. The time to accumulate-with RISK– is over.
Now, at this stage of your life, is the time to DISTRIBUTE. And that means, Sure, guaranteed, Income that can never run out no matter how long you or your spouse live. Is that possible? You bet it is! It’s what I use for my own retirement money and what I use for people who have money they can’t afford to lose.