Retirement Planning: Compounding and Saving for the Long Term
When it comes to retirement planning, investing isn’t just about how much money you have to invest; it’s also about how much time you invest it. The earlier you start, the longer your money has the chance to grow.
Enter the power of compound growth.
What is compound growth?
Compound growth means earning interest on your interest, in addition to your principal amount. Compound interest will make savings grow at a faster rate than simple interest, which is interest calculated only on the principal amount.
How compound growth can help you save for retirement.
With compound growth, the longer your interest has the chance to earn interest, the faster your account grows. In other words, the more time you have, the more growth potential.
The sooner you start your retirement investment planning, the longer compound growth can work for you. When you invest in tax-deferred retirement accounts, your account has the potential to grow faster because the money you would have paid in taxes on earnings each year remains in the account and can earn additional money.
Do the math.
With compound growth, you will actually save more by investing less money over a longer period than more money over a shorter period.
For example: Lilly started saving and investing for retirement at age 30 and saved $10,000 a year for 35 years. At the 7% rate of return, she ended up with $1,382,368 at age 65.
Brennan waited until he was 40 to start, but he saved more each year: $15,000 a year for 25 years. At the same 7% rate of return, he ended up with $948,736 at age 65. So even though Brennan invested more money—$375,000 versus $350,000— he didn’t have as many years for his money to compound and ended up with $433,632 less than Lilly.
You can see how compound growth will work for you with a compound interest calculator at Investor.gov
Balancing retirement saving with short-term goals.
When it comes to saving, we all juggle competing goals and demands. For example, you may feel that saving for your children's college is more important than saving for your retirement right now. Do both if you can, but saving for retirement is essential. While your children may be able to get loans or financial aid to help pay for college, there is no "financial aid" if you don’t have enough saved for retirement.
The time to start is now.
Remember, the longer you wait to plan and save for retirement, the more you'll need to invest each month. Put the power of compound growth to work for you and your retirement. There’s no better time to start than now.
An Enterprise Wealth Management financial advisor can help you balance your short-term needs with a realistic retirement savings plan that will protect your future.
Rachelle Packard, CTFA, CFP®
Senior Financial Advisor
Senior Vice President
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