THE POWER OF COMPOUND GROWTH

Every investor needs to fully understand the amazing power of compound growth. Investment growth accelerates exponentially when you give your investments enough time to grow.

The earlier you start saving for retirement, the less money it will take as a percentage of your income to achieve your goal. The opposite is also true, unfortunately. The less time you have, the higher percentage of your income you’ll need to contribute to achieve your goal.

This is due to the power of compound interest. The important lesson of compounding is that you should start saving and contributing to your 401(k) as early as possible. There exists an incredible window of opportunity for maximizing the power of 401(k) plans from your early twenties until your late thirties.

This is another one of those things that everyone should have learned in high school.

This graph below shows the balance of a 401K where the individual started contributing at age 25 and contributed an equal amount each year. The annual investment return rate or growth rate is also constant. So, the only factor affecting the slope of the line is compounding. Notice how the line start curving straight up after age 50. This is the compound effect.

From the graph, see how the growth is not so exciting from age 25 to 45 - twenty years. By the time you reach the 30 year mark (age 55), the growth in the investment account starts to accelerate. This person did not increase their savings in these later years. The growth benefit came only from the power of compounding.

A 401K investor can affect their retirement account balance the most by starting to make contributions as early as possible – in their 20s or 30s – and by generating higher investment returns through their fund choices.

A target date fund investor will earn about 6.5% per year on their investments in the long term. A better investor will earn 9.5% per year on their investments. A 40% increase in annual investment returns like this will lead to a 90% increase in your account balance over several decades thanks to compound interest.

Compounding still works wonders for investors in their 50's and 60's.

A 55-year-old retirement investor has a very good chance of living to age 85. So their investment time horizon is 30 years. That is still plenty of time to gain the tremendous benefits of compounding.

We often work with customers in their late 50's and early 60's and we are often able to increase their retirement income by 80% due to higher investment returns and the power of compound interest.

Stay Disciplined My Friends,

Phil

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