Most people have heard about the power of compound interest. Even world-renowned physicist, Albert Einstein had something to say on the matter. He called it the eighth wonder of the world. When it comes to long-term savings, like saving for retirement, compound interest can ensure anyone can live out their retirement years financially comfortable

Half-baked

The problem however, when it comes to saving for retirement, is that people forget about compound interest and just how much it contributes to their savings lump sum when they get to retirement.  

All too often, people save diligently for 20 years, and when they reach their late 30s or 40s, they cash in a portion of their pensions. They use this large lump-sum of money to pay off debt, buy a new car, renovate their home or invest in a holiday house at the beach.  

What they don’t realise is, that by doing this, they have just set their retirement savings back to below zero. The reality is that because of compound interest, the future value of the money they are losing is substantial. An examination of the numbers just shows how much is being lost by not allowing pension investments to continue growing for another 20 to 30 years.  

The numbers

Let’s assume that we earn an annual interest rate of 5% on our investments. If, at the age of 20, you put £100 towards your retirement every month, by the time you are 45 years old your investment will have grown to over £59 550.97. During that time, your personal contribution would total £30 000. Compound interest would have contributed the remaining £29 550.97 to your lump sum.  

If you keep that money invested and you carry on putting £100 per month away until age 65, your investment will grow to £ 202 643.73. Your personal contribution will total £54 000 and your compounded interest will equal £ 148 643.73.  

Gambling on good fortune

The reality is, that if we do not save conscientiously throughout our lives, saving for retirement can become increasingly expensive. The lumpsums required to kickstart our investments need to be increasingly largerSo, we end up banking on a lot of good fortune – inheritances, large bonuses, sudden business success, or maybe winning the jackpot.  

Short-term prudence for long-term gain

The beauty of saving conscientiously throughout our lives, is that we do not need to be rich to do so. A person of simple means can end up being far more prosperous than their high-earning colleagues later on in life just by putting a little away each month.  

Ultimately slow and steady wins the retirement race – but we need to understand the impact of compound interest.   

This blog has been written for Carrick Wealth which is part of the greater Carrick Group and is based in South Africa, not in the UK and therefore is not subject to same regulations as Carrick Global Wealth Limited. The thoughts and comments of the Directors are their own. Please note that past performance is not and indication of future performance and that the value of units can fall as well as rise, and you may not get back all of your original investment.