Will Today’s Young Families Ever Realize the Benefits of Compound Interest?
I cease to be amazed at the power of compound interest. Over the last 12 years I have been in the financial services industry, and I have worked with many individuals before and after they retire. Because they have a nest egg, they hire our firm to help them plan and manage those assets. In many cases, individuals that have committed to saving 10% to 15% of their income their entire career have accrued over a Million Dollars in their 401k. Some would say, but I bet they earned a significant income all those years. That however, is not always the case.
Certainly each and every one of those individuals started a high percentage of their salary at a young age and continued to do so throughout their life. But it isn’t just the saving that was so important. It was saving at a young age that really made the difference.
In order for compound interest to benefit you, three things are required: money, time and interest. To benefit significantly from compound interest, the sooner you can accrue a good balance in your retirement account, the more time compound interest can benefit you. Money doubles every 7 years at 10 percent. So if a young family can accrue $100,000 by age 30 and earn 10 percent on that money for the next 21 years, by the time they are 51 that $100,000 would be $800,000 WITHOUT saving another dime to the account. By the time they were 58 it would be $1,600,000. That is the power of compound interest when you combine it with a strong starting balance time.
However, today’s young families in general are saving well beneath what they need to meet their goals. Many say, “I’ll save later in my career, but right now I just can’t.” If their first $100,000 is not saved until age 50, to reach the $1.6M mark in the other scenario by 59, they would need to save $100,000 a year and earn 10 percent interest from age 50 to 59 to reach $1.6 million. The difference between the two scenarios is astounding. This is why it is so critical to begin saving while you are young.
The challenge is that the demands on our income may have never been greater. Today’s young families have been raised on technology and require technology, which can be expensive. Iphones, Ipads, Ipods, and Ihomes may lead to “I don’t have any money to save”. Unless we all do a better job educating young families on the necessity to budget and save, we could have a retirement crisis coming in the next 20 years.