The Power of Compounding - when 2% equals twice your retirement

Few people realize the power of compounding and the difference that even 2% can make in their financial life...

We have already talked about how declines make a difference (see PS Core Principles). Now it's time to understand how making a little more per year can mean the difference between struggling or thriving at retirement.

Example A:
Let's take a look at a 25 year old who saves $100 per month until he or she is age 65. Using the historical average return for the broad market including dividends, at 10% his or her money would have grown to $584,222.

Now how much more would it have grown to at 12%? Take a guess first, ... ok... the actual amount is $1,030,971! the slight increase of 2% nearly doubled the return and the difference could mean everything at retirement.

Starting age       Starting balance          Contributions per month     Annual % return          Balance at age 65
25                       Zero                            $100 per month                  10%                             $584,222
25                       Zero                            $100 per month                  12%                             $1,030,971
25                       Zero                            $100 per month                  15%                             $2,455,145

And just for fun...
25                       Zero                            $100 per month                    20%                          $10,575,155

Watch out for inflation- If you are one of those people that think that the 10% return of $584,222 is enough in forty years, keep in mind that after adjusting for the affects of 3% annual inflation on that $584,222 -there is actually about $242,000 in the equivalent of today's money. As you can see return is important and the younger you are the more profound the difference.

I'm not that young anymore... now what?
OK, so your not 25 anymore. if you are 40 or older, your time horizon has changed and it will be harder to get the power of compounding working for you - but not impossible. I would still assume that you were able to put away $20,000 in a retirement account and knowing that time is of the essence you are putting away at least $300 per month. If so, you will be fine if you use PerformanceSignal to grow and manage your account...

Can you make my money last longer?!
As the advances in medical sciences continue, people are living longer and longer. One of the repercussions of living longer is that it is very easy to outlive your money. This is now one of the biggest concerns facing Americans nearing retirement. So you have some money either through inheritance or from your retirement savings, now you want to make it last your whole life and it would be nice to possibly pass some of it to your family.

Let's see what a difference 2% return per year can make in the number of years your money lasts...

Example B
Starting age    Starting balance    Annual % return    Income per month    How Long
65                   $500,000                6%                       $3,000                      18 years
65                   $500,000                8%                       $3,000                       23 years
65                   $500,000               10%                      $3,000                       over 40 years

The Solution
Whether you are trying to save money to meet your future goals or trying to make your money last, the return you can get without additional risk is vital to your success and PerformanceSignal is the solution.

In the next page "Risk verses reward" see how PerformanceSignal let's you participate in funds that historically provide better returns but without taking on the additional risk commonly associated with such investment vehicles.

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