Compound Interest – the most powerful force in the universe!

When saving for a long-term goal, such as retirement, is it better to save small amounts for a long time, perhaps saving when we cannot afford to, or waiting until later in life and putting larger amounts aside when it is more affordable?

We look at both sides of the debate and put some simple figures together.

Let’s put some ground rules in place:

• The savings are non-concessional (i.e. after-tax) contributions made to a superannuation fund.
• The rate of return earned is a net return (i.e. after the deduction of all fees, taxes, and charges).
• All projections are expressed in 2018 dollars. However, there will be inflation. This can be managed by increasing the amounts saved in line with inflation.

Option 1 – Saving $100 per week for 40 years, earning 5% per annum.

We will start saving $100 per week, from age 25 through to age 65. We earn a conservative 5% per annum on our savings.

According to the ASIC’s Moneysmart Calculator, we would accumulate a total of $661,275 over a 40-year period.

The actual savings contributed, amounts to $208,000 and the earnings component is more than double at $453,275.

Option 2 – Saving $200 per week for 20 years, at 5% per annum.

In this option, we save $200 per week, but don’t start until age 45, also saving through to age 65, and earning 5% per annum.

The amount saved will also be $208,000, however by starting later, the earnings are only $148,229, making a total of $356,229 after 20 years.

To achieve the same outcome as Option 1, we would need to save $371 per week from age 45 for 20 years.

 Option 3 – Saving $100 per week for 40 years, earning 10% per annum.

The total amount saved is still $208,000, however, the total amount saved has jumped to a massive $2,740,434.

Option 4 – Saving $200 per week for 20 years, at 10% per annum.

Sadly, the accumulated savings after 20 years, even at 10% per annum, is a rather paltry $658,120.

So, the jury is in……

Saving a smaller amount for a longer period certainly seems to win out.

 

 

Source:  Peter Kelly | Centrepoint Alliance