“That Einstein fella was a real idiot.”
-No one. Ever.
What’s the first thing that comes to mind when you think of Albert Einstein? The Theory of Relativity? Nuclear energy? Bad hair day?…All jokes aside, the guy was an absolute genius that provided some of the greatest intellectual contributions to humanity that we’ve ever seen. Yet with every invention or theory he and all the brilliant minds before him came up with, what has he famously named as mankind’s greatest invention of all time?
Answer: Compound Interest
If one of the smartest dudes to ever walk the face of the Earth said it, we here at blooom figure it’s worth a short blog post. Compounding in investing sounds boring, but trust me, it’s a magical thing for retirement planning.
If you aren’t familiar with the term, you can think of compounding as the way your money can be used to make more money, or the ability for your money to grow exponentially over time. Take just a single dollar, for example. If you invest a single dollar in the stock market and just let it sit untouched for 40 years, it could be worth around $31 by then. That’s a 3,000% (yes, three thousand) return on your investment for simply investing $1! And if you really want your mind blown, consider this – if you’re a newborn baby reading this, by the time YOU retire, that same single dollar invested could be worth $789! In other words, 788,000% growth. Not too shabby.
My guess is that unlike all of us at blooom, you probably haven’t had National Save for Retirement Week (this week) circled on your calendar all year like it’s your birthday. But in all the excitement that is #NSFRWeek, we’d like to throw out a challenge to anyone reading. It’s time to stop making excuses and start taking advantage of the power of compounding interest for retirement planning. All it takes is a single dollar to get started. Our challenge this year is for you to commit to contributing just one extra dollar each day to your retirement account(s). How do I do this, you ask? The easiest way is to just start by increasing your annual 401(k) contributions by $365 per year.
Now, here’s what that could mean for you in retirement. If you’re 35 years old, that additional $365 over the next year alone could grow to an extra $4,800 in retirement savings at age 65. If you’re 25, we’re talking an extra $11,500 potentially. And that’s just if you do this for one year and then stop, which we think would be silly. Want even more of a challenge with an even bigger payoff? How ‘bout increasing your 401(k) contributions over the next year by just 1%? Let’s say you currently make $50k per year. Increasing your contributions from 5% to 6% could mean an extra $150,000 or more in 40 years. Just think of what would happen if you made that a habit EVERY year!
The point is that all it takes is a small amount to get started. Compounding truly is a powerful thing and with time on your side, the best time start your retirement planning is yesterday. But since Einstein never finished his time machine, I think you’ll have to settle for today. So get movin!
If you want to see what your 401k will look like, try our 401k Calculator.
*Figures mentioned are derived from future value calculations that assume a 9% rate of return, compounded annually. 9% seem a little high? Since 1928, the S&P 500 Index, which is the most common benchmark for US stocks, has actually returned an average of over 10% per year. So, if you’re the newborn baby, you might even assume higher for retirement planning purposes.
Published on October 17, 2016