“Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t… pays it.” – Albert Einstein
This magical wonder of compound interest that amazed Einstein is available to millions of people today. Unfortunately, Americans are better spenders than they are savers. According to Fidelity, those aged 60-69 contribute the highest income percentage into their retirement accounts compared to all other age brackets. However, this amounts to 11.2% of their gross income and is below the expert-suggested retirement savings rates of 15%.
If this wasn’t bad enough, according to the Fed’s 2018 Report on Economic Well-Being of US Households, a whopping 25% of US adults have no retirement savings at all. The best investment vehicle available for most people is their employer-sponsored retirement plan, such as a 401(k) or 403(b). Through consistently saving, taking advantage of a FREE company’s match, and the magic of compound interest, your money will grow to ridiculously awesome heights.
A $1 Million Example
For example, let’s imagine Balloon Boutique LLC matches 50% of employee Brenda’s contributions up to 6% of her salary. That means, if Brenda makes $50,000 per year, Balloon Boutique LLC will match 50% of Brenda’s contributions up to a maximum of $3,000 per year. If she contributes 15% of her pre-tax salary into her 401(k), she would contribute $7,500 and Balloon Boutique LLC would contribute $3,000 in matching funds for a total of $10,500 in 401(k) contributions for the year.
Let’s assume Brenda graduated from college when she was 22 and it took a few years to pay-off her student loans and build a 6-month emergency fund. At the age of 25, Brenda begins investing in her 401(k) as outlined above, and anticipates a conservative 1% salary increase every year.
Assuming a conservative 6% annual rate of return, at the age of 59, Brenda will have amassed just over $1,000,000 in her 401(k).
Assuming a 9% annual rate of return, at the age of 59, Brenda will have amassed just over $2,000,000 in her 401(k).
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In both of these examples, Brenda’s lifetime contributions were only about $305,000. Depending on the average annual rate of return, this number grew to between $1 million to $2 million.
How “Magical” Growth Happens
- The disciple of consistently contributing to his retirement plan
- The free company match at work
- The magic of compound interest
Gleaned from common sense & Dave Ramsey, consider these 4 suggestions to get on track and stay on track:
- Get out of all non-mortgage debt
- Build a 6-month emergency fund
- Contribute at least 15% of your gross income into retirement accounts
- Get the full employer match on whatever they offer
- Some employers offer 401(k), Roth 401(k), 403(b), etc
- Never take out a loan from your retirement account for 2 reasons:
- There’s too much risk. If you lose your job, you typically have 60 days to repay this loan – if you don’t, you’ll get taxed on this amount as if it were income and be assessed a 10% penalty.
- It prevents that money from benefiting from compound interest
Key Takeaway
Starting early & contributing consistently to retirement could be the best financial decision people make. Your older self will thank you.
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