Which is better: saving for 40 years or 10?

Surprisingly, the magic of compounding means that you will end up with a bigger savings account if you only save for the first 10 years of your working life compared to saving for the last 40 years of your working life.

Having 10 extra years for compound interest to work has the same result as all the extra years of contributions, research by CLSA in the UK found, assuming a constant 7% pa rate of return – at which rate your money doubles every 7 years.

The research compared a 21 year old saving $2500pa until age 30 - who amassed $553 000 by age 70 – with a 31 year old saver who saved the same annual amount until age 70 – who ended up with $534 000 by that age.

As Albert Einstein said of compound interest, it is the “eight wonder of the world”……”…he who understands it earns it; he who doesn’t pays it.”

Key lessons:

  • There is no amount too small to start investing, the earlier the better;
  • It is crucial to stay invested and keep reinvesting interest and dividends for the duration – especially through challenging times like the global financial crisis;
  • It is hard to get rich quickly, but possible to get rich if you keep reinvesting and have time on your side;
  • Better and lender than a borrower be…as compound interest also works in reverse, being especially important to pay down non-deductible debt.

However, if you have not yet started to save at all, don’t despair and do noting, but start now.

If you would like to get more certainty that you will be able to meet your own lifestyle goals, please feel free arrange a time to meet with Michael Rees-Evans, Partner – Wealth Consulting, to work out what you should do.

Important note: this information is of a general nature and has been prepared without taking account of anyone’s financial situation, objectives or needs. Before making any investment decisions based on the contents you should obtain professional advice.

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