The Effect Of Compound Interest

Mindoro Group (Pty) Ltd - Blog - The Effect Of Compound Interest

Will you have enough money when you retire?  

To retire comfortably requires a sound investment strategy that starts as early as possible.

When it comes to long-term investments like your retirement savings, compound interest is a small thing that makes a massive difference. It is often ignored because the impact of compound interest isn’t immediately visible, but the benefits are undeniable.

Compound interest refers to earning interest on your interest. Instead of only earning interest on the same principal amount, the interest is recalculated monthly based on the principal amount plus earnings. You can see why that is appealing!

Here is an example. Say you have saved R100, and you earn 4% interest. Your interest will be R4 in the first month, bringing your balance to R104.

You will earn 4% again next month, but this time on R104—which will amount to R4.16. So, your balance will now be R108.16.

By the third month, you’ll earn R4.32, taking you to R112.48.

Now, let’s look at the effect of compound interest on retirement savings. The amounts will be larger, but the concept of compound interest remains the same.

A 25-year-old earns R10 000 a month and gets an increase each year. They would earn roughly R19 million by the time they reach retirement age (typically 65).

If their pension is 70% of their final salary and they live until they are 80, they would need around R20 million to support them for the 15 years of retirement.

As you can see, there is a shortfall of about R1 million.

Even if they saved their full salary while working and only spent it once they retired, it would still not be enough. And no one can save 100% of their salary.

Most individuals only manage to save about 15% of their salary, which means the other 85% will need to come from investment returns. This is where one can—and should—wield the magic of compound interest.

What’s Next?

Contact us to see how compound interest and savvy investment savings can help you –

This document is for illustrative purposes only and does not constitute financial advice. You rely on the contents at your sole discretion.

Sources: Old Mutual Wealth – Business Tech