The idea of becoming a millionaire may seem wildly aspirational. However, €1 million or more is what most 25 year olds today may need to retire comfortably. This is based on ever-increasing life expectancy and the premise of the four percent rule for retirement.
If this seems too good to be true and the numbers don’t add up, you may not be taking compound interest into account. Compound interest is a method of continually reapplying interest to a principal (the original sum of money put into savings or an investment) that’s growing over time. Put simply, it’s interest on interest, which is a powerful financial force as it puts your hard-earned money to work and grows larger as it feeds on itself. If you still have a couple of decades ahead until you stop work, anything you can contribute to a pension fund or savings plan now will grow substantially.
If you’re starting to save at age 25 and want to retire at age 65, you have a period of 40 years to save. Compound interest is often dubbed the eighth wonder of the world. This is why: You’ll have only invested €408,000 over the 40 years, the rest of your pension fund comes from interest. The interest you earn in your first year of saving continues to earn you interest for the next 39 years. As long as you keep your interest invested and your savings continue to grow, you may end up having more “contributions” from interest than from your monthly savings.
The power of compounding makes it possible for your money to grow to a large sum with a small initial investment. Get on track now with saving for your retirement:
- Develop healthy money habits by regularly reviewing your spending and redirecting any extra cash toward your savings. Rein in spending where possible.
- Invest more whenever your income increases.
- Make additional contributions to any pension funds, especially any employer-funded pensions to which your employer makes matching contributions.
- Make regular contributions to self-employed retirement plans if you work for yourself.
- Invest in opportunities that align with your current lifestyle and your retirement savings goal, such as property, stocks, and shares.
The most important thing is to start now and contribute regularly to your retirement savings. Starting early will pay dividends in your future and help you accumulate extra money so you can live a comfortable retirement.
This article originally ran in the September 2021 issue of Dockwalk.