Here are some simple calculations to show the benefit of compounding and the power of turbo-charging your savings. If you don’t believe you too can get rich in 10-15 years keep reading!
The power of compounding
For the average retirement saver this effect is huge. Compounding your investments over 40 or so years works wonders with your savings. If we assume a real index return of 5% (net of inflation, dividends reinvested), the first dollar invested grows to $7.04 in real terms. Investing one dollar every month, adjusted by inflation and compounded with 5% annual return gives you almost $1,500 after 40 years.
For the turbo retiree who wants to retire after, say, 150 months (12.5 years), compounding has a lot less opportunity to unfold. That first dollar grows to only $1.84 in real, inflation-adjusted terms. Investing one dollar monthly (inflation adjusted) and getting 5% real return yields only around $206 after 150 months.
What we lose due to less compounding we have to make up with frugality!
The power of frugality
During the accumulation phase, every dollar we don’t spend every month accelerates the retirement date in two ways: Continue reading “Early Retirement Math 101” →