What’s better?

We look at the 2 different schools of thought on retirement savings

It’s reported Albert Einstein called compound interest “the eighth wonder of the world”. When it comes to your retirement, compound interest is the secret sauce that takes regular weekly savings and turns them into extraordinary sums of money.

But what’s better – saving small amounts over a long period? Or saving larger sums over a shorter timeframe?

Well, we’ve done the maths for you and here are the results. But first, the assumptions:

Assumption 1: The rate of return used is after deducting fees, tax and charges.

Assumption 2: All projections are expressed in 2019 dollars.

Assumption 3: Inflation has not been considered.

Assumption 4: The rate of return has been calculated at 10% per annum.
(Please note: 10% is a conservative return figure. Between 1900-2017, the All Ordinaries Index of the Australian Stock Exchange generated an average rate of return of 13.2% per annum.)

Strategy 1: Smaller amounts over longer time
If you start placing $100 each week into your super fund at age 25 and continue to do so until you are 65, with compound interest, your savings will have grown to $2,740,434. But importantly, you have only contributed $208,000. The difference has been generated by compound interest.

Strategy 2: Larger amounts over less time
If you place $200 each week into your super fund but begin when you are 45yo, you will have contributed the same amount of money. However, by 65 your savings will have grown to $658,120. That’s a significant difference when compared to the first strategy.

It’s never too early or too late
When you begin your career or start a family, it can be difficult to find any spare cash to contribute to your retirement savings. So the important message from these examples is doing something at any age will always be better than doing nothing.

At WPA, our focus is always on you!

  • Where are you now?
  • Where do you want to be?
  • How do you get there?

For straight-forward, practical financial, accounting and taxation advice
contact our knowledgeable team at WPA and SVA by calling 02 8850 0388.

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