Compound Interest Translated

Ben Carlson has a fantastic blog post on turning the power of compound interest into numbers that resonate. Rather than summarize it here, I highly recommend clicking the link.

The above chart is taken from Carlson's blog and reproduced with a third column translating total return to dollars.

Here is where investing and financial planning dovetail. When we do retirement planning for clients, our investment returns assumptions have a DRAMATIC effect on the viability of retirement spending assumptions. As seen above, a 2% lower return to a couple in their 30s will mean a halving of their retirement bucket. That may mean tens of thousands of dollars less in annual retirement spending.

Longer projected lifespans mean that we need to plan for retirements of 30 or more years. Having more money saved for retirement isn't a matter of having better vacations, it may be a matter of not having to worry about running out of money. Moreover, what retirees earn on their investments during retirement will have a similar impact on the health of their retirement spending.

The above illustrates how vital it is for people to properly allocate their retirement savings plans (i.e. your 401(k)). Too many have sub-optimal retirement allocations and miss out on the awesome power of compound interest. It's a multi-million dollar mistake mindlessly made when filling out a 401(k) enrollment form. Guidance by an expert can make a gigantic difference.