The idea of becoming a millionaire may seem daunting. However, €1 million or more is what most 25-year-olds today may need to retire comfortably. How can you achieve that?
In simple terms, if you invest €850 a month from the age of 25, and your money grows at an average rate of 4% a year after charges, you will have just over €1 million by the age of 65.
That’s because of the magic of compound interest.
What is compound interest and how does it work?
Compound interest refers to a method of continually reapplying interest to a principal (the original sum of money put into savings or an investment) that is growing over time.
Put simply, it is 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 thanks to compound interest.
In his book Unshakeable Your Guide to Financial Freedom, Tony Robbins states:
“You’re never going to earn your way to financial freedom…the real route to riches is to set aside a portion of your money and invest it, so that it compounds over many years. That’s how you will become wealthy while you sleep.”
The magic of compound interest
Using the figures above and starting to save at age 25 while aiming to retire at age 65, you would have a period of 40 years to save.
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This is why compound interest is often dubbed the 8th wonder of the world. You will have only invested €408,000, the rest of your pension fund comes from interest.
To illustrate the benefits of compound interest, here is what the first 12 years of saving would look like:
| Year | Year deposits | Year interest | Total deposits | Total interest | Balance |
| 1 | €10,200.00 | €264.47 | €11,200 | €264.47 | €11,464.47 |
| 2 | €10,200.00 | €690.80 | €21,400 | €955.27 | €22,355.27 |
| 3 | €10,200.00 | €1,134.51 | €31,600 | €2,089.78 | €33,689.78 |
| 4 | €10,200.00 | €1,569.30 | €41,800 | €3,686.08 | €45,486.08 |
| 5 | €10,200.00 | €2,076.90 | €52,000 | €5,762.98 | €57,762.98 |
| 6 | €10,200.00 | €2,577.08 | €62,200 | €8,340.05 | €70,540.05 |
| 7 | €10,200.00 | €3,097.63 | €72,400 | €11,437.69 | €83,837.69 |
| 8 | €10,200.00 | €3,639.40 | €82,600 | €15,077.09 | €97,677.09 |
| 9 | €10,200.00 | €4,203.24 | €92,800 | €19,280.33 | €112,080.33 |
| 10 | €10,200.00 | €4,790.05 | €103,000 | €24,070.37 | €127,070.37 |
| 11 | €10,200.00 | €5,400.77 | €113,200 | €29,471.14 | €142,671.14 |
| 12 | €10,200.00 | €6,036.37 | €123,400 | €35,507.51 | €158,907.51 |
Note: the figures in the table above are for illustrative purposes only. They are intended to show what is possible and to highlight the impact of compound interest.
Start saving now for your retirement
To build your wealth for the future and take advantage of compound interest, it’s important to start early and be consistent.
It is possible for your money to grow to a large sum with a small initial investment because of the power of compounding.
To get on track now with saving for your retirement, you can:
- Develop healthy money habits by regularly reviewing your spending and redirecting any extra cash toward your savings. It’s essential when saving for retirement that you reign in spending where possible (and to take advantage of compound interest on the extra money you can set aside).
- Invest more whenever your income increases (e.g. salary increase or bonus).
- Make additional contributions to any pension funds, especially any employer-funded pensions to which your employer makes matching contributions. You could end up with much more money in retirement as a result.
- Make regular contributions to self-employed retirement plans if you work for yourself.
- Even if you’re not self-employed, have a private pension plan. It’s not wise to rely solely on government or employer pensions, so research your options for private pension plans, especially if you are considering retiring earlier than the traditional retirement age of 60–70 years old.
- Invest in opportunities that align with your current lifestyle and your retirement savings goal, such as property or 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.
Are you on track to saving for your retirement?
Regardless of whether you are nearing retirement or just starting to think about what you need to plan for your future, knowing how much you will need can be challenging.
There are many factors to consider reaching your retirement savings goal and you need to balance that against how you can afford to live now.
A financial adviser can help by giving you unbiased advice on retirement planning, so if you have any questions please get in touch.
Disclaimer: all investments carry risk and all investment decisions of an individual remain the responsibility of that individual.
