Following on from the last few days, I’m combining retirement thoughts with compounding. The power of compounding is quite incredible.
I read an article recently about setting aside almost $3,000 for a child when they are born. This money could come from parents, grandparents, uncles and aunties or even from crowdfunding, I suppose.
The idea was that you could put that $3,000 into a low cost S&P 500 index fund and just let it sit there for 65 years. You would not take any out, nor would you need to put any more in. You would just let it roll over and compound.
Using the figures from the article, it noted the S&P had delivered an average annual return of between 10% and 11% in its nearly 100 years of existence. If it continued to average that rate, or even a little less (9.5%), the account would be worth over $1m by their 65th birthday.
This is more than 90% of what people would have in their retirement savings. By doing this one thing, during pregnancy or within the year after their birth, you would set them up for retirement. Regardless how their financial habits developed, they could always count on their $1m retirement fund when they turned 65.
The power of compounding is compelling.
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