One common misconception many of us have when it comes to investing is that it is too late to start. Whether you’re thinking about retirement, buying a new home, or even assisting your kids through college, it is never too late to start. One of the main reasons it is never too late to start is because of compound growth. In this article, we will delve into what compound growth is and how it can have a remarkable impact on your investments and financial life.
Understanding Compound Growth
Before exploring how it relates to you, let’s review what compound growth means. The concept of compound growth shows how your investment return will increase each year as it begins to earn on your original account balance plus prior profits earned within the account. For example, say you have a $100,000 balance in your investment and you earned 8% this year, then your new balance becomes $108,000. Even if you earn the same 8% next year, you will earn that return on the $108,000 rather than the original $100,000. This becomes even more powerful as you look over the long term. If you look at the same situation but over a span of 15 years, your $100,000 could grow to $317,217 with no other contributions! Now, imagine if you have 30 years instead of 15!
Retirement Planning
Now, let’s consider why compound growth matters to you as it relates to retirement planning. Even if you started saving later than what you had wanted, compound growth can create a snowball effect and help you catch up. For example, if you didn’t start really saving for retirement until you are age 50, that gives you 15-20 years to save up for your retirement. As you can see in the example above, compound growth can be extremely helpful in getting you to your goal. Another aspect where this can be crucial in retirement is when you consider inflation. With everything getting more expensive, compound growth can help you stay ahead of inflation and make sure your purchasing power increases at the same rate or even higher.
Estate Planning
Another aspect where compound growth can be extremely beneficial is with estate planning. As you age, leaving assets for your children or grandchildren becomes a consideration. If you do have a goal to leave something behind, it is important to plan ahead. It is essential because when you are in retirement, you have generally shifted your assets to a more conservative stance. However, for accounts that you intend to leave to your heirs, this could be a perfect time to leverage compound growth. By adjusting that specific account to a more aggressive allocation, you can give it time to build exponentially through compound growth. Now, imagine if that specific account was also a Roth IRA. All of the funds and the compound growth would be tax-free to the beneficiary. That could be a great way to maximize the value that you are leaving behind.
As you navigate your financial journey, be sure to consider the time horizon for each of your accounts. Leverage the power of compound growth by allowing accounts with longer time frames to grow exponentially, while also safeguarding those needed for immediate use. Remember, compound growth works over shorter time frames too, so it is never too late to start. If you have any questions on maximizing your account growth, reach out to us at jgua.com, or give a call at 607-936-3785. We look forward to helping you reach your financial goals.
