How To Retire Strong Compounding Manage Credit Save And Invest IRA 401(k) Welcome to How to Retire Strong, the website designed to help you plan for retirement! It doesn’t matter how much money you make—you can build a nest egg that will sustain you during your retirement years. It just takes some planning NOW. In a few minutes you can learn a lot: how to get out of debt; how to put the power of compounding to work for you; facts about inflation; the basics of choosing investments, and selecting retirement accounts. "Albert Einstein believed compounding was the most powerful force in the universe.

Compound interest is the most powerful force in the universe. - Albert Einstein

      Money Invested is the amount invested in the beginning.
Interest is the amount of appreciation or gain each year.
Years equals the number of years you are investing.



Example: Let's say you invest $1,000 when you're 20 years old and completely forget about it until you are 50. In that time your investment grew 10% each year. Your investment would be worth $17,449.40.

Years: 30
Annual Interest: 10%
Money Invested: $1,000.00

What is compounding?

You don't have to be Einstein to put the power of compound interest to work for you. Compounding is the process by which an investment increases in value over time. The stock market has its ups and down. But if you invested $1,000.00 in the S&P 500 on December 29, 1976, as of December 29, 2006, your investment would be worth $13,397.87. That means that in only 30 years, the investment went up by over 13 times! Averaged out year to year, that is equivalent to an average annual return of around 8.65%.
Years Interest Money Invested Result = $0.00 $ %
Years Current Value $ Result = $0.00 This calculator assumes an average annual inflation rate of 3%.

Why You Should Consider Inflation

In 1900, you could buy a first class stamp for 2 cents. Today, it costs 39 cents. As time goes on, things cost more. Because things will probably cost more when you retire, you must take advantage of compounding to counteract this effect. Let’s say you have $1000 today and you put it into a shoe box to save for retirement. Assuming you retire 30 years from now and inflation averages 3% per year, your $1000 will only be worth around $400 in today’s dollars.

But don’t despair. You can use the principle of compounding to counteract the effects of inflation. To do so, you must invest. Let’s say that instead of putting your $1000 in a shoe box, you put it into a bank’s “certificate of deposit” paying 5% per year. Assuming 3% inflation and 5% return per year, your investment will be worth $4,322 after 30 years. But because of inflation, $4,322 will only buy what $1,811 buys today. Note that even with the effect of inflation, investing in the 5% CD (yielding $1,811 inflation adjusted) outperforms placing the money in a shoe box (yielding $400 inflation adjusted) by a factor of 4.5!!

Inflation Calculator

Below is an Inflation Calculator, you can use that to calculate what money may be worth in the future.

This website is for informational purposes only and does not provide or intend to provide legal or financial adivce. Please consult an attorney, accountant, and or financial planning professional for financial and legal advice. Copyright 2006. All rights reserved.

       

Compound Interest Calculator