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Know Your Terms Series: Compounding Interest For Retirement


How and where you save your money matters, which is why it is essential to work with a financial advisor. If you are planning to retire in the next 5 to 10 years, now is crunch time. It is unlikely that your monthly Social Security will provide a comfortable living wage. This means you need to make the most of your money, beyond your investments and 401k contributions. Compounding interest is excellent, but often an underutilized way to put your savings to work for you.

What Is Compound Interest?

Compound interest occurs when the interest on your savings or investment begins to accrue its own interest. Not all investments compound and some compound percentages and schedules are more attractive than others. High-yield savings accounts and some bonds compound, but you can also compound your non-interest-bearing dividends. The goal is to reinvest the percentage you earn, eventually doubling your money.

What Is The Difference Between Compounding Interest And Simple Interest?

 

Standard savings accounts accrue simple interest, but this interest is not as lucrative as compounding. For example:

  • A $100,000 deposit with standard simple interest of 5% earns $50,000 over a 10-year term.

  • A $100,000 deposit with compound interest of 5% earns $62,889 over a 10-year term.

Does Interest Add Up?

 

To hear that a 2.5, 5, or 10 percent interest being referred to as “high-yield” might not sound like much—but yes, it really adds up. Think of your interest as free money, which, when compounded, starts gaining its own interest. The larger your savings, the more interest you will accrue during each compounding schedule.

What Is An Ideal Compounding Schedule?

Your compounding schedule refers to the frequency in which your interest essentially becomes part of your balance. In other words, when it begins accruing its own interest. Compounding schedules can be monthly, quarterly, semi-annually, and annually.

 

The amount you have in savings, how soon you plan to retire, and how soon you start drawing from your savings are all important factors in determining your compounding schedule. The first few years typically aren’t too impressive, but as you continue to accrue interest and add more to your savings, compounding can really pay off.

 

Is It Too Late To Compound Your Money?

 

It’s never too late to maximize your earnings, but the sooner you leverage high-yield savings, the better. If you are retiring soon, you want to begin the process before you need to utilize your money for your monthly expenses. Better yet, if you are still contributing to your savings on a monthly basis. Sometimes, this means strategically shifting your savings and investments in a manner that will yield the highest interest rates in the shortest amount of time.

 

Compounding interest is one of many retirement saving strategies to consider, and the sooner you start planning, the better. I invite you to reach out to Linden Oak Wealth Partners today to schedule your initial consultation. We will assess your current strategies and determine a roadmap that supports your retirement timeline.

 

Linden Oak Wealth Partners offers fee-only financial advising customized for women, in particular, women in transition. Our goal is to create an environment where financial planning is efficient, simplified and easy to understand. We want clients to feel empowered and engaged every step of the way. Please contact us to schedule an initial consultation today.

Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital.

The views expressed in this blog post are as of the date of the posting and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Linden Oak Wealth Partners unless a client service agreement is in place.

If you have any questions regarding this blog post, please contact us.