I was giving a presentation at the Dun Laoghaire Rathdown Chamber of Commerce B2B meeting last week on pensions. Beforehand, I was talking to David Crawford who as me ‘would it be better to start with a cent and have it double every day for a month or have €1m right now?’ I knew it was a trick question but had thought that is should have started as €1 and not 1c. Oh, how wrong was I!! At the end of 30 days, the 1c doubling every day would become €5,368,709. This really got me thinking of the power of compounding.
It is unrealistic to expect your money to double 30 times over a month or a year. It’s not going to happen. It’s even unrealistic to expect your money to grow by a constant amount over any period because growth just doesn’t happen like that. But what if you invested €500 a month into a pension and earned 5% per annum. What would you get then? It very much depends on how long you were investing for.
Time | Amount Invested | Estimated Return |
40 years | €240,000 | €763,010 |
30 years | €180,000 | €416,129 |
20 years | €120,000 | €205,516 |
10 years | €60,000 | €77,641 |
The longer you are invested for, the greater the power of compounding has on your money.
Now, let’s look at things in reverse. Say we want to have a fund of €763,010 at retirement. How much do we need to invest on a monthly basis to achieve that target?
Time | Monthly Investment Required |
40 years | €500 |
30 years | €917 |
20 years | €1,856 |
10 years | €4,914 |
What a massive difference that is. Start 10 years later and the cost doubles from 40 to 30 years and 30 to 20 years respectively.
But don’t get disillusioned because you didn’t start a pension in your 20’s and don’t see the point now. Those figures are based on the exact same return happening every year for decades. As I said at the beginning, it doesn’t work like that.
With consistent long term investing (and remember 20 years is a long time), I am willing to bet that with the power of compounding, you will get a lot more than 5% average return.
As always, if you have any questions, please contact me directly at steven@bluewaterfp.ie