Compound interest is vital both during your working years and in retirement.
Many people concentrate on saving during their working years, however, it’s as important for your money to continue growing during retirement.
This growth helps ensure you maintain your lifestyle for the next 30+ years, including keeping up with inflation and taxes.
The below chart reflects the power of compound interest. Specifically, growth of $100K over 30 years using different interest rates.
In general, holding too many cash-equivalent investments or trying to time the market by moving all your money into cash can cause you to miss out on the compound interest your portfolio needs to outpace inflation.
What happens if you try to time the market?
Studies show that missing the stock market’s 10 best days over a 30-year period can lower an investor’s average annual total return by 2.72%.
Missing the best 30 days lowers an investor’s return by 6.14%!
(Source: Bloomberg and Wells Fargo Investment Institute. Daily S&P 500® returns from 9/1/92–8/31/22.)
Realistic Approach That Supports Your Retirement Lifestyle
Instead of market timing, the 60/40 portfolio remains a reliable basis for asset allocation.
In fact, it’s achieved a compounded annual growth rate of 7.3% over the 200 years’ worth of analyzed data (from 1820 to September 30, 2023), according to Morgan Stanley research.
Certainly, the past doesn’t predict the future.
60/40 Example
In a recent client communication, we provided an approximate 60/40 portfolio example using a conservative 6% annual return to show how a couple with $2 million in retirement savings could grow their wealth to $2.6 million while adhering to the 4% annual withdrawal rule. See the realistic example here: 3 Steps To Help Your Money Outlive—You.
Stay the Course
Trying to time the market, i.e., moving all your money into cash, can be detrimental to your long-term investing success, including missing out on compound interest.
Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it. – Attributed to Albert Einstein
Before You Go
Get help optimizing your retirement income. Download our FREE “Prolonging Retirement Income” checklist.
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