The Ridiculous Power of Compound Interest V: Basic Investing Examples
4/8/2021
Picking up where we left off in the compound interest series (I, II, III, and IV), let’s go through some simple examples of compound interest applied to investing.
To make things realistic, let’s assume:
You are ~20 years old and starting to investment in order to retire at approximately age 60. Let’s call that 40 years of investment time.
You have $1,000 to invest
You can expect to have an “average” annual growth rate (more accurately CAGR) of 7.06% after adjusting for inflation
Given these assumptions (and [for now] assuming no future investments), when you’re ready to retire you will have: $15,314.03
That’s over a 15x return on your initial investment, however it’s not really enough to retire. If you instead wanted to have say $1M ($1 million) at retirement, you would have needed:
To invest $65,299.58 upfront
While a lot less than a $1M, that’s still no small chunk of change, especially for a ~20 year old
OR to have an “average” annual growth rate (CAGR) of ~119% if you wanted invest just the initial $1,000
In case you’re not aware, that’s a ridiculously high growth rate for a investment, and definitely NOT something you should plan on getting
Neither of those are great options, so what can you do if you want to get that million? Short answer: Keep investing! (We’ll discuss what exactly that means in the next post.)