CHAPTER 7Work Optional (a.k.a. Retirement)
Retirement can sound like a snooze-fest because unless you're close to retiring, you are saving for something that is very far away. It's hard to say no to money now to reap the rewards much later. But the benefits are big.
The Power of Compound Interest
When it comes to investing (for retirement and otherwise), especially when we're starting early, there's a beautiful phenomenon called compound interest that helps our money grow exponentially. Look at this chart:
Oh, it's beautiful! How it works: You invest $1,000 and it grows by 8% each year. Over the past 30 years the S&P 500, which is often used as a proxy for the market, has had an annual return of 8.29% (adjusting for inflation). After the first year you have $1,083, by year 15 you have $3,302, and at year 50 you have $53,631 (over 53× what you started with).
“Fun” poll: Would you rather have a penny that doubles for 30 days or $1,000,000?
Drumroll …
On day 30 the doubling penny would be almost $5.4 million. Well, that escalated quickly.
The rule of 72 states that your estimated return divided by 72 is how long it takes your money to double. What!? So in this case, using 8.29%, your money would double every nine years. Not bad.
TLDR (but please always read): The earlier you start, the more time you're giving your money to compound and grow exponentially.
What Does Retirement ...
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