Compounding At Its Best

In my spare time today, I threw together a few quick calculations in Excel regarding retirement, specifically how much we should save and how often we should save it. The results are quite startling, at least to me. Everyone has heard about the power of compounding and the importance of saving early in your life, but I think there are many creative ways to save, and now I have the numbers to prove it! All calculations are based on an 8% yearly interest rate earned, and the columns are as follows:

Yearly Savings, # of Years, Comments, Value In Year 2047

• $10k, 40 yrs., Base Case, $3.03M
• $10k, 35 yrs., Skip Last 5, $2.97M
• $10k, 35 yrs., Skip 2nd 5, $2.34M
• $10k, 35 yrs., Skip 1st 5, $2.02M
• $10k, 10 yrs., First 10, $1.70M
• $15k, 5 yrs., First 5, $1.52M
• $10k, 5 yrs., First 5, $1.01M
• $10k, 5 yrs., Last 5, $63k

Wow, so ideally we will have around $3M in the bank when it’s time to retire, if we continue on the savings plan we are currently on. Other things of note include the fact that if we stop contributing for the next 5 years, we end up with $2M, a decrease of a million dollars! Alternatively, if we keep saving like this for the next 10 years, we can stop saving altogether after that and still have $1.7M to retire on. This sounds like an interesting option, because it would free up more money later to spend on housing, or travel, or whatever else. Essentially, whatever money we can put in over the next five years is likely to increase by a factor of 20, so each $50 extra we can put away will be worth $1,000 to us in the end. This really brings home the fact that we really need to keep focusing on saving as much as possible, even if it means deferring things like world travel, at least for the next 5-10 years.

Sounds easy, right?  I think it will be quite challenging, particularly since we both have good, steady jobs which somehow translates into the feeling that we have plenty of money and we shouldn’t have to watch what we spend as much any more.  I think it’s harder to save now than it has been over the past few years when money was tighter…