The Impact of Compounding on Retirement Savings

Matt LaRocca |

Clients often approach us with questions regarding how much they should save for retirement. A good rule of thumb is to save approximately 10-15% of your pre-tax income for retirement, particularly for a younger individual, and perhaps more if getting a late start on retirement saving. Many investors do not realize that the impact of saving just a little bit more each month can be profound. This is due to the nature of compounding, or in other words, earning profits on previously earned profits. A recent blog post by the Wall Street Journal, which discusses a study by Fidelity, highlights the impact of a young investor saving 1% more each month for retirement:

According to Fidelity’s calculations, a 25-year-old with a $40,000 salary must set aside an additional $33 a month to save an extra 1% annually. But that little bit of extra savings will translate into an additional $320 of monthly income—in 2015 dollars—over a 25-year retirement. (This assumes our 25-year-old earns a 1.5% annual raise, net of inflation, works until he is 67, and earns a 7% annual return.)

Often, investors need an advisor to motivate them to begin saving for retirement. A well-crafted plan to satisfy expected retirement needs through current savings is imperative to ensure financial security later in life. At RDM Capital, we work with clients to establish a plan that maximizes savings to capitalize on the benefits of compounding over time.