One of the best pieces of advice that we can offer is to just wait and be patient.  When the financial “gurus” start talking financial collapse and panic is setting in, this tends to cause a bigger problem.  Many people will rush to sell off their investment products and items, which only lends to the panic and market selloff.

This brings down the market more affecting your retirement assets.

If you look at the market historically, this is probably just a minor adjustment.  Your retirement funds should escape and even grow once all is settled down.

When you talk compound interest, you are talking about money that makes money which makes more money. Sounds strange, right? Consider this. Take 7 pennies (for ease of calculations), one for each day of the week. Now, lets call your dresser or hutch the “Bank”. Each day when you wake up, you will place a penny on this dresser. Now after 7 days you know you will have at least 7 pennies invested.

Now the Bank takes this money and invests it in loans and other ways to make money. They charge a higher interest rate on those loans than what they pay you for your deposits. However, in this one week, you have made 3 pennies in interest. You now have 10 pennies.

Now, compound interest kicks in. Your original 7 pennies has now turned into 10 pennies. So if you keep investing a penny a day and you keep earning interest, you will have deposited 365 pennies in a year. Now instead of 3 pennies per week interest, lets say that you earn 10 percent interest on your money. You might think you calculate it on the total for the year.

Wrong!

This is compound interest we are talking about! So, you are earning 10 percent a month. So during month one, you have invested 30 pennies. You earned 3 in interest. In the second month you deposit another 30 pennies. You now have 63 pennies that you are earning interest on, so you have earned 6.3 pennies. The third month you deposit another 30 pennies. You are now up to 96.3 pennies and have earned 9.6 pennies interest.

See how this can grow? Let’s look at a real life example.

Let’s look at a simple, one time investment of $5,000. This is not an ongoing type of investment and only a single long term investment for 30 years. Let’s assume three different rates of return on our investment, 2%, 6% and 12%. These are rather realistic rates of return on investments these days, especially in 401k and Mutual fund investments.

While the $5,000 investment at 2% interest isn’t much after 30 years, the 6% rate of return will grow to around $30,000. At the 12% rate of return, it will have grown to around $180,000!Which would you rather have at retirement? The $30,000 or the $180,000? The rate of return makes a huge difference. The power of compound interest can help you attain all your financial goals more easily than you may think.

Here is another example that shows the power of compound interest. How would you like to turn $33,500 into $4 million? Start an IRA for your child when he or she is born. A $500 contribution every year (less than $50 per month) for 67 years (a total contribution of $33,500) at a 10% rate of return will give your child about $4 million at retirement! Waiting until your child is 21 to start saving will reduce this value at retirement to $500,000!

I hope these retirement planning tips help you to understand a couple of key facts about compound interest. First, don’t wait to invest!!! Compound interest works best over time! Secondly, keep investing at any age! Some people think they are too old to invest. This thought will cost you money!

In order to determine the level of risk you are willing to take, you need to know how much money you are going to invest. You also should know what your financial goals and plans are for your retirement.

When you determine how much money you are going to invest, this can be based upon a weekly or yearly sum, or even a lump sum if you have that much. Some investments only allow a weekly or monthly contribution, while others allow for lump sum deposits.

You also need to know what your financial goals are going to be. Do you want to maintain your lifestyle at its current level? Do you anticipate having your home paid for and can live for less each month? What part of the country do you want to retire in? These are crucial questions that you must know an answer to in order to properly fund your retirement.

The length of time that you have before you retire is another factor in how much risk you can take with your retirement planning. If you are young and in your 20′s or 30′s, then you can assume more risk than someone who is in their 50′s or 60′s. Why? Your retirement investing strategy should be for the long term if you are younger. The power of compounded interest really comes into play, but that is for another post.

If you are getting close to retirement, you really need to weigh your options closely and carefully as the volatility of the stock market and other factors can make or break your retirement.

Your level of risk that you can assume when planning your retirement is directly proportionate to your retirement. The length of time that you can invest your money is probably the most crucial factor in how much risk you can take in order to safely reach your retirement goals. We will cover more retirement planning tips in our next post, specifically how compounded interest works in your advantage.