Compound Interest Doesnt Add Much To Your Wealth

Compound Interest Doesnt Add Much To Your Wealth

Compound Interest Doesn’t Add Much To Your Wealth
The biggest gripe that I​ have with a​ few famous financial planners is​ their myth and​ awe of​ compound interest .​
They say, compound interest is​ the​ 8th Wonder of​ the​ World according to​ Einstein, and​ will make you a​ million for​ your retirement if​ you’d only skip a​ few trips to​ your local coffee shop!! In my opinion, compounding your return on investment is​ a​ tiny factor in​ wealth building compared to​ how much and​ how often you save money.
Growth charts used by the​ people struck by compounding ignore all forms of​ taxation, fees, commissions, inflation, and​ then misleadingly uses an​ average return of​ 10-12% .​
Let’s start with the​ average stock market return of​ 10.7% This return rate is​ the​ most frequently published number to​ reflect a​ stock market average .​
There are many problems with market averages, but the​ 10.7% is​ not any kind of​ accurate annual compounded growth rate .​
As an​ example, if​ the​ stock market has a​ loss of​ 10% one year, and​ a​ 20% gain the​ next year, these zealots say that the​ average return for​ these two years is​ +5% (+.2-.1)/2) .​
This is​ a​ mathematical failure to​ add .​
The correct return is​ only 3.9%, and​ again, this doesn’t include fees, commissions, taxes and​ inflation .​
How are you going to​ compound your money when the​ stock market starts one of​ its frequent 5 year droughts of​ moving down and​ sideways (’73, ’81, ’87, ’00) .​
The after-inflation Dow Jones Industrial Average annual return for​ the​ last 55 years is​ only 4.8%; plug that little number into your calculator for​ 10 years and​ see how many Rolls-Royces you can buy.
Your growing portfolio will either be in​ a​ taxable account (knock another 25% off of​ your annual compounded growth rate for​ taxes) or​ in​ a​ qualified retirement account .​
The zealots talk about qualified accounts like everyone can have them, but there are mazes of​ rules for​ who can qualify for​ certain programs, how much they can invest, and​ even a​ ceiling to​ how much can be put in​ them .​
Sooner or​ later every dime of​ these accounts will be taxed as​ well .​
And when the​ baby-boomers start emptying the​ government’s social security account in​ 2014, tax rates on these retirement accounts are not going to​ remain low .​
Politicians will take the​ easy way out and​ simply tax these retirement accounts to​ make up any deficit .​
The point is​ this: when money is​ in​ a​ retirement account, it​ isn’t yours until the​ government taxes it​ and​ releases it​ to​ you.
If you start playing around with realistic compound rates, the​ serious increase in​ earnings doesn’t start until after 50 years .​
So unless you are a​ 4 year-old with $50,000 in​ the​ bank and​ have the​ discipline to​ never spend it, even the​ concept of​ compounding is​ fairly irrelevant for​ your financial future .​
Today, half of​ the​ 50 year-olds in​ the​ U.S .​
do not have $50,000 in​ retirement assets .​
Even skilled investors are unlikely to​ build that into a​ tidy $2,000,000 by the​ time they turn 65.
The compounding that pays the​ most is​ the​ addition to​ your savings over time and​ investing skill .​
If you don’t continually add to​ your accounts, they can not add up to​ much; No big money in​ = No big money out .​
And if​ you don’t continually accumulate investing skill and​ knowledge, you won’t be able to​ keep your money growing faster than inflation is​ destroying it .​
Please note that there are no books titled How To Get Wealthy By Putting Some Money Under a​ Mattress .​
Your money has to​ be invested and​ earning interest above the​ inflation rate or​ you are getting poorer.

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