The ‘magic’ of retirement and compound interest – The Royal Gazette

Starting young and saving regularly can lead to a comfortable retirement. Our monthly series of realistic Bermuda retirement reviews continues today with this great retirement success story from a Official newspaper reader.

The reader wrote, “I’m just an ordinary person with an ordinary life. I never made it to the top of the food chain, but that was never my goal in life. As I begin my retirement, I proudly look back on a successful professional career and what I have gained, learned and contributed over my 45 year career.

“When my children were small, we sent them to daycare. It cost $300 a month at the time, if I remember correctly. It was hard; my paycheck took a big hit because I was just starting a first rung on the ladder. Anyway, as kids do, before I knew it, they were in school all day. Whew, I thought at least that expense is over.

“Then I had another crazy thought. Why don’t I pretend our child care expenses still exist, but put the money in a savings account every month instead? The deposit rates weren’t great, but I figured it would add up eventually. At least it will be a rainy day fund.

“That’s how it started. Notice, this was not a strategy, but rather an impulse. There was little opportunity or help available at that time to explore terms like financial planning, securing your future, and all those investing superlatives, like long-term appreciation, and the like.

“Life went on, month after month, the old childcare money was automatically deducted from my salary. I received many raises over the years. One day, I suddenly realized that I had never missed that little daycare savings nest egg and it was starting to add up, so I created another account using my last raise, and further on another and another and another. became more prudent by managing the amounts in longer-term and more profitable fixed deposits, rolling them over each time they matured.

“Eventually, I even gathered my courage and invested in a few passive index funds. I didn’t dare to invest too much because I understood so little about investments and capital markets. It also became an interesting challenge, because I tried to learn as much as I could about stocks and bonds because at that time Bermuda had the national pension plan for employees.

“Have I already cashed out? Well, no, although I was so tempted one particular time – there was this wonderful watch. But, you know, I just couldn’t – it had been so difficult for the family in the beginning to start the savings program.

“Good thing, too. I just retired and am happy to report that my retirement is carefree, comfortable, not luxurious, but very well financially. All these small, consistent savings plans that have been growing for 40 years have paid off. You can do it too. Take my advice, just start!

Good readers, how did our retired contributor manage to do this?

1. Consistency.

2. The power of compounding — mathematical certainty.

3. Passive long-term capital appreciation.

4. Perseverance. The willingness to give up instant gratification.

The effect of compound interest on savings is a magical mathematical reality, even when interest rates are very low.

Compound interest means that each interest is added to the principal and the next calculation of interest earned pays interest on both the principal and the added interest. That’s the magic ingredient — the interest grows exponentially. Let’s do a little math here.

Simply put, we’re taking our reader’s savings of $300 per month, compounding interest on a monthly basis, while adding an additional $300 each month, compounding that additional interest and adding to the total, and repeating each month for 480 months – that’s 40 years.

After only a year, it starts to get very complicated. However, there is a free online calculator that can do this for you. A link to the website is included at the end of this article.

The Future Value Annuity Calculator might seem like a confusing title because you just thought you were calculating savings and interest, but that’s actually what our reader was doing.

The tedious method of checking your work (and the calculator) to determine a rough estimate of the final savings is to:

1. Multiply annual capital deposits of $3,600 by 40 years = $144,000

2. Multiply the 2% annual interest rate of $72 by 40 years = $2,880

3. Multiply the interest rate of 2% per year of $72 by 39 years = $2,808. Why? This is the second annual saving of $3,600.

4. Multiply the interest rate of 2% per year of $72 by 38 years = $2,736. Why? This is the third annual saving of $3,600.

5. Multiply the interest rate of 2% per year of $72 by 37 years = $2,808. Why? This is the fourth annual savings of $3,600.

6. And so on, go through each subsequent year until you get to the last $3,600 saved.

7. Now add up all the interest and add it to the deposited principal amount of $144,000.

Calculation with the Free Usage Calculator shows that the future value of 480 monthly deposits of $300, deposited at the end of each period and earning an annual interest rate of 2% would be $220,330.69. This total includes $144,000 in payments made and $76,330.69 in interest earned. It’s not a bad start to a retirement, and it’s just a savings plan.

So, do you still think that 2% is a low and insignificant interest rate? Imagine if deposits earned more.

Next time, we’ll share more about this retiree’s story of self-guided and determined financial planning.

Readers, please share your retirement planning and retirement stories with me. We want to hear from you. All data published will be on an anonymous basis with changing identities, certain facts, etc. – preserving the reader’s confidentiality.


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Martha Harris Myron CPA CFP JSM: Master of Laws — International Taxation and Financial Services. Dual nationality: Bermudian/American. Pondstraddler Life, Financial Perspectives for Bermuda Islanders and their Global Mobile Connections on the Great Atlantic Pond. Financial columnist at The Royal Gazette, Bermuda. Contact: [email protected]

It all adds up: A screenshot showing the total and accrued interest when $300 is saved monthly with 2% interest allowed to accrue. After 40 years, the total is $220,330.69, including $76,330.69 in interest earned (Graph from

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