The Power of Compound Interest 

QUESTION: I am a small business owner and have established a SEP IRA retirement account. How do you suggest I invest my contributions?

ANSWER: Let me begin by stating upfront that I am not a qualified investment counselor. However, you can gain insights by following the suggestions of the “Oracle of Omaha” Warren Buffet, one of the richest people in the world.

Mr. Buffet has said the best thing for the unsophisticated investor is to put your money in a low expense mutual or exchange traded fund that tracks the Standard & Poor’s 500 stock index. This index has consistently generated over 10% annual returns on average over the decades. That includes a combination of 7% real return and 3% from inflation.

This is not to say that a 10% return is guaranteed every year but, rather, it is an average return for the investor that has patience and a long-term perspective.

One does not have to hit the lottery to become a millionaire. Consider the power of compound interest. If you want to know how long it takes one dollar to double in value, divide the anticipated rate of return into seventy two. At just 6% compounded monthly, that dollar will double in value in twelve years.

Compound interest is simple: It’s the interest you earn on both your original deposit and on the interest you continue to accumulate. Compound interest allows your savings to grow faster over time.

In an account that pays compound interest, the return is added to the original principal at the end of every compounding period. That's typically daily or monthly. Each time interest is calculated and added to the account, the larger balance results in more interest earned than before.

For someone in their early twenties, just starting their career, that 6% would double almost four times by their expected retirement age. So if one were to invest just $400 per month or $4,800 each year, over the period of 45 years (Age 65), they would accumulate $1,179,103.

To do your own calculations go to:

https://www.nerdwallet.com/banking/calculator/compound-interest-calculator

So there you have it. You don’t need to be a “wall street wizard” to retire rich. You just must have the discipline to commit to a systematic savings plan and resolve to not touch it until you retire.

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Gray Poehler is a volunteer with the Naples Chapter of SCORE, Counselors to America’s Small Business. To ask a question or request free and confidential business counseling, call 239-430-0081 or log on to https://www.score.org/naples/local-mentors