Retirement these days looks as though it’s far off for many of us. Each year, Statistics Canada comes out with what Canadians believe they will need to retire. And each year, that number climbs higher and higher. By 2025, I wouldn’t be surprised if we hit $2 million that retirees believe they will need. This is why we’re going to look at a savings hack to get you over halfway there.
That hack? Compound interest!
Compound interest is a strong tool that can allow investors to earn interest on both their initial investment as well as their accumulated investment over time. The effect of compounding then can have a huge influence on your wealth accumulation, significantly boosting how you grow your wealth over the long term.
For instance, let’s say you were to consider an investment with annual compound interest at 8%. If you were to invest $10,000 and leave it alone for 30 years, letting it compound along that way, this alone would achieve $100,627.89! That’s without a single further contribution.
But the savings hack goes beyond this. That’s because it won’t be enough to invest and forget about it, as you can see. Instead, you need to come up with a consistent plan. And that means starting early and investing often.
Investing is key
Now, to be clear, it’s never too late to invest. However, if you invest early and often, then you can invest far less to reach millionaire status with this savings hack. The earlier you start, the more time you have for your investments to compound. In fact, this can be the difference between reaching millionaire status and having a couple hundred thousand dollars for retirement.
How much should you save if you want to invest for, say, the next 30 years? Further, where should you invest? Diversification and risk management here will be key. Investors should meet with their financial advisors and come up with a strong strategy to create diversification across the board. This will help spread out the risk and reduce the likelihood of creating lower returns.
How much and how often
Let’s say you were to invest in a strong company that’s been proven to be sticky in terms of investing. For that, I would consider Royal Bank of Canada (TSX:RY). The bank is the largest by market cap on the TSX today, with a dividend yield at 4.14%. It holds a compound annual growth rate (CAGR) of 6.3% over the last decade, with dividends at 7.5% CAGR. Then, let’s say you can afford to put $500 aside each month for retirement. That’s $6,000 per year. Here’s what you could achieve.
| Year | Share Price | Shares Owned | Annual Dividend Per Share | Annual Dividend | New Shares Purchased | New Balance |
| 1 | $133.00 | 45.00 | $5.52 | $248.40 | 43.00 | $12,911.36 |
| 2 | $146.72 | 88.00 | $5.93 | $521.84 | 42.00 | $20,274.80 |
| 3 | $155.96 | 130.00 | $6.37 | $828.10 | 41.00 | $28,350.09 |
| 4 | $165.79 | 171.00 | $6.85 | $1,171.35 | 41.00 | $37,360.76 |
| 5 | $176.23 | 212.00 | $7.36 | $1,560.32 | 40.00 | $47,207.16 |
| 6 | $187.33 | 252.00 | $7.91 | $1,993.32 | 40.00 | $58,145.96 |
| 7 | $199.13 | 292.00 | $8.50 | $2,482.00 | 40.00 | $70,277.76 |
| 8 | $211.68 | 332.00 | $9.14 | $3,034.48 | 40.00 | $83,707.44 |
| 9 | $225.02 | 372.00 | $9.83 | $3,656.76 | 40.00 | $98,550.40 |
| 10 | $239.20 | 412.00 | $10.57 | $4,354.84 | 41.00 | $115,184.31 |
| 11 | $254.27 | 453.00 | $11.36 | $5,146.08 | 41.00 | $133,523.26 |
| 12 | $270.29 | 494.00 | $12.21 | $6,031.74 | 42.00 | $154,003.52 |
| 13 | $287.32 | 536.00 | $13.13 | $7,037.68 | 43.00 | $176,838.18 |
| 14 | $305.42 | 579.00 | $14.11 | $8,169.69 | 44.00 | $202,263.18 |
| 15 | $324.66 | 623.00 | $15.17 | $9,450.91 | 45.00 | $230,533.48 |
| 16 | $345.11 | 668.00 | $16.31 | $10,895.08 | 46.00 | $261,938.04 |
| 17 | $366.86 | 714.00 | $17.53 | $12,516.42 | 47.00 | $296,767.17 |
| 18 | $389.97 | 761.00 | $18.84 | $14,337.24 | 49.00 | $335,777.40 |
| 19 | $414.54 | 810.00 | $20.25 | $16,402.50 | 51.00 | $379,408.26 |
| 20 | $440.66 | 861.00 | $21.77 | $18,743.97 | 53.00 | $428,135.88 |
| 21 | $468.42 | 914.00 | $23.40 | $21,387.60 | 55.00 | $482,494.17 |
| 22 | $497.93 | 969.00 | $25.16 | $24,380.04 | 57.00 | $543,061.80 |
| 23 | $529.30 | 1,026.00 | $27.05 | $27,753.30 | 60.00 | $611,037.90 |
| 24 | $562.65 | 1,086.00 | $29.08 | $31,580.88 | 63.00 | $687,216.90 |
| 25 | $598.10 | 1,149.00 | $31.26 | $35,917.74 | 66.00 | $772,472.70 |
| 26 | $635.78 | 1,215.00 | $33.60 | $40,824.00 | 69.00 | $867,765.72 |
| 27 | $675.83 | 1,284.00 | $36.12 | $46,378.08 | 73.00 | $974,882.37 |
| 28 | $718.41 | 1,357.00 | $38.83 | $52,692.31 | 77.00 | $1,095,102.78 |
| 29 | $763.67 | 1,434.00 | $41.74 | $59,855.16 | 81.00 | $1,229,846.70 |
| 30 | $811.78 | 1,515.00 | $44.87 | $67,978.05 | 86.00 | $1,381,534.92 |
While you may still have a ways to go to reach two million, you now have $1.38 million in hand! And that’s all thanks to compound interest and stable investing.
