The Power of Compound Interest

graph created using www.helpfulcalculators.com

During a recent episode of the Dave Ramsey Show, he and Chris Hogan were discussing the CARES Act and the damage that it will create for people’s retirement if they withdraw money early from their retirement account. The CARES Act allows an individual to withdraw up to $100,000 from their retirement account prior to being of retirement age without being assessed the traditional 10% penalty. You WILL still pay taxes on that money if you choose to withdraw it. More than $12 Billion dollars have been withdrawn from retirement accounts since the Act when into effect. This may initially seem like a good way of getting your hands on cash that would otherwise be trapped in a retirement account, but let’s consider the ramifications.

If you were to have started a Roth IRA 10 years ago with a $500 initial deposit and have contributed the maximum of $6,000 a year and continue to contribute that amount for 30 years at a 10% interest rate, you will end up with $1.14 million dollars. At the end of the 30 years, you will have only contributed $180,000 into the account. That means that $959,663 of the account is from the compound interest growth alone! And let’s not forget that because it is a Roth IRA, this entire account is tax free!!!

Albert Einstein called compound interest the eighth wonder of the world and for good reason. When we look at the graph closely, you begin to realize that the majority of the growth comes in the last 10 years of the curve. If you withdraw money from that account as a result of the CARES Act, you will be causing yourself to re-start at the beginning of that graph. 20 years of investing at the same rate will only grow to $383,348. This is a $800,000 choice. Don’t loose 10 years of investing because their is no longer a 10% penalty.

TIME and CONSISTENCY are the keys to building wealth! COVID has shaken our world and in many instances causing people to react without considering all the ramifications. Your future self will thank you if you leave your retirement money alone.

Stay safe and stay well.