The Miracle and Misery of Compounding

MikeJones_2

No question, sorry, just thought I'd share this with you.

As part of my working routine, I put together a free daily pension news update for members of the public, trustees, financial advisers and employers on the more interesting pension and retirement related articles which have appeared over the previous 24 hours.

People use it for different reasons - but in the main it's to keep up-to-date with what's going on in this very broad subject.

When I was researching today's update I came across what I thought was an interesting article for several reasons, not least because of this quote:

‘You're going to learn to love your pension. To see it as a gorgeous big cake that you'll start baking early, watch rise and feast on in your dotage.’

But I have to admit to being nowhere near the correct answer to this question (the article gives 3 multiple choice answers – and I managed to not look at the answers before I took a quick guess):

‘Compounding is quite miraculous when it's working for you; but not when it's against you. Here's a quick teaser: if you put a penny into a jar on the first of January and then doubled the amount you put in every day for a month (2p on the second, 4p on the third, 8p on the fourth, etc) how much do you think you'd have at the end of the month?’

Don't pick up a calculator - and within 10 seconds take a quick guess without even trying to work it out - and see how close you are. Can you get to within 10%? I didn't. You have to scroll down the article to the paragraph headed The Miracle and Misery of Compounding to find out the answer.

See:
- Being in the black is the new black (The Times)

Mike

I work in the field of Pension Education and Pension Guidance in the UK. I am a member of the Specialist Pensions Forum as well as being a Voluntary Adviser for The Pensions Advisory Service. I work with scheme members, employers, trustees, scheme administrators and advisers on most things to do with employer sponsored pension schemes. The views expressed by me in this thread are my personal opinions. You should seek professional advice from an appropriately experienced and qualified adviser. I am not an IFA.

purch

To get the final amount, you'd be putting one hell of an amount in on the 2nd to last day of the month !!!!

Desperate_Housewife_2-2

I've eard of the doubling up method of making money before and used it on my kids. I told them I knew how to make a million in a month, the trick is to work out how you are going to double it!

I find the article a bit patronising though,the author made sweeping assumptions about women based on stereotypical viewpoints. I think the attitude explored could refer to men or women.

Thanks for pointing it out though.

MikeJones_2

Continuing the theme about compound interest, an old colleague of mine Tom McPhail reveals some interesting figures in an article in What Investment.

Discussing the merits of starting a pension for a child in the year of its birth, Tom calculates that, ‘Assuming seven per cent investment growth and 0.8 per cent annual charges, an investment of £300 per month, made into a pension plan for 18 years from birth would be worth £1,428,028 at age 60 (at a cost of £64,800).’

He adds, ‘Compare this with the child starting investing £300 per month at age 18, and saving for the next 42 years. The fund would be worth just £648,000, even though the cost had increased to £151,200.’

In anyone’s book that has to be considered as an excellent form of estate planning for those in a position to do this for their children and is on a tangent with the findings of a survey about retirees’ main concerns – inheritance tax. See:
- In for the long haul (What Investment)
- IHT 'biggest concern' for retirees (IFAonline)

Mike

I work in the field of Pension Education and Pension Guidance in the UK. I am a member of the Specialist Pensions Forum as well as being a Voluntary Adviser for The Pensions Advisory Service. I work with scheme members, employers, trustees, scheme administrators and advisers on most things to do with employer sponsored pension schemes. The views expressed by me in this thread are my personal opinions. You should seek professional advice from an appropriately experienced and qualified adviser. I am not an IFA.