The Practicon Viewpoint by Ann Page Griffin

A SECRET TO MAXIMIZING RETIREMENT FUNDS

While your first thought might be "I don't need to read this now. I have years to go before retirement," let me assure you: the younger you are, the more important the secret referenced in the title. Not only is it important for your own retirement, you have an opportunity to influence your team members' retirements also.

The secret: Pay yourself first and let time make your money grow. Saved, invested, and left untouched, retirement funds will compound to create wealth for your retirement years beyond your wildest dreams. This concept is called compounding returns by some investment counselors. Simply defined, compounding returns are interest on interest, growth on growth, appreciated value on appreciated value. Left intact, savings and investments can grow exponentially because each succeeding year the investor makes money on the initial investment plus last year's interest, growth, or appreciated value. Get it? Your saved/invested money grows ever faster as it earns money on the principal and on the accrued return, whether or not you add more money to the account.

A story from the book The Wealthy Barber by David Chilton drives home the power of compounding returns. Even though Chilton's book was originally published in 1989, almost 30 years ago, the principles it explains still hold true.

Chilton tells the story of 22 year old twins who decide to begin saving for retirement. Twin A opens an IRA (Individual Retirement Account) and funds it with $2,000 per year for six years, then stops. He never touches the original IRA investments nor the earnings, and both continue to earn 12% per year, a healthy rate of return. Keep in mind the principle of compounding returns means every year his IRA earns money on the principal plus the money made on last year's gains.

Twin B procrastinates, opening an IRA in the seventh year, the year his brother stopped funding his own IRA. Twin B also contributes $2,000 per year to his IRA for the next 36 years. His IRA also appreciates at 12% per year, and he makes no withdrawals.

Fast forward—the twins turn 65 and decide to get together to compare their IRA holdings. Twin B expected his IRA would be worth nine to ten times as much as his brother's, which had been funded for the initial six year period only. Not so—at age 65, they both have the same amount in their IRA—$1,200,000.

Do the math and you will find Twin A contributed a total of $12,000 to his IRA while Twin B contributed a total of $74,000 to his. The difference? Compounding returns!

This simple story demonstrates the powerful concept of compounding returns: letting saved, invested money earn money on last year's earnings while the investment also earns money on the principal. The secret to reaping the rewards of this concept: commit to pay yourself first; or, if you're a tithing Christian, pay yourself right after you pay your tithe to the Lord. Learn to live on your wages after your regular retirement savings are put aside. Invest for retirement, the earlier, the better, and let compounding returns richly reward you.