Most of us are aware of the seven wonders of the world. What is less well known is the eighth wonder of the world: compound interest.
An easy way of showing the benefits of compound interest/returns is an explanation of the Rule of 72. This simple mathematical equation demonstrates how quickly the value of an investment can increase over time.
By dividing 72 by the estimated interest rate or investment return, you can determine how long it takes to double your money, e.g. an annual interest rate of 3% would result in your capital doubling in 24 years: 72 divided by 3 equals 24. An annual investment return of 6% would double in 12 years: 72 divided by 6 equals 12.
The implications of this rule highlight the potential losses of opportunity to KiwiSavers who were in default or conservative portfolios when they should have been in balanced or growth portfolios.
In the aftermath of the Covid-19 lockdown, the sell-off of the global investment markets caused KiwiSaver portfolio values to drop alarmingly, particularly for those in growth-oriented strategies. Sadly, in reaction to this unexpected fall in their KiwiSaver balances, too many people panicked and ‘dumbed down’ their KiwiSaver portfolios from growth to conservative, crystallising the loss in value and reducing the opportunity to benefit from gains from the recovery the market has been experiencing since April.
However, the real loss for these nervous savers is only just beginning, as their loss of confidence in the investment process is likely to ensure that they face a compromised future retirement lifestyle. Had these investors been properly supported and advised, both the current loss and potential future losses could have been avoided.
A professionally prepared retirement plan would aid you in this process by determining your retirement goals and timeframe; analysing your resources, particularly your income and expenditure requirements, both now and in the future; and assessing your
risk profile.
A plan to ensure your future financial wellbeing should give you the confidence to invest sensibly, ignore the ‘noise’ in the investment markets, and instead focus on the bigger issue of accumulating sufficient investment capital to fund your preferred lifestyle in retirement. This should certainly be Plan A, but what if there is an unanticipated interruption to your current employment, perhaps as a result of a Covid-19-related redundancy or business failure? In this event, your retirement plan should provide you with a Plan B, which would hopefully still allow you to achieve your goals.
If you haven’t sought professional advice about the best KiwiSaver scheme for you, or if you don’t have a retirement plan, there’s no time like the present to get one tailored to your specific requirements.
OnePlan, T: 0800 1plan4u, www.oneplan.co.nz