March 17, 2025 • 23 mins
Compound interest has been called the 8th wonder of the world - and for good reason! In this episode, we break down the magic of this concept, share practical examples, and give actionable tips to help you maximize your savings and investments over time.
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Intro/Close (00:03):
Welcome to the Real Talk Retirement Show, where we
explore the financial side ofretirement and beyond.
Whether you're currentlyretired or planning for the
future, we offer real, relatableconversations about money and
personal finances.
Most importantly, we dive intoall these topics using Real Talk
.
Now, let's get real about yourmoney and your retirement.
(00:23):
Now, let's get real about yourmoney and your retirement.
Brian Graff (00:28):
Hello friends, colleagues, loyal listeners, hi
Mom Just kidding, my mother hasno idea what a podcast is, but
we are Brian Graff and TracyBurke from Conrad Siegel, back
with you for another episode ofthe Real Talk Retirement Show.
This is episode number three,and delighted to be in front of
you again today, tracy.
(00:50):
Today we're going to talk aboutsomething that's so awesome,
amazing, right, it's one of themost powerful concepts in all
investing, which is why it'ssometimes called the eighth
wonder of the world, at least ininvesting circles.
Any idea what I'm talking about, tracy?
Today I think we're going to betalking about compound interest
, right, brian, ding, ding.
I don't know if we have anaudio clip to go along with that
(01:13):
bell ringing, but yes, tracy,you're correct.
Compound interest Super, superimportant.
We think that it's probably themost important concept that
long-term investors need to beaware of and without further ado
, tracy, let's get right into it.
Can you explain to ourlisteners a little bit more
about what compound interest isand why it's so important?
Tracy Burke (01:34):
Yeah, for sure, because most folks have heard
the terminology before, but likea lot of other jargon that
might be in the financialservices field, sometimes you
think you know what it is, butlet's just break it down in a
very simple concept.
It's basically you're makingmoney on the money you make,
(01:55):
right?
So, as an example say, you have$1,000.
You invest that.
You earn 5% in a year.
At the end of that year you'regoing to have $1,050.
The next year now you're goingto be earning interest not only
just on the if you still have 5%interest.
You're not just going to beearning interest on that 1,000,
(02:15):
but you're going to be earninginterest on the 5% you earned
the year before.
That's the compounding ofeffects.
So it really snowballs as timegoes along.
So when investing, thatcertainly works on your favor.
Besides just earning on whatyou're putting initially all the
earnings you're going to beearning money on that as well.
(02:39):
Now, on the other hand, if youhave debt, if you're paying
loans, especially credit carddebt, it can actually work
against you because that sameconcept if you have interest
that's accumulating or accruing,you're actually paying interest
on the interest.
So it can work the opposite way, while it's magical on the
investment side?
(02:59):
It's not magical, it's thecomplete opposite on the other
side.
For credit card debt inparticular, mortgages are almost
always simple interest, so thatdoesn't apply in that case.
But some of the less favorabledebt and at some point we'll
talk about debt in future shows.
But I just want to point outit's good for investing, not as
(03:20):
good on the debt side.
Especially depends on what typeof debt.
Brian Graff (03:23):
Sure, great point, tracy.
We will focus on the good sideof it today.
We'll think about saving andinvesting.
And, tracy, I think it's prettysafe to assume that most of our
listeners have heard the nameWarren Buffett.
Yeah, not to be confused withthe late great Jimmy Buffett,
the musician who's probablyenjoying his cheeseburger in
paradise, washing it down with aboat drink up in Margaritaville
above.
(03:44):
Shout out to my Uncle Phil andAunt Ruth, who are both parrot
heads.
But anyway, back to WarrenBuffett.
If you're not familiar with him, definitely Google him.
But Warren Buffett is generallyconsidered to be one of the
greatest, if not the greatest,investors of our lifetime.
And, tracy, did you know that99% of Warren Buffett's net
(04:04):
worth occurred after age 65?
That's crazy, right?
And he's turning 95 this yearand has been investing for
roughly 75 years.
So why was all this wealth solate in life Compound interest,
right?
So I think, while WarrenBuffett was widely known for his
skill in investing, the secretsauce or the secret formula
(04:27):
really was just time Time beingon his side and letting that
interest compound on top ofinterest on top of interest,
like you were alluding toearlier, tracy, and that
snowball effect.
A great quote, and I want tomake sure I read this right from
Warren Buffett is that mywealth has come from a
combination of living in America, some lucky genes and, of
course, compound interest.
(04:48):
So pretty, pretty telling stuffright there.
Tracy Burke (04:52):
Yeah for sure, and time matters, right.
In this case, certainly timedoes matter and, like you just
said, this is exciting becauseit really does work.
So let's do a couple exampleshere.
Brian, to sort of drill thisdown a little bit, is better
(05:12):
than starting later, right?
And we've heard that all along.
You're better off at startingat at 22 versus 32 or 42 or 52,
right?
So we're going to use anexample, and we have two folks,
jane and jim.
Apologies to any you knowcouples out there that are named
jane and jane and jim, butthese this is an anonymous
couple.
Uh, so we're going to startwith jane.
(05:33):
Jane, jane saves five thousanddollars each year.
She does it at the beginning ofevery year and she does that
starting at her age 22, and doesthat for 10 years.
So between 22 up to 32, shesaves $5,000 a year and then for
(05:54):
the rest of her lifetime, shedoesn't save anything after
there.
Jim, on the other hand, he doesalso save $5,000 a year, but
instead of starting at age 22,he waits to age 32, basically
when Jane dropped off, and hesaves the whole way up until his
full retirement age for socialsecurity standards, which is age
67.
So, assuming they both get thesame rate of return and just say
(06:17):
it's a flat 7% year after yearreturn.
Brian, who do you thinkprobably has more money at age
67 at that point?
Brian Graff (06:27):
Yeah, you know, I want to say Jim, of course,
because on the surface he savedso much more than Jane.
But knowing where thisconversation is headed, and also
because women typically makebetter decisions than men, I'm
going to go with Jane.
How does that sound?
Tracy Burke (06:41):
That's a great response, brian, and you are
100% right.
Jane did win the race in thiscase and again, she saved from
22 up to 32 and then nothing forthose next 35, 36 years.
Now, those next 35, 36 years,now Jane ends up with $844,000.
(07:03):
And keep in mind she only putin $50,000, 5,000 over 10 years.
So she put in 50, that grew to844 because of compound interest
in the earnings or in herinvestment.
Jim, on the other hand, hewasn't far off, 7 was was his
end.
So about 50 000 less.
But keep in mind he saved 180000 over those 36 years that he
(07:25):
was saving between that periodof time.
So again, jim invested overthree and a half times the
amount that jane did.
He put 180 versus the 50, buthe ended up with a bit less.
And again, that's where timematters.
Brian Graff (07:41):
Yeah, that's pretty amazing.
So it tells you that, yeah,over time, even just a modest
sum like what Jane contributedover her 10 years can really
turn into a massive fortune.
Now, some people might notthink of $844,000 as a massive
fortune, but I think it's a lotof money, right?
I think it goes without sayingand for most people it is
substantial.
(08:02):
So let's take it a step further, tracy, and use another example
.
Let's call this saver, I don'tknow how.
About Brian?
All right, it's a good enoughname, right?
Let's say, brian started saving$5,000 a year at age 22.
Exactly what Jane did, right?
Because I just said, jane'ssmart, she's a woman.
But one big difference is Briandecided to increase his
(08:26):
contributions by 2% every year,essentially to kind of keep up
with inflation, and did thisthroughout his working years up
till his retirement age of 67.
So what would Brian have had atage 67, assuming an average
rate of return of that, you know, 7%, believe it or not, Tracy?
Over $2.1 million, right?
(08:47):
That is really significant.
So you know, kind of, justlooking at the math on that,
from age 22 through age 67,brian saved about $371,000,
meaning that the earningscompounded to over $1.75 million
.
So most of all that fortune wasbecause of the compound
(09:11):
interest associated with thatsavings.
Tracy Burke (09:13):
So Brian, I know that's a hypothetical Brian
right, but if you, brian, if yousave there man, you would be in
pretty good shape at 67.
Brian Graff (09:22):
I would certainly take it Tracy Yep, I would not
look back.
I would enjoy those frequenttrips to the beach and enjoy my
retirement for sure If I couldjust do what Jane did and then
keep saving until retirement age.
Tracy Burke (09:34):
Yeah, so that's the most ideal situation, right?
Not start late like Jim did, ornot start early like Jane did
and then stop, but just to gothroughout.
And that's obviously.
And those numbers again arestaggering in terms of the
investment gain and what'shappened.
So if we transition just alittle bit here to talk about a
(09:56):
couple of the other elements sowe talked about the importance
of saving and how investmentscan grow, and whether it's
within retirement accountsoutside of retirement accounts
obviously works the same mannerbut also want to talk about bank
savings too, because compoundinterest there works as well.
We're in an environment nowwhere interest on bank accounts
(10:20):
is higher than it's been formaybe over the past 20 years,
Right, but it's important to gethigher interest and search out
making sure you're getting thosebest interest rates on your
bank accounts, Right, Brian?
Brian Graff (10:32):
Yeah, definitely.
And you know we use the exampleof emergency funds right that
rainy day account and you know,for many, many years, high-yield
savings accounts or productthat might give you closer to a
(10:58):
3.5% return versus a half apercent can really have a
substantial effect even on,again, those rainy day funds, as
we like to call them.
Tracy Burke (11:07):
Yeah, and a lot of times the brick-and-mortar banks
and most of us use abrick-and-mortar bank for at
least some of our bankingfunctions right, if you call
them up or if you walk in,they're probably not going to be
able to give you that three anda half 4% interest rate.
Where a lot of folks aregetting those high yield savings
that Brian mentioned.
Those are generally found onthese online based banks that
(11:30):
have less expenses and sothey're able to do them, but
they're very reputable.
They are FDIC insured.
So again something if you'regetting just very little in your
bank savings, somethingconsidered there that can help
with compounding it, even astime goes along.
And then something else I thinkit's worth mentioning for our
viewers, brian back in 2022,congress and they passed what
(11:55):
was known as Secure Act 2.0.
Now, for the average person,you probably maybe heard it a
couple of years ago and, yes,that was 2.0.
There was a 1.0, I think wasback in 2019.
Those of us in the financialspace, these are some of the
more monumental laws thatCongress has passed, especially
(12:18):
for retirement savings and sometax elements and some other
things here for quite a while.
529 college saving accountmoney you know, 529 account
money to a Roth over a period offive years if somebody ends up
(12:43):
with excess money in a 529.
The student got scholarships orsome other areas, or just the
school wasn't as expensive asmaybe what they they originally
thought it was going to be endup with excess money in a 529.
And again, the good news is isthat law allows you to move
(13:07):
excess money in 529 to a RothIRA.
Now, at some point we'll talkabout Roth IRAs, because they
were super powerful, uh, buttax-free earnings and great ways
to also save for retirement.
If you can do that, uh.
So I'm going to use anotherexample and let's call this
person Fred, all right, soFred's a student and his parents
just ended up with too much ina 529.
(13:29):
Again, you know, for whateverthose reasons are, what this law
allows, they can do the maxcontribution, and right now here
in 2025, the max Rothcontribution for somebody under
age 50, and Fred's a student, sohe obviously would be is $7,000
.
So this law allows a person tomove $7,000 for five years from
(13:54):
the 529 to a Roth, and the Rothdoes have to be in Fred's name.
So we do that math 7,000 a yearfor five years, that's $35,000,
assuming there is that excessin 529s.
But moving that money, if youdo that from, say, age 22, say
after Fred graduates fromcollege, over those first five
(14:17):
years that $35,000 of moneymovement takes that Roth IRA.
If Fred does not add any more toit, turns that into $690,000
again at age 67.
And again, just like the otherexamples, we're assuming a 7%
(14:38):
annual average return throughthere.
Again, no further contributions.
So that's another powerful waycompounding can work, especially
if you're fortunate enough tohave that excess into 529.
Of course that's not the goalnecessarily, but if you end up
there, that's another way to getmoney over there and the power
(14:58):
of compounding.
Brian Graff (14:59):
Yeah, what a good problem to have.
I was just thinking about that,as you were talking Tracy with
three kids college age myself, Ipromise you I was not like
Fred's parents and we did notoverfund our 520.
So what a good problem to haveand another example of how
compounding can really benefityou in the future.
Tracy Burke (15:16):
Yeah.
Brian Graff (15:17):
So, yeah, something else.
I want to talk about shiftinggears a little bit.
Tracy is a nice way to kind ofa ballpark way to calculate
future growth, and it'ssomething we call the rule of 72
.
Oh yeah, yep, yeah, this is agood one.
So this basically tells you howlong it will take your money to
double right, so to double insize.
(15:38):
So let's say you have, you know, half a million dollars and you
know that when you retire youwant to have a million dollars
in there.
You can kind of follow the ruleof 72.
And the way that works is youtake that number 72, divide it
by your expected return or theinterest you make on that money
so let's say 6% and it gives youthe number of years it will
(15:59):
take for your investment todouble.
So, for example, you'll take 72and let's say you assume a 6%
rate of return.
72 divided by 6 equals 12.
So you can expect it to takeapproximately 12 years for your
investment to double.
Okay, so that's it's a prettyneat quick, back of the napkin
way of figuring out how long itwould take to double your
(16:21):
investments.
What do you think about therule of 72, trace?
Is that something you use alittle bit when talking to your
clients as well.
Tracy Burke (16:28):
Yeah, yeah, quite a bit.
And sometimes we don'toutwardly refer to it.
But sometimes when we'retalking with clients and say,
hey, I want to get to thiscertain threshold, I want to get
my account balance to a millionor five million or whatever the
number is, how long will ittake to get there Sometimes a
question.
So I often don't say, well, letme break up my rule 72
calculator and talk through it.
(16:49):
But inside your head I'm doingthe math like, well, geez, if
they're getting a 5, 6, 7, 8%,whatever the rate of return is,
you do the math and you cansometimes come across sounding
like a genius.
Well, yes, I can figure thisout so quickly.
But, yeah, so it's a good wayto do it.
And keep in mind that that'sassuming no additional
contributions be putting in, soyou're not saving there.
(17:12):
But also then the opposite.
Or there's different ways tosort of do the calculation with
that rule of 72.
And let's say, hey, I want mymoney to double in 12 years.
Sort of looking at it from theopposite standpoint, you know I
want, so I have this much money,and it might not be a great
example but say you're saving tobuy a house.
(17:33):
Because if you're buying ahouse.
12 years is a long time to sortof save to buy a house.
But you're saving to buysomething in the future or you
want to get to a certain numberand you know you say, hey, 12
years is that mark?
Well, it's just the opposite,right?
You take 72 divided by 12 andthe math you did a few moments
ago, brian 6% is that return?
(17:54):
So you can figure out how long.
You can also figure out what isthe rate of return on my
investment for doubling as well,for doubling as well.
And then maybe one last examplewhat return do I need to double
my existing money and again, nofurther additions over a period
of time, and maybe we say over10 years.
(18:16):
What return do I need to get todo that?
72 divided by 10 years would be7.2%.
So you know just a couple ofdifferent ways to look at.
It can go both ways.
But a great way to sort offigure out how does that
compounding work without any newmoney coming in?
What can you expect movingforward?
Brian Graff (18:37):
For sure.
It's such an interestingconcept.
In fact I was prepping for thepodcast last night at home and
talking to my kids about it andthe two that are more into
business and again college age18 and 20, talked about the rule
of 72 with them and they kindof looked at me like yeah, are
you sure it's that easy, dad,you know to kind of just do that
little bit of math.
So I saw my son with hiscalculator at one point.
I'm not sure if he was tryingto prove the theory or what he
(18:58):
did, but he looked satisfied inthe end.
So yeah, it's prettyinteresting stuff, that rule of
72.
Absolutely Well.
Okay, tracy, you know we'vetalked a lot today about the
beauty and the power ofcompounding, but let's wrap up
and let's, as always, talk aboutsome action items here a little
bit, because, remember, thesepodcasts only work if we're
giving people steps to take toget where they want to be in
(19:21):
their retirement savings journey.
So the most important thing Iknow we've said it a few times
today everybody is to save right.
You know, again, it's never tooearly or too late to start
saving for retirement, butsomething I hear myself say on
repeat every day talking toretirement plan participants is
start now, because even savingjust a little bit, as we talked
(19:42):
about earlier, can really go along way and have this
incredible impact on yourretirement savings because of
compound earnings.
So get started and, like Briandid in our example, continue to
increase your savings a littlebit every year.
Try not to get too stagnant,because that compounding, while
it works wonders, works evenbetter when you continue to save
a little bit more every year.
Tracy Burke (20:04):
What else?
Tracy better when you continueto save a little bit more every
year.
What else, tracy?
Yeah I would say, if you arefurther along in life and have
saved, and whether you've adultchildren, grandchildren, helping
to get them started on futuresavings.
We talked about that Roth IRAexample.
So, grandparents or parents,you know, if we think back to
(20:28):
early adulthood, that's timewhere cash flow isn't very good
and it's tough to save at thatpoint.
Right, it's tough to save forretirement, it's tough to save
for a potential down payment forhome, even car and all those
other type of things.
So if you're further along andagain you're able to help, you
(20:52):
know whether it's Roth IRAs foryou know helping to further
retirement and keep in mind thatthe grandchild or child does
need to have earned income toput money into a Roth for them.
But then then then 529s youknow from from that standpoint.
So, again, get helping them,get started.
You know Roth IRAs and 529s,those two because of the
tax-free nature they may.
If what we're talking aboutright now is the eighth one to
(21:12):
the world compound interest,those two might be the ninth one
to the world.
Brian Graff (21:16):
Yeah, hey, that sounds like a great future
podcast topic Tracy Keep thatone in mind.
I'm going to jot that downright now.
Tracy Burke (21:22):
There we go.
And then the other thing is,you know, action item just
practice patience and disciplinewhen investing.
This doesn't happen overnight,right?
Compound interest takes time.
Use that example of WarrenBuffett earlier.
Just allow it to grow.
You know, if we think and I'veheard this many years ago and it
might even be from WarrenBuffett because he has so many
(21:43):
great quotes or great thoughtsout there but you know it's it's
like going out and planting atree.
If I go out and plant a tree,you know, in my yard, and then
in a year from now I'mdisappointed because it didn't
grow more and I dig it up andthen I'm like, well, geez, I'm
gonna go and plant in brian'syard, right, because maybe his
soil is more fertile and maybewe'll go there.
We just just got to give ittime to grow, right.
(22:05):
So patience and discipline issuper important when investing
and allowing that growth.
Brian Graff (22:12):
Yeah, I love that shady tree analogy, tracy, yeah,
so thanks everybody forlistening to us today.
We hope that you enjoyed thistopic as much as we did, and I
just want to remind everybodyplease reach out to us with any
questions that you may have,whether it's about this specific
podcast topic or just investingand saving in general.
We are here to help.
So please email us at podcastat conradsegalcom, and, you know
(22:37):
, please be sure to share thisepisode, or any of our podcast
episodes with family and friends.
We'd love people to get theword out for us a little bit.
We hope we're putting out somegood, important information and
if you like what you hear,please give us a five-star
review and subscribe to thepodcast as well.
Well, until next time, tracy.
A pleasure as always, my friend, and look forward to the
(23:00):
recording episode number fourpretty soon.
Have a great day.
Intro/Close (23:06):
Thank you for tuning into today's show.
The Real Talk Retirement Showis created and produced by
Conrad Siegel, an advisory firmthat specializes in helping
people prepare for retirementand beyond.
If you want to learn more aboutour work or meet the team, you
can visit conradsegelcom.
Information on this show is foreducational purposes only and
(23:27):
should not be consideredpersonalized investment tax or
legal advice.
Before making decisions, youshould consult with the
appropriate professionals foradvice that is specific to your
situation.
Welcome to the Real Talk Retirement Show, where we
explore the financial side ofretirement and beyond.
Whether you're currentlyretired or planning for the
future, we offer real, relatableconversations about money and
personal finances.
Most importantly, we dive intoall these topics using Real Talk
.
Now, let's get real about yourmoney and your retirement.
(00:23):
Now, let's get real about yourmoney and your retirement.
Brian Graff (00:28):
Hello friends, colleagues, loyal listeners, hi
Mom Just kidding, my mother hasno idea what a podcast is, but
we are Brian Graff and TracyBurke from Conrad Siegel, back
with you for another episode ofthe Real Talk Retirement Show.
This is episode number three,and delighted to be in front of
you again today, tracy.
(00:50):
Today we're going to talk aboutsomething that's so awesome,
amazing, right, it's one of themost powerful concepts in all
investing, which is why it'ssometimes called the eighth
wonder of the world, at least ininvesting circles.
Any idea what I'm talking about, tracy?
Today I think we're going to betalking about compound interest
, right, brian, ding, ding.
I don't know if we have anaudio clip to go along with that
(01:13):
bell ringing, but yes, tracy,you're correct.
Compound interest Super, superimportant.
We think that it's probably themost important concept that
long-term investors need to beaware of and without further ado
, tracy, let's get right into it.
Can you explain to ourlisteners a little bit more
about what compound interest isand why it's so important?
Tracy Burke (01:34):
Yeah, for sure, because most folks have heard
the terminology before, but likea lot of other jargon that
might be in the financialservices field, sometimes you
think you know what it is, butlet's just break it down in a
very simple concept.
It's basically you're makingmoney on the money you make,
(01:55):
right?
So, as an example say, you have$1,000.
You invest that.
You earn 5% in a year.
At the end of that year you'regoing to have $1,050.
The next year now you're goingto be earning interest not only
just on the if you still have 5%interest.
You're not just going to beearning interest on that 1,000,
(02:15):
but you're going to be earninginterest on the 5% you earned
the year before.
That's the compounding ofeffects.
So it really snowballs as timegoes along.
So when investing, thatcertainly works on your favor.
Besides just earning on whatyou're putting initially all the
earnings you're going to beearning money on that as well.
(02:39):
Now, on the other hand, if youhave debt, if you're paying
loans, especially credit carddebt, it can actually work
against you because that sameconcept if you have interest
that's accumulating or accruing,you're actually paying interest
on the interest.
So it can work the opposite way, while it's magical on the
investment side?
(02:59):
It's not magical, it's thecomplete opposite on the other
side.
For credit card debt inparticular, mortgages are almost
always simple interest, so thatdoesn't apply in that case.
But some of the less favorabledebt and at some point we'll
talk about debt in future shows.
But I just want to point outit's good for investing, not as
(03:20):
good on the debt side.
Especially depends on what typeof debt.
Brian Graff (03:23):
Sure, great point, tracy.
We will focus on the good sideof it today.
We'll think about saving andinvesting.
And, tracy, I think it's prettysafe to assume that most of our
listeners have heard the nameWarren Buffett.
Yeah, not to be confused withthe late great Jimmy Buffett,
the musician who's probablyenjoying his cheeseburger in
paradise, washing it down with aboat drink up in Margaritaville
above.
(03:44):
Shout out to my Uncle Phil andAunt Ruth, who are both parrot
heads.
But anyway, back to WarrenBuffett.
If you're not familiar with him, definitely Google him.
But Warren Buffett is generallyconsidered to be one of the
greatest, if not the greatest,investors of our lifetime.
And, tracy, did you know that99% of Warren Buffett's net
(04:04):
worth occurred after age 65?
That's crazy, right?
And he's turning 95 this yearand has been investing for
roughly 75 years.
So why was all this wealth solate in life Compound interest,
right?
So I think, while WarrenBuffett was widely known for his
skill in investing, the secretsauce or the secret formula
(04:27):
really was just time Time beingon his side and letting that
interest compound on top ofinterest on top of interest,
like you were alluding toearlier, tracy, and that
snowball effect.
A great quote, and I want tomake sure I read this right from
Warren Buffett is that mywealth has come from a
combination of living in America, some lucky genes and, of
course, compound interest.
(04:48):
So pretty, pretty telling stuffright there.
Tracy Burke (04:52):
Yeah for sure, and time matters, right.
In this case, certainly timedoes matter and, like you just
said, this is exciting becauseit really does work.
So let's do a couple exampleshere.
Brian, to sort of drill thisdown a little bit, is better
(05:12):
than starting later, right?
And we've heard that all along.
You're better off at startingat at 22 versus 32 or 42 or 52,
right?
So we're going to use anexample, and we have two folks,
jane and jim.
Apologies to any you knowcouples out there that are named
jane and jane and jim, butthese this is an anonymous
couple.
Uh, so we're going to startwith jane.
(05:33):
Jane, jane saves five thousanddollars each year.
She does it at the beginning ofevery year and she does that
starting at her age 22, and doesthat for 10 years.
So between 22 up to 32, shesaves $5,000 a year and then for
(05:54):
the rest of her lifetime, shedoesn't save anything after
there.
Jim, on the other hand, he doesalso save $5,000 a year, but
instead of starting at age 22,he waits to age 32, basically
when Jane dropped off, and hesaves the whole way up until his
full retirement age for socialsecurity standards, which is age
67.
So, assuming they both get thesame rate of return and just say
(06:17):
it's a flat 7% year after yearreturn.
Brian, who do you thinkprobably has more money at age
67 at that point?
Brian Graff (06:27):
Yeah, you know, I want to say Jim, of course,
because on the surface he savedso much more than Jane.
But knowing where thisconversation is headed, and also
because women typically makebetter decisions than men, I'm
going to go with Jane.
How does that sound?
Tracy Burke (06:41):
That's a great response, brian, and you are
100% right.
Jane did win the race in thiscase and again, she saved from
22 up to 32 and then nothing forthose next 35, 36 years.
Now, those next 35, 36 years,now Jane ends up with $844,000.
(07:03):
And keep in mind she only putin $50,000, 5,000 over 10 years.
So she put in 50, that grew to844 because of compound interest
in the earnings or in herinvestment.
Jim, on the other hand, hewasn't far off, 7 was was his
end.
So about 50 000 less.
But keep in mind he saved 180000 over those 36 years that he
(07:25):
was saving between that periodof time.
So again, jim invested overthree and a half times the
amount that jane did.
He put 180 versus the 50, buthe ended up with a bit less.
And again, that's where timematters.
Brian Graff (07:41):
Yeah, that's pretty amazing.
So it tells you that, yeah,over time, even just a modest
sum like what Jane contributedover her 10 years can really
turn into a massive fortune.
Now, some people might notthink of $844,000 as a massive
fortune, but I think it's a lotof money, right?
I think it goes without sayingand for most people it is
substantial.
(08:02):
So let's take it a step further, tracy, and use another example
.
Let's call this saver, I don'tknow how.
About Brian?
All right, it's a good enoughname, right?
Let's say, brian started saving$5,000 a year at age 22.
Exactly what Jane did, right?
Because I just said, jane'ssmart, she's a woman.
But one big difference is Briandecided to increase his
(08:26):
contributions by 2% every year,essentially to kind of keep up
with inflation, and did thisthroughout his working years up
till his retirement age of 67.
So what would Brian have had atage 67, assuming an average
rate of return of that, you know, 7%, believe it or not, Tracy?
Over $2.1 million, right?
(08:47):
That is really significant.
So you know, kind of, justlooking at the math on that,
from age 22 through age 67,brian saved about $371,000,
meaning that the earningscompounded to over $1.75 million
.
So most of all that fortune wasbecause of the compound
(09:11):
interest associated with thatsavings.
Tracy Burke (09:13):
So Brian, I know that's a hypothetical Brian
right, but if you, brian, if yousave there man, you would be in
pretty good shape at 67.
Brian Graff (09:22):
I would certainly take it Tracy Yep, I would not
look back.
I would enjoy those frequenttrips to the beach and enjoy my
retirement for sure If I couldjust do what Jane did and then
keep saving until retirement age.
Tracy Burke (09:34):
Yeah, so that's the most ideal situation, right?
Not start late like Jim did, ornot start early like Jane did
and then stop, but just to gothroughout.
And that's obviously.
And those numbers again arestaggering in terms of the
investment gain and what'shappened.
So if we transition just alittle bit here to talk about a
(09:56):
couple of the other elements sowe talked about the importance
of saving and how investmentscan grow, and whether it's
within retirement accountsoutside of retirement accounts
obviously works the same mannerbut also want to talk about bank
savings too, because compoundinterest there works as well.
We're in an environment nowwhere interest on bank accounts
(10:20):
is higher than it's been formaybe over the past 20 years,
Right, but it's important to gethigher interest and search out
making sure you're getting thosebest interest rates on your
bank accounts, Right, Brian?
Brian Graff (10:32):
Yeah, definitely.
And you know we use the exampleof emergency funds right that
rainy day account and you know,for many, many years, high-yield
savings accounts or productthat might give you closer to a
(10:58):
3.5% return versus a half apercent can really have a
substantial effect even on,again, those rainy day funds, as
we like to call them.
Tracy Burke (11:07):
Yeah, and a lot of times the brick-and-mortar banks
and most of us use abrick-and-mortar bank for at
least some of our bankingfunctions right, if you call
them up or if you walk in,they're probably not going to be
able to give you that three anda half 4% interest rate.
Where a lot of folks aregetting those high yield savings
that Brian mentioned.
Those are generally found onthese online based banks that
(11:30):
have less expenses and sothey're able to do them, but
they're very reputable.
They are FDIC insured.
So again something if you'regetting just very little in your
bank savings, somethingconsidered there that can help
with compounding it, even astime goes along.
And then something else I thinkit's worth mentioning for our
viewers, brian back in 2022,congress and they passed what
(11:55):
was known as Secure Act 2.0.
Now, for the average person,you probably maybe heard it a
couple of years ago and, yes,that was 2.0.
There was a 1.0, I think wasback in 2019.
Those of us in the financialspace, these are some of the
more monumental laws thatCongress has passed, especially
(12:18):
for retirement savings and sometax elements and some other
things here for quite a while.
529 college saving accountmoney you know, 529 account
money to a Roth over a period offive years if somebody ends up
(12:43):
with excess money in a 529.
The student got scholarships orsome other areas, or just the
school wasn't as expensive asmaybe what they they originally
thought it was going to be endup with excess money in a 529.
And again, the good news is isthat law allows you to move
(13:07):
excess money in 529 to a RothIRA.
Now, at some point we'll talkabout Roth IRAs, because they
were super powerful, uh, buttax-free earnings and great ways
to also save for retirement.
If you can do that, uh.
So I'm going to use anotherexample and let's call this
person Fred, all right, soFred's a student and his parents
just ended up with too much ina 529.
(13:29):
Again, you know, for whateverthose reasons are, what this law
allows, they can do the maxcontribution, and right now here
in 2025, the max Rothcontribution for somebody under
age 50, and Fred's a student, sohe obviously would be is $7,000
.
So this law allows a person tomove $7,000 for five years from
(13:54):
the 529 to a Roth, and the Rothdoes have to be in Fred's name.
So we do that math 7,000 a yearfor five years, that's $35,000,
assuming there is that excessin 529s.
But moving that money, if youdo that from, say, age 22, say
after Fred graduates fromcollege, over those first five
(14:17):
years that $35,000 of moneymovement takes that Roth IRA.
If Fred does not add any more toit, turns that into $690,000
again at age 67.
And again, just like the otherexamples, we're assuming a 7%
(14:38):
annual average return throughthere.
Again, no further contributions.
So that's another powerful waycompounding can work, especially
if you're fortunate enough tohave that excess into 529.
Of course that's not the goalnecessarily, but if you end up
there, that's another way to getmoney over there and the power
(14:58):
of compounding.
Brian Graff (14:59):
Yeah, what a good problem to have.
I was just thinking about that,as you were talking Tracy with
three kids college age myself, Ipromise you I was not like
Fred's parents and we did notoverfund our 520.
So what a good problem to haveand another example of how
compounding can really benefityou in the future.
Tracy Burke (15:16):
Yeah.
Brian Graff (15:17):
So, yeah, something else.
I want to talk about shiftinggears a little bit.
Tracy is a nice way to kind ofa ballpark way to calculate
future growth, and it'ssomething we call the rule of 72
.
Oh yeah, yep, yeah, this is agood one.
So this basically tells you howlong it will take your money to
double right, so to double insize.
(15:38):
So let's say you have, you know, half a million dollars and you
know that when you retire youwant to have a million dollars
in there.
You can kind of follow the ruleof 72.
And the way that works is youtake that number 72, divide it
by your expected return or theinterest you make on that money
so let's say 6% and it gives youthe number of years it will
(15:59):
take for your investment todouble.
So, for example, you'll take 72and let's say you assume a 6%
rate of return.
72 divided by 6 equals 12.
So you can expect it to takeapproximately 12 years for your
investment to double.
Okay, so that's it's a prettyneat quick, back of the napkin
way of figuring out how long itwould take to double your
(16:21):
investments.
What do you think about therule of 72, trace?
Is that something you use alittle bit when talking to your
clients as well.
Tracy Burke (16:28):
Yeah, yeah, quite a bit.
And sometimes we don'toutwardly refer to it.
But sometimes when we'retalking with clients and say,
hey, I want to get to thiscertain threshold, I want to get
my account balance to a millionor five million or whatever the
number is, how long will ittake to get there Sometimes a
question.
So I often don't say, well, letme break up my rule 72
calculator and talk through it.
(16:49):
But inside your head I'm doingthe math like, well, geez, if
they're getting a 5, 6, 7, 8%,whatever the rate of return is,
you do the math and you cansometimes come across sounding
like a genius.
Well, yes, I can figure thisout so quickly.
But, yeah, so it's a good wayto do it.
And keep in mind that that'sassuming no additional
contributions be putting in, soyou're not saving there.
(17:12):
But also then the opposite.
Or there's different ways tosort of do the calculation with
that rule of 72.
And let's say, hey, I want mymoney to double in 12 years.
Sort of looking at it from theopposite standpoint, you know I
want, so I have this much money,and it might not be a great
example but say you're saving tobuy a house.
(17:33):
Because if you're buying ahouse.
12 years is a long time to sortof save to buy a house.
But you're saving to buysomething in the future or you
want to get to a certain numberand you know you say, hey, 12
years is that mark?
Well, it's just the opposite,right?
You take 72 divided by 12 andthe math you did a few moments
ago, brian 6% is that return?
(17:54):
So you can figure out how long.
You can also figure out what isthe rate of return on my
investment for doubling as well,for doubling as well.
And then maybe one last examplewhat return do I need to double
my existing money and again, nofurther additions over a period
of time, and maybe we say over10 years.
(18:16):
What return do I need to get todo that?
72 divided by 10 years would be7.2%.
So you know just a couple ofdifferent ways to look at.
It can go both ways.
But a great way to sort offigure out how does that
compounding work without any newmoney coming in?
What can you expect movingforward?
Brian Graff (18:37):
For sure.
It's such an interestingconcept.
In fact I was prepping for thepodcast last night at home and
talking to my kids about it andthe two that are more into
business and again college age18 and 20, talked about the rule
of 72 with them and they kindof looked at me like yeah, are
you sure it's that easy, dad,you know to kind of just do that
little bit of math.
So I saw my son with hiscalculator at one point.
I'm not sure if he was tryingto prove the theory or what he
(18:58):
did, but he looked satisfied inthe end.
So yeah, it's prettyinteresting stuff, that rule of
72.
Absolutely Well.
Okay, tracy, you know we'vetalked a lot today about the
beauty and the power ofcompounding, but let's wrap up
and let's, as always, talk aboutsome action items here a little
bit, because, remember, thesepodcasts only work if we're
giving people steps to take toget where they want to be in
(19:21):
their retirement savings journey.
So the most important thing Iknow we've said it a few times
today everybody is to save right.
You know, again, it's never tooearly or too late to start
saving for retirement, butsomething I hear myself say on
repeat every day talking toretirement plan participants is
start now, because even savingjust a little bit, as we talked
(19:42):
about earlier, can really go along way and have this
incredible impact on yourretirement savings because of
compound earnings.
So get started and, like Briandid in our example, continue to
increase your savings a littlebit every year.
Try not to get too stagnant,because that compounding, while
it works wonders, works evenbetter when you continue to save
a little bit more every year.
Tracy Burke (20:04):
What else?
Tracy better when you continueto save a little bit more every
year.
What else, tracy?
Yeah I would say, if you arefurther along in life and have
saved, and whether you've adultchildren, grandchildren, helping
to get them started on futuresavings.
We talked about that Roth IRAexample.
So, grandparents or parents,you know, if we think back to
(20:28):
early adulthood, that's timewhere cash flow isn't very good
and it's tough to save at thatpoint.
Right, it's tough to save forretirement, it's tough to save
for a potential down payment forhome, even car and all those
other type of things.
So if you're further along andagain you're able to help, you
(20:52):
know whether it's Roth IRAs foryou know helping to further
retirement and keep in mind thatthe grandchild or child does
need to have earned income toput money into a Roth for them.
But then then then 529s youknow from from that standpoint.
So, again, get helping them,get started.
You know Roth IRAs and 529s,those two because of the
tax-free nature they may.
If what we're talking aboutright now is the eighth one to
(21:12):
the world compound interest,those two might be the ninth one
to the world.
Brian Graff (21:16):
Yeah, hey, that sounds like a great future
podcast topic Tracy Keep thatone in mind.
I'm going to jot that downright now.
Tracy Burke (21:22):
There we go.
And then the other thing is,you know, action item just
practice patience and disciplinewhen investing.
This doesn't happen overnight,right?
Compound interest takes time.
Use that example of WarrenBuffett earlier.
Just allow it to grow.
You know, if we think and I'veheard this many years ago and it
might even be from WarrenBuffett because he has so many
(21:43):
great quotes or great thoughtsout there but you know it's it's
like going out and planting atree.
If I go out and plant a tree,you know, in my yard, and then
in a year from now I'mdisappointed because it didn't
grow more and I dig it up andthen I'm like, well, geez, I'm
gonna go and plant in brian'syard, right, because maybe his
soil is more fertile and maybewe'll go there.
We just just got to give ittime to grow, right.
(22:05):
So patience and discipline issuper important when investing
and allowing that growth.
Brian Graff (22:12):
Yeah, I love that shady tree analogy, tracy, yeah,
so thanks everybody forlistening to us today.
We hope that you enjoyed thistopic as much as we did, and I
just want to remind everybodyplease reach out to us with any
questions that you may have,whether it's about this specific
podcast topic or just investingand saving in general.
We are here to help.
So please email us at podcastat conradsegalcom, and, you know
(22:37):
, please be sure to share thisepisode, or any of our podcast
episodes with family and friends.
We'd love people to get theword out for us a little bit.
We hope we're putting out somegood, important information and
if you like what you hear,please give us a five-star
review and subscribe to thepodcast as well.
Well, until next time, tracy.
A pleasure as always, my friend, and look forward to the
(23:00):
recording episode number fourpretty soon.
Have a great day.
Intro/Close (23:06):
Thank you for tuning into today's show.
The Real Talk Retirement Showis created and produced by
Conrad Siegel, an advisory firmthat specializes in helping
people prepare for retirementand beyond.
If you want to learn more aboutour work or meet the team, you
can visit conradsegelcom.
Information on this show is foreducational purposes only and
(23:27):
should not be consideredpersonalized investment tax or
legal advice.
Before making decisions, youshould consult with the
appropriate professionals foradvice that is specific to your
situation.
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