Researchers from the University of Washington have estimated that the number of people who live off of retirement savings past 100 will increase significantly in the coming decades. Physiologically speaking, humans can live as long as 150 years, but very few would be able to reach that age now. As of 2021, we know of one French woman who lived to celebrate her 122nd birthday before she passed away in 1997; however, we also see more people celebrating their centenary birthdays.
How Longer Life Expectancy Affect Finances
According to a June 2021 study published in the Demographic Research journal, the odds of someone reaching age 127 will increase to 67% by the end of the 21st century. At the same time, there will be a 13% probability of humans living to be 130 years old. When we consider the various healthcare and social development factors in which we are showing global improvement, it is not difficult to think about these statistical models.
Now that you know that your lifespan may end up being longer than you previously expected, it makes perfect sense to start looking ahead in terms of personal finance. We should only view the study above in a positive light; the longer we can expect to be around, the more time we will have to get rich through compound interest strategies.
Using Buffett as a Model for Longer Retirements
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Billionaire investor Warren Buffett was 56 years old when his net worth posted ten digits. He started investing at the age of 11, and he opened his first compound interest account when he was still a teenager. As a result, approximately 44% of Buffett’s net worth, which is currently estimated to be more than $80 billion, was generated by compounding. At the age of 90, Buffett admitted that good genes and a reasonably healthy lifestyle had enabled him to live that long, but he also pointed out that compound interest allowed him to build up his net worth a lot sooner than expected.
Retirement Savings Strategy for Young Investor
One of the most common compound interest scenarios involves a young investor who starts out with $100 and continues to deposit that same amount month after month until she reaches age 65. Assuming that she can enjoy an annual percentage yield of 10%, which is not impossible to achieve, this investor will retire as a millionaire. Over the length of this period, the monthly cash deposits will only add up to $56,400, but the magic of compounding will make her investments gain exponential value.
Let’s say our young investor is blessed with longevity genes that allow her to continue generating income past the age of 65. If she keeps working and depositing 100 until she celebrates her 75th birthday, her compounding portfolio will be worth more than $3.5 million.
Making Longer Retirement Plans a Reality
Notice how the scenario above makes assumptions that are easy to assimilate for the sake of mathematical calculations. Setting aside $100 these days is entirely doable because such amounts are routinely spent on dinner and drinks on a Friday night; however, we can also think about our young investor increasing the amount of her monthly contributions over time, thus making her compounding portfolio more valuable. Through career development, this investor could increase the amount of her contributions as her salary rises.
Compound interest does not have to be a passive or static investing activity; in fact, the 10% APY of our example would require more than just monthly deposits into a high-yield savings account. The 10% is doable if you take into consideration a benchmark index such as the S&P 500, which has returned 10.3% annual returns over the last three decades. The average yearly return on bond funds tracked by Morningstar is about 6%, but many have beaten the S&P 500 in various years.
At a time when we are no longer looking at age as a disease, compound interest makes more sense than ever. Now and more than ever, time is on our side. The key to building wealth is to do it slowly.
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