Compound Interest won’t help you retire early, but it may help you afterwards

I’ve always been the cynic on the practical value of compound interest – while it will probably will more than double the real value of a conventional retiree’s retirement savings by the time they get to retire, it’s not magic. The problem is we don’t live long enough, we don’t work long enough, particularly in the PF favourite occupations of finance and IT, and more to the point, particularly for young folk compared to me, you get some serious career progression which means you can save more money as time goes by.

career progression is much faster now
career progression is much faster now

Money is fungible – it doesn’t matter that your pension pot has £1000 from the £180 you saved when you were 25 with a paltry 20% tax lift, boosted by compounding, or £1000 from the £600 you saved in a month when you were 45 and paying 40% tax. It still adds up the same. All the old saws about Sensible Susan saving for 10 years ‘twixt 20 and 30 before she has kids never to save into a pension again doing better than Erratic Eddie who only started when he was 30 are bollocks unless you assume unrealistically high real rates of investment return or very long working lives. A long working life is something that by definition the FI/RE crowd don’t want to have.

Unrealistic Investment returns

Before you assume a 10% real terms return from investments ask yourself why that slack bastard Warren Buffett is only good for 13% p.a. average, I was wrong here he’s good for 19%. But he says you are only good for 6-7% nominal, 3-4% real. Bear in mind that the sequence of returns matters – take a hammering at the end and it’s worse than taking a hammering at the start. Cautious fellows like RIT are pushing down the safe withdrawal rate below 4%, the SWR is a proxy for the real investment return modified by the sequence of returns risks. Although you are slightly insulated from sequence of returns risk while you ware working (you can always work one more year for comfort and all that) compare to your retired self, assuming you can do better than twice the average real return year on year steadily is making an exceptional claim. You only get the exceptional evidence to back up that exceptional claim just before you retire. There’s no go-around again option by then.

Long working lives

One observation is supportive for this – we live a lot longer now than a few decades ago, possibly up to 10 years longer, and by observation while sitting on our backsides in offices gives us lardy arses the middle-aged of today just don’t seem to carry the burden of musculoskeletal aches and pains of the manual workers of my father’s generation, and arthritis and respiratory diseases are far less common than the middle-aged adults I knew as a child. There is some sample bias in my observation – I grew up in a working-class community but worked and lived in a community of people who didn’t work with their hands, but I would say that in general we are fitter but fatter in middle age than earlier generations.

The trouble is that to have a long working life there has to be work you can and ideally want to do throughout that long working life. I managed 30 years before I got pig-sick of the way the workplace was changing, and I didn’t even work in the those favourite PF occupations of IT and finance both of which seem to burn people out before they clear their forties nowadays. My Dad worked from 14 to 65, over 50 years, I only managed thirty. Anybody who wants to retire early isn’t going to have a long working life, and the value of compounding depends critically on the amount of time it is given to work.

Another problem is that the pace of change is faster now. Experience accumulated over a working life counted for more in the past. Much of what I learned as a young pup is absolutely worthless now – things like timing the studio cameras to be synchronous and in colour phase at the vision mixer is just irrelevant to anything now, though it was handy to know 30 years ago. As such you may have trouble in commanding higher pay later in life in technical fields, although it is still true that leading people is a skill that improves with age. But organisations have flatter hierarchies now, the levels in the pyramid are further apart. And anyway, TEA gives it to you straight between the eyes

the underlying purpose of work…which was to fund getting the fuck out as quickly as possible.

which sort of goes against doing it long enough for that compound interest malarkey to make the saving easier. Compound interest is the principle behind most people’s approach of only saving less than 25% of their pay to a pension. They get a nice long working life, or suffer an extreme income hit when they stop working.

This is why compound interest won’t help you, FI/RE wannabee

I worked for 30 years, which is an old lag in the FI/RE universe – although I had a decent job it wasn’t one of those finance/IT ones (I did some IT but it was peripheral). Many of you are targeting a 20 year working life, which is a good call, look around your office and ask yourself how many 45 year-olds and up are there? If a normal working life is 21 to 67 these days  then just under half your colleagues1 should be over 45. If you don’t see that many older employees, then don’t count on a long working life in that industry.

Monevator’s compound interest calculator tells me at a real interest rate of 4.5% your starting contributions will be increased to 2½ times their value over 20 years. If you look at the ONS chart you expect to get a tripling of salary over your short career – it took me over 30 years to get the career progression that seems to happen in half that time nowadays. So your increased later monthly savings will probably beat out the value of compound interest on your early monthly contributions. Plus at the moment the old git gets more help/shafted less by the taxman than the young fellow – I experienced this directly, it’s much cheaper  to save to a pension with a 40% tax boost than a 20% boost. You still need those early contributions, every little helps and all that, but forget that story of Sensible Susan quitting at 30. The only reason that could work is if she works (ie not drawing down) until she is 67 and enjoys a higher than excepted investment return. That ain’t likely – secular stagnation would seem to be lowering investment expectations, not inflating them. And who wants to work to 67? Not you, FI/RE aspirant.

Who does compound interest work for?

Entities with long investment horizons. Preferably ones that are longer than a human lifetime, because at realistic rates of return on capital, that’s how long you need for it to shoot the lights out. Apparently there’s something called Downton Abbey on t’telly, and The Escape Artist deconstructs the compound interest message from there. Basically get on the side of Capital – either by earning a shitload more money than most but not living an extravagant lifestyle, or alternately get your ancestors to work for your capital and live off the income it generates. Decency would suggest you don’t spend more than the income, so that you can gift your idle spawn the same gift your ancestors handed you. This doesn’t work well in a world of rapidly increasing human population and increased capital from non-human work, specifically fossil fuels, but it worked tremendously well for a lot of human history. Okay, it worked well for the aristocrats, rather than most people.

One of the interesting things in the comments on TEA’s article is where parents try and teach their children how compound interest works. Observe how they have to create absolutely unrealistic accounts where Daddy pays a whopping 10% p.a. interest rate to make the story ‘interesting’ enough to attract any attention. Look at how long you have to go back in time to when the Bank of England interest rates were that much – nearly a quarter of a century! That was a special case when Soros was ejecting Britain from the ERM. And look at when interest rates hit 10%+before in the late 1970s – the Ermine was still at school then. And remember what else happened then – we had inflation running at 27% annually at one point, so that 10% interest was still a dead loss. It’s a totally unrealistic rate, and they aren’t going to get that sort of interest unless all sorts of other shit is going down in the economy at the same time.

Now I know that you often have to simplify and amplify things for pedagogic reasons, because children are simple-minded with short attention spans, but in the end you’re teaching a lie. The difference between 5% annual return and 10% annual return is stupendous2 . This is similar to other lies people tell children to make them believe the world is other than it really is, like Father Christmas and the Tooth Fairy. It’s a good story. But it’s not true. You sometimes have to tell children lies like that, but as adults you should have grown out of such fantasies about compound interest in the same way as hopefully you don’t still believe in Father Christmas.

Compound interest, if positive and greater than inflation, can give you any amount of money you want. The catch is you have to wait long enough for it to work its magic, and 20 years is enough for a doubling, but not a tripling, at typical real rates of return of the riskiest commonly available asset class with the best long-term historical performance. Of course a doubling is worth having. But it’s not life-changing. Also bear in mind if you carry any debt at all during your working life then that is compound interest working against you. Debt includes a mortgage – you pay roughly twice the real price for a house in the long run at typical British long-term mortgage rates, which funnily enough, happen to be around the 6% mark. The only thing that makes that acceptable is you’d otherwise be paying rent for that time, and even then it takes a long time to break even.

In comparison, just under a thousand years ago a lot of people accumulated a shitload of capital in the UK, because William the Conk stole it from the previous owners and gave some of it to his mates who aided and abetted the heist. Compound interest worked for them – the aristocracy still owns more a third the land in England, much of which has remained in the same families’ hands for the last 200 years. You’re looking at compound interest at work – it paid for each generations huntin’ and fishin’ and all those servants to make their life easier than the rest of the country.

No wonder that the middle classes, observing the twin forces of automation and globalisation destroying many of the jobs they hoped their sons and daughters would go into, are bitching like hell to get inheritance taxes reduced so they can featherbed their kids against the incoming economic storms. Get on the side of capital. It sure beats the hell out of working for a living, and it’s doubly sweet if you didn’t have to earn the capital in the first place.I mean FFS, let’s make the middle class’s houses IHT free as they peg it so their children don’t need to work to earn the money to buy a house, because when you die you are reincarnated in the form of your kids so they are entitled to it, and anyway, houses are so cheap in Britain that any poor sap who doesn’t get a house bequeathed them by Mom and Pops can work a few years to buy a house. Not.

become a long-lived vampire to get the magic of compound interest working for you
become a long-lived vampire to get the magic of compound interest working for you

Compound interest works for old money, because it works very well if you have a time horizon measured in hundreds of years. Become a dynasty, or maybe become a vampire, slumbering in a box for three hundred years until your time is ready, while your Vanguard all-world index fund has been working for you for three centuries. Want to see what 200 years of compounding looks like – take a look at the Rothschilds. You can piggy-back on their investment approach, the only thing missing from the compound interest win is you need to do the whole vampire trick of taking time out while compound interest works for you. Becoming a vampire isn’t the only way, if you build a spaceship in your garage and put the hammer down once you’ve cleared Earth orbit you can slow down time for yourself while Vanguard and compounding do the heavy lifting for you. Obviously you lose your entire human web of life while doing so and won’t know any living person when you come back, but hey, that’s just the price of early retirement using compound interest. You could take your entire nuclear family with you and enjoy your winnings. Best to make sure there really is an Earth/human race/society you want to live in when you come back…

Who else does compounding work for?

People who have accumulated a decent wedge. Young folk always wonder why the greybeards have all the bloody money – they accumulated it over a working life. The corollary of, say, a 5% real return on income is that if you can keep your spending down to less than 5% of the capital then you won’t run out of capital. Unfortunately the only way to get that sort of return is to accept volatility which makes the spending rate indeterminate and statistical, the nominal SWR is lower than the return because the volatility means you either have to accept a variable spending rate or you will be drawing down your capital.

That low compounding rate means you need 20 times your desired annual income even hope to achieve stasis, and as soon as you draw income the compounding will slow, or reverse. If you are spending most of your income on living the middle class dream and sending your kids to public school then you aren’t going to get anywhere – in a 20 year working life you aren’t going to accumulate 20 times your annual spend. You need to seriously earn a lot more than you currently spend, or alternatively spend a lot less than you currently earn 😉 Cutting excess spending punches above its weight, because if you want to increase what you earn keeping spending the same you start to find the taxman grabs an increasing share of what you earn, adding a headwind to your efforts.

The forces that make compound interest are the same ones that pays rentiers and aristocrats (who are rentiers who didn’t earn their rent-seeking capital) an income. It just won’t really help you that much to retire early, if you are a typical FI/RE aspirant. I wasn’t a typical FI/RE guy, by the way – I would have been OK working to 60 if the workplace hadn’t become such a ghastly gamified bullring where form became valued over function. I have since then come to the conclusion that working to 60 would have been a terrible waste of my time, but I had to retire to find that out 😉 That would have been a working life of nearly 40 years, nearly twice the length of the one many PF writers aspire to.

As it was I worked for one and a half times the usual target. And at the peak of my earning power I sweated three years spending at a level that the JRF classified me below the poverty line 3

Straight between the eyes, no? You do not have enough to live on
Straight between the eyes, no? You do not have enough to live on

although I managed to avoid buying money at Money Shops because I didn’t spend £118 pw on Sky TV, mobile phone subscriptions and other manifestations of the Jacob trifecta of tickets, shopping and restaurants.

This isn’t easy, guys. There is no Compound Interest Fairy that makes it easier for you. If there were, everyone would be retiring at 40. There’s an argument to be made that if we weren’t such damn fools sinking so much of our earnings into our houses then we might all be retiring earlier, but in the end it didn’t work out that way.

Compound interest is a great story, but a myth at the same time

It’s a fantastic story, that the passage of time gives you free money. What on earth is not to like? Waiting most of your life for that free money! That’s the bit that aristocrats get right – they had diligent ancestors who put the work in or seized the opportunities from others, depending on your point of view. If you don’t have dynastic wealth and want to retire earlier than other people, do something different from other people.  Make the difference between what you earn and what you spend bigger, and note that the taxman adds a headwind to earning more but not to spending less.

Compound interest may help you after you retire

Young retirees have a very long time of not working, and they need compounding to keep their capital topped up. Compound interest will do more for them after they retired, because a) they will be retired longer than when they were working, and b) they will start their retirement with a shitload of capital, unlike their impecunious Younger Self when they started saving. I could take a reasonable estimate that I have 30 (slightly optimistic) to 50 (I would be over 100) years left to live- already that would permit me to spend down some of my capital. This effect is allowed for in the Monte Carlo analyses of things like FireCalc and cFiresim. Extreme early retirees have a longer gap to bridge – a 40-year old is looking to finish work less than halfway through life, and indeed less than a third into their adult life. To a first approximation they need to live like aristocracy – aristocrats never spend their capital, they are merely the guardians of the ancestral wealth for the next generation.

I’m a compound interest refusenik on early retirement because the maths doesn’t add up over human-sized periods of time if you come from a standing start. And I’m assuming that most wannabe early retirees are humans, and not aristocrats. You gotta get the capital before compounding will help you. It’s helping me – it has put a fair bit more money into my ISA4 than I was allowed to put in this year. But that seed capital came from some of those 30 years of working, not the Compound Interest Fairy.

  1. you do start to see people die off in their 50s, but it isn’t terribly common 
  2. compared to the 2.5 times in the previous example, the Bank of MMM would increase the capital by seven times  over 20 years. I’d bank with the Bank of MMM if I could get an account paying twice the typical real return on equities – on cash! 
  3. the JRF think purely in term of income, not wealth. I entered the income I had left after saving into pension AVCs and ISAs 
  4. integrated over time 2010-15 

36 thoughts on “Compound Interest won’t help you retire early, but it may help you afterwards”

  1. > Decency would suggest you don’t spend more than the
    > income, so that you can gift your idle spawn the same
    > gift your ancestors handed you.

    And an aristocrat probably shouldn’t even spend the income if they have more than one heir. Multiple heirs having to split up a single adequate inheiritance is the fastest way to water down multi-generational wealth.


    1. Not so bad these days when people have fewer children though – two aristocrats should be able to provide for two kids OK, and with careful living may be able to do better 😉


  2. Makes cryogenic freezing upon death sound quite appealing. When I wake up in 500 years time, it might be quite a culture shock, and I would most certainly feel quite isolated, but at least my Vanguard LifeStrategy fund will have blown up. Future drinks on me.


  3. The problem with inter generational compounding is the dreaded death taxes. For the middle classes they tend to mean a big hit has to be taken every generation to the family stash.

    I see what you’re saying but I have to disagree with the tone. Compound interest is a fundamental part of most peoples investment returns. Whether you’re a dividend growth investor, value seeker, accumulation fund owner or even a nasty BTL landlord like me, you’re investment returns are most likely contributed to by compounding. Sure it’s not the magic bullet to a passive millionaire lifestyle that some of the charts we bandy about might indicate (especially if you zoom out the x axis) but it is the maths that is at the heart of most investment returns.


    1. The fundamental problem is that rotten typical rate of return of 5% real, 1/20th p.a.. When combined with a working life of 40, 50 years and all the other stuff one wants to fit into a working life (kids, house, a bit of fun along the way) it doesn’t leave much opportunity for saving 20*annual spending. Halve the time and it’s even worse.

      It’s just not going to add that much to most people’s retirement savings, it ignores that fact that currently pension savings are taxed less onerously as you start paying 40% tax. I was able to save a third of the notional capital behind my pension as AVCs in the last 3 years of working – I worked there for getting on 24 years in total so in about an eighth of my time working for The Firm.

      The aristocracy cracked the death taxes by using holdings of agricultural land to store wealth across the generations. The don’t farm it themselves, they use contract farmers for that now that serfs aren’t easily available, but agricultural relief sorts the IHT problem for them 🙂


  4. “That was a special case when Soros was ejecting Britain from the ERM.”

    I know what you mean here but I think it was a case of Mr Soros basically observing the government of the day’s bravado and thinking “My map reading says you guys are on the wrong path – I’ll (make a collosal) bet that when the mist clears you’ll recognise that, turn 180 and I’ll be here to meet you … (doubtless) with a knowing smile.” 🙂

    Jesus, now THAT’s what I’d call having “skin in the game” !!

    He didn’t actually boot us out of the ERM as such but he was certainly, shall we say, “an interested third party” at the time the inevitable happened 😉


    1. Its’ a fair cop. I was sore about Soros getting the upside while I was paying 15% mortgage interest on a house dreadfully underwater on the loan, but I’ve got over that now… most of the time.


      1. Actually my first mortgage started when interest rates were around that level too. I remember it being 14.5% discounted for the first year to 13.25% (ouch !), still, like you, I lived to tell the tale. Most people almost have a coronary when they hear you talk about those times now. Quite. “How would you cope with double digit interest rates (wait for the double TAKE !) now then ?” Pretty much game over for a lot of people under such conditions now. I suspect they can relax though as it’ll probably never (be allowed to) happen. Like that bit in Ghost Busters about “being responsible for saving the lives of millions of registered voters” the whole damned thing’s political.

        As for Soros, fair play to him – he called their bluff and won big time. I certainly wasn’t smart enough to spot what was going on back then. The people we should be pissed off with are the people who put us on the wrong side of that trade in the first place, but then most of them seem to be equally useless at getting such things right (Brown selling off gold, etc).


      2. I dunno, I’m with the title of the Bond movie – never say never. I am possibly halfway through my adult life. I reckon there’s an evens chance I’ll see double digit interest rates (and inflation) someday…


  5. What about if you have a private pension invested in shares, to which you can add anything saved every year, can’t pull any funds out, get the tax relief & the share values are compounding on average over the couple of decades you’ll have to most likely work?

    That would be surely be significant even to an average worker without a great salary/career, given the stats showing an historical average of 8%(?) for the appreciation of share prices annually.

    Any bonuses you could throw in would then also greatly help, any annual direct work-related ones, redundancy payments, inheritances & other windfalls – provided you don’t have to spend them at the time of course …..& if a person is lucky enough to get a couple of breaks in their lives.


    1. Crikey, that’s a rough working life 😉 I’m not saying CI doesn’t help your early contributions, but career progression (and the lower net cost of pension savings later on) make the effect much less than often claimed. And I absolutely dispute the claim that saving from 20 to 30 and then knocking it off trumps starting at 30 unless you have a low career progression, are nearly as talented in investor as Warren Buffett and/or work longer than usual.


  6. Great article – the graph on earnings for the different cohorts was an eye-opener.

    For me compounding is the most important, but least predictable, element of my financial planning.

    Rather than a SWR I model a spending rate, and a real growth rate. The former is £10k – £20k pa and the latter 2% – 4% (after fees) for equities and 0% for cash.

    The reason for doing it this way is that I’m unlikely, at those spending levels, be able to vary my spending much if the stock market tanks for a while.

    I then model out until I’m 100 with the best case being £10k spending, 4% real return on equities, and the worst case being £20k spending and 2% real return on equities.

    I also have assumptions for pensions, care home fees, house sale etc.

    It’s the real return on equities that makes the most difference over that timescale. More so than if I assume £10k or £20k spending pa.

    If I assume a 3% real equity return my model flatlines on total net worth. This is ideal – I’m maintaining the real value of my asset base in perpetuity.

    If I assume 2% my net worth halves over that time period; 4% it goes up 50%.

    That’s a huge variation. And while it’s “likely” that equities will return 3%+ real over such a long time, I can’t help modelling the worst case and thinking I should work a few years beyond my hoped-for retirement date.

    It’s the sensible, prudent, side of me that has got me to the point that – per the spreadsheets – I should be able to retire in a few years. But it’s also the sensible, prudent, side of me that means I want a bit more certainty before I pull the rip cord…

    Early retirement is a hell of a decision to make, especially on the back of a spreadsheet…


    1. I failed to credit that graph, which comes from here

      That is one amazingly comprehensive spreadsheet! The one counter I might make is that from experience it is tremendously easy to overestimate running costs. A whole bunch of things get cheaper when you control your own time, and particularly more if you are prepared to insource some activities (chopping firewood, growing food) – but you need time. But it is possible I was exceptionally fearful when I made those computations.

      Also the assumption I made of never working again isn’t always the case. By observation of other early retirees, even working a little part-time minimum wage can make a difference, and they seem to gain something intangible from this too. The world has a lot of micro-opportunities for the financially independent who don’t need the same pay as someone starting out.


  7. I quite like the MMM example of 10% for simplicity. MMM has some of his money invested in, so he will be getting that 10% headline figure, for now. However, it certainly doesn’t translate too well over this side of the pond.

    The JRF minimum income calculator was a nice link. My target is to come in below their minimum, but live a full life. I appear to be doing quite well.

    However, you are starting frighten me regarding my middle age career in IT. Is there anyone older than me in the office, 1 person by 6 months. Plus the IT Director, but he doesn’t count.


    1. The book Rich Dad Poor Dad would charge the JRF with poor man’s thinking – they only think in terms of flow, not stock, hence the income bias…

      Old stagers in IT seem to fade away into contracting. Mind you, if they have been getting on the side of Capital and below the JRF threshold then it’s not a bad way to go – they don’t need the full-timeness or repeatability of employment, they are getting better paid for their hours and may not want the office politics. OTOH you’re only as good as your last gig, and a year is a long time in IT, so long sabbaticals carry more risk than in other fields.


      1. “Old stagers in IT …”

        The important thing is to have a plan. And as you have pointed out, compound interest isn’t going to help me escape. However, I shall be relying on compound interest when escape velocity has been reached.


  8. How timely! Just a few days ago, we were reading The Escape Artist, and a commenter @ben suggested we read your earlier post on compounding interest. We did, and now you provide an update! In a way, the full title of your post does explain your central point well: compounding interest won’t help you retire early but it may help you afterwards. That seems to make a lot of sense. You are not saying that we shouldn’t attempt to get the most out of compounding interest–since it can never hurt to save–but that CI is not the magical formula for EARLY retirement.

    On a separate note, we’re interested in pursuing your thoughts about the difficult working lives of today: “I managed 30 years before I got pig-sick of the way the workplace was changing, and I didn’t even work in the those favourite PF occupations of IT and finance both of which seem to burn people out before they clear their forties nowadays.”

    Of the two of us, one (Will) is in the IT industry, and we see that it IS a younger man’s career (mostly for under 45). The other (Julie) is a professor, and we know that that’s no longer such a cushy and long-lasting profession. (Yet another school shooting today in the US.)

    Are people in other professions also finding their work much less satisfying or fulfilling–or just plain too hard to handle? Are we just complaining about something earlier generations had to accept unquestioningly, or is there some validity to our concerns?


    1. I have to credit TEA and his Downton Abbey post for reminding me of the sorts for whom CI really works 🙂

      Changes in work and the misery of metrics, well, how long have you got? I used to rant on here all the time about that and bore the living daylights out of people. I would say that the forces of globalisation and automation are making work a hell of a lot more competitive, that certainly applies in IT – before 2000 it was much more a First World workforce, but afterwards there’s a much greater pool of competition. There’s also more compartmentalisation which strips the fun out of things.

      I did a job for the teachers a while back – they don’t seem happy folk, and the same basic problems seem to afflict tertiary education too.

      I’d summarise that professional jobs are becoming more micromanaged, more competitive, and more gamified.

      Now there are some who will say that’s all great, it’s a sign of progress and efficiency, and maybe it is for the customers. But we are also building an economy where it’s harder for two people to raise children, where people flake out of the workforce early and we all have to commute for hours to get to work, and where many jobs are so uncertain people invented the term precariat. I don’t regard that as an unequivocal success.

      It might simply be that living standards in the First World had to fall to meet rising living standards in the developing world as improved communications and globalisation mean businesses can source effort from a wider pool of workers. Let’s not forget the wider picture – a billion souls have been lifted out of extreme poverty since 2000 and perhaps the experience of white collar jobs in First World countries getting a lot worse is a price worth paying in the grand scheme of things. That’s as may be, but I care about my experience of life, and I am extremely glad to have gotten out of that damned rat-race in the nick of time…


  9. Agreed. There’s a seismic shift underway between the tectonic plates of the classes and the post war gains of the working class have already been mostly eroded away over the last couple of decades, whilst the whittling away of the middle class lifestyle is really gaining traction now.

    This is being done by outsourcing their jobs, increasing the labour pool in various ways to depress wages & mechanising away other occupations. Hand in hand with this is the weakening of resistance to these changes by diluting the effectiveness of legal options to fight back via employment rights & equivalent weakening of the efficacy of any democratic voting for change.

    So, for about 90% of the population in a lot of 1st world countries, recently it has become more obvious that quality of life is plummeting – hence the fall in birthrates there below replacement in some cases – who wants to endanger their kid(s) with the increasing insecurity they are feeling?

    It will be interesting to see if the social compact will break down as these economies deteriorate. If a tipping point is reached where the majority don’t have a disposable income after basic living costs, then how will the wheels turn if not lubricated by the mindless, unnecessary consumption that is such an important factor holding a lot of these countries’ economies up.


  10. I’ve already had 10 years of retirement and my type of working life doesn’t exist any more in Canada so I won’t generalize or harken back to “Glory Days.”
    That said, it seems to me that the old Micawber principle of spending less than you make and saving something outside of real estate still applies. I had to go to 58 and like ermine would have stayed till 60 had the workplace environment been different. My wife went to 55. We both put in more than 30 years.
    We have been able to do most of what we wanted in retirement so far and we are still in good shape as far as our capital goes – mind you we have the luxury of two DB pensions to keep the wolf away from the door.
    We still spend less than we get, and we expect that as we enter the 8th decade of our lives we won’t travel as much and certainly we’ll buy less stuff. Maybe we’ll pay more for hearing aids and walkers but unless we are faced with assisted living earlier than we anticipate we should be OK.
    For us saving did more than investment return to get us where we are.


  11. As for the article, we’ve disagreed on all this before. 🙂 I also don’t get where you’re getting 5% returns from, you lived and saved through the late 80s and through the 1990s.

    If you’d been “Early Ermine” starting as we all should in your early 20s you probably would have seen at least 10% real (a guess, but I’m sure it’s around there) on an initially very equity heavy portfolio that rebalanced 1/2% a year towards bonds. Today returns are (presumed — though not by me when it comes to UK equities) lower but remember inflation is currently zip.

    I see there’s a point here, but I’m afraid in my opinion the phrase “compound interest won’t help you retire early” just isn’t remotely true.


  12. p.s. Sorry, me again, I thought I should supply some figures for my top of head estimate above. If anything you’d have done even better, although to be fair I’m not factoring in rapacious pension fund fees etc here (but of course people don’t need to pay those now! 🙂 )

    Should have saved old chap.

    But hey, I went to the BBC bar in its pomp too, and it was mighty distracting. 🙂 We only get one pass through for wine, women (/men), and song. 🙂


    1. The assumption is that everything goes right. I’m happy to eat the difference if WB did better than I cited, the outliers will do 12%. I did well on the pension front, can’t argue with a DB pension and talented dudes spreading the risk. Heck, I am surrendering some DC for the surety of capped DB.

      We have to agree to disagree here. CI won’t help people retire early IMO. Once they have saved the wedge, it will help them, but CI is no friend of the saver to FI. It’s a helper of people with money, it’s a helper of old money. The savers to Fi don’t live long enough or save long enough to get the win IMO, until they are retired.

      The proof is in my last 3 years -an eighth of my working life at The Firm, and less than 1/8 of my shortened working life,. In which I saved 33% of the total nominal capital of my DB pension – helped by the tailwind of a 40% tax bung. Career progression, and desperation, counts. It beats CI on early contributions into the long grass. I’m not disagreeing with the theory of CI. I am disagreeing with the practice. People earn more as they get older; I had underestimated this because it happens faster now than it did for me. The ONS show modern career progression is twice the pace I saw, as a result people in their 40s see the pay increases I saw in my 50s. The downside is these guys never see their 50s in the same industry, but at a constant saving rate, never mind a 40% tax advantaged one they knock early savings + CI into a cocked hat.


  13. I’ve got 20 years work behind me, I reckon I have another 10 or 15 years to go – 10 if I really go at my savings and the markets favour me. 60. So that’s 10-15 years for a bit of compound interest to help me along the way. It might not be the miracle that some say it is but it does lend a helping hand – I see it as I reinvest the daily interest I get from my p2p.


    1. It does lend a helping hand – to quantify that if you use Monevator’s handy CI calculator over 30 years saving steadily with no career progression and 5% p.a. real CI you’d have 2.3 times the amount you saved in total at the end, worth having, but not so worth having that you could to a burst in your 20s and then sit back. The ONS seems to indicate on average your income will increase 3x in real terms along the way, so increasing your savings in line with your pay will make more difference. I simulated that here, but in practice the simulation underestimates the value of career progression because pension savings are much cheaper for 40% taxpayers, which makes a late savings burn punch way above its weight.


  14. Compound interest is an indisputable mathematical law, but whether or not the (global) economy will support this in our lifetimes to be useful is a question that needs to be considered. Just because there have been periods in recent history (last 100 years or so) where there has been the ‘possibility’ of enjoying returns allied to Compound interest it does not mean it will be so in the future.

    In the context of our society compound interest returns main driver is obviously growth (shares, property, etc.), where can the growth necessary to support life changing CI come from? Where are the innovations coming from that will drive this? There have been massive changes from new technology over the last 100 years; can this rate of change be continued? I don’t think so personally. With the levels of automation and dumbing down of jobs/lower salaries how will people pay the ridiculous costs of housing? Those that argue my house is my pension are in for a nasty shock – possibly.

    The ever increasing global debt burden will be a major headwind for the foreseeable future. Any attempt to inflate our way out of it will erode what little capital most of us peasants have.

    Maybe I am in a pessimistic mood as I have just been reading a book ‘Seventeen Contradictions and the end of capitalism’ where there is a chapter questioning ‘Endless Compound Growth’. I am neither left nor right in my political views but I am starting to take a greater interest in such matters as I can’t see what we have now as being sustainable.

    Personally I don’t think it wise to rely on compound growth as the major driver of ones accumulation of wealth, at best is will be a useful addition. I acquired 95% of my wealth over 12 years, very little down to CI.

    However, some people like many here and it seems ‘The Escape Artist’ can achieve very good personal compound wealth growth by above average investing skills. How many can consistently do this over many decades?


  15. You rant, dear sir, has encouraged a penny to drop. Why, I have often wondered, did The Left set out to bugger up the schools? The answer is it was all a plot by the Lizards who control them. By thus encouraging the better off part of the middle classes to pay for private schooling, they ensured that these people have to work on, and on, and on, rather than chucking it in and buggering off to Suffolk.

    Clever old Lizards.

    But why do the Lizards want to hold the middle class noses to the grindstone? To be revealed.


  16. I’m pretty sure MMM and certainly ERE acknowledged on more than one occasion that savings are more important than compound interest for ERE’s.

    The longer term benefits are undeniable though, as you’ve quite rightly pointed out, if you have time on your side! My own take is save up some cash now, learn to live on less than my peers then take on part time work so the stash can be left well alone, or even be added to if possible. This hits the problem from both sides. I get a semi FI type of life while letting compounding doing most of the work for when I properly retire.

    I think the 10% account is a good idea, teaching kids anything about PF must be hard so getting that in there while they are young is important. It’s not like their world is going to be shattered when they learn in the real world they can only get 5% or whatever, and you don’t even need to lie to them that they can. You can make it clear this is a special account for them up to the age of 12 or whatever age you decided.



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