MONEY MAESTRO | A fresh burst of belief in the power of compound interest

I was in a workshop recently where one of the presenters was just about to retire and what he said renewed my already-healthy appreciation for the power of compound interest. He had been with his company for over 30 years and in the middle of his term they changed their pension fund structure. The funds that they had already contributed were ringfenced and they kind of started a new one.

Now here is the kicker — the value of his first 15 years of contributions with their compound interest accounted for over 70% of his pension. This was even though no further contributions were made to the ringfenced portion — and his income had grown so his later contributions were far greater than what he paid all those years ago. The foundation of a successful retirement strategy is often established within the initial decade of disciplined saving.

Financial advisors consistently observe that early contributions, amplified by the power of compounding, distinguish those who retire comfortably from those facing shortfall risks. Compounding functions as an exponential growth mechanism, where returns generate further returns over time. For example, contributing R1,000 monthly to a Retirement Annuity (RA) from age 25, assuming a 10% annual return, accumulates to approximately R2.1 million by age 65.

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Commencing at age 35 yields only R890,000—a stark illustration of the first decade’s outsized influence, as early growth compounds for decades longer. This principle aligns with empirical evidence. The JSE All- Share Index has delivered a compound annual growth rate exceeding 12% since 1960, while global benchmarks like the MSCI World Index average 8-10%.

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