Suze Orman: ‘Value of Compounding’ Is Lost on the Young, Costing Them Hundreds of Thousands in Retirement
Written by
Yaël Bizouati-Kennedy
Edited by
Nicholas Morine
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Personal finance expert and New York Times bestselling author Suze Orman recently said that the “value of compounding” is lost on younger generations. In turn, she argued that this could cost them hundreds of thousands in retirement savings.
“They don’t understand the value of compounding and that the key to their financial independence is their age,” Orman recently told The Wall Street Journal.
Orman argued that if you start — at 25 — putting $100 a month into a Standard & Poor’s 500 index fund through a Roth IRA every single month for 12 months, every year, until you are 65, it’s possible you will average a 12% annual rate of return over 40 years.
“At the end of those years, you have a million dollars. You wait 10 years until you’re 35? At the age of 65, you’ll have $300,000. [Young people] don’t get that. They would rather dress cool, go on their TikToks,” she added.
The Power of Compound Interest
As Schwab explained on its website, compound interest makes your money grow faster because interest is calculated on the accumulated interest over time as well as on your original principal.
“Compounding can create a snowball effect, as the original investments plus the income earned from those investments grow together,” according to Schwab.
Schwab further explained that, generally, to assess how long it would take for your savings to double, you can use the so-called “Rule of 72.” Doing so involves dividing 72 by the expected rate of return. So, for instance, targeting 6% returns annually, you would double your investment about every 12 years.
The value and importance of compounding is a concept Orman has been reiterating for years.
For instance, in a 2023 LinkedIn post, she said, “You can’t make up for lost compounding.”
“Every dollar you don’t save in your 30s, 40s and 50s is a dollar that can’t compound. A $10,000 investment made at age 45 will be worth around $32,000 at age 65, assuming a 6% annualized return. Invest the same $10,000 at age 55 and it will be worth less than $18,000,” she wrote.
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