The Power of the Penny

One cent on the dollar may not make your eyes pop, but when you figure how much more it can add to your retirement kitty, it can surprise you. Through the amazing power of compound interest, adding 1% to your interest yield can add hundreds of thousands of dollars to your nest egg over the long term, giving you more cash and greater peace of mind in your retirement years.

Here’s an example: At age 30, you start investing $300 a month in a mutual fund with an average annual return of 8%. At age 65, you’ll have $692,751 in your retirement fund when you’re ready to quit working. Shop around for an additional 1% of yield and you’ll add almost $200,000 to the fund at retirement age. At a withdrawal rate of 8%, that adds about $16,000 in spendable retirement income every year. You can do your own math with a spreadsheet like Microsoft Excel, but if you’re averse to inputting complex formulas, there are several online sites that will do the job for you. Just plug “compound interest calculator” into your search engine.

An easy way to add 1% to your mutual fund yield is to choose funds with low expenses. The average actively managed equity fund charges between 1.3% and 1.5% to invest your money. Low-cost index funds, on the other hand, charge as little as 0.2%. To help you find one, Morningstar lists 72 stock funds with ratings of four stars or better with expense ratios of less than 0.5%. To get a list, go to Morningstar.com.