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Long-term savings, the solution for your retirement

by alex

The magic of long-term savings exists, and it is straightforward to start it, start saving as soon as possible, and make regular contributions are the two key elements for it.

We will first clarify the concepts SIMPLE INTEREST AND COMPOUND INTEREST.

Simple interest is that which is obtained at the expiration of each period and is not added to the contribution to generate new interest. That is, the interest generated throughout the process does not come into play to generate new benefits. It is the usual one in savings deposits and generates the so-called arithmetic progression.

Compound interest is one in which the money we save generates interest that accumulates to principal to generate new interest in the future. The sum of each annual savings plus the interest generated is accumulated to generate higher interest in the following years, and this is every year. It is usual in ownership Life savings insurance and generates the so-called geometric progression.

We apply these concepts to a practical example:

María is 28 years old since she entered the world of work two years ago and, after extensively informing herself, she decides to start saving for her retirement by taking out savings insurance. Her initial contribution is 10% of her income, a percentage that she decides together with her personal advisor after carrying out an exhaustive analysis of her needs.

His annual premium will amount to €1,800, and he completes 20 years of regular savings; he does not have the savings generated and keeps it that way until he is 67 years old, with which the total of the savings premiums he pays will amount to €36,000 (€1,800 x 20 years).

Marcos, at the age of 41, plans to start his savings, just as María is clear about the need to complement his retirement and decides to take out his savings insurance by paying the same €1,800 annual contribution, he reaches the age of 67, having contributed a total of €46,800 (€1,800 x 26 years).

Who do you think will get more guaranteed capital if both

Have the same annual return of 2%?

Both María and Marcos contribute €150 per month to their retirement insurance, with a guaranteed interest rate of 2%. However, Marcos has paid a total of €10,800 more than María and has started saving much later.

This is how compound interest will behave to “reward” the time during which you save and not the amount of money contributed:

The rule of 72 calculates how long it will take your money to double.

The rule of 72 indicates that your money will double in the number of years resulting from dividing 72 by the interest rate earned.

Years = 72 / interest rates, with an interest of 2%, 72 divided by two are needed, that is, 36 years; with a 3% interest, 24 years are needed, with a 4% interest, 18 years are enough… and so on. This shows that the effect of compound interest, given enough time, can be important in building up good savings for retirement. 

When is the time to start saving?

Now! Millennials are the first generation in many things; they must also be saved and have financial freedom in the short and medium term, just as the rest of the young people in the European Union already do.

Postponing the hiring of a product that ensures our quality of life at the time of retirement is a mistake that we pay dearly for, precisely because we miss the ‘magic’ of compound interest that always plays in our favor. The saving effort undergoes a considerable increase over the years. However, the doubts about whether we will be able to continue maintaining the contributions in the future make us opt for the easy path and leave for later a decision on which it will depend in good part enjoy a comfortable old age.

In the example that we have just seen, María interrupts her contributions and, however, the advantage of early hiring generates a significant return; along this path, we have been working to offer our insured the option of limited payments so that we can establish and quantify at the time of contracting the duration of the payment of the contributions, achieving savings as it continues to generate significant returns until retirement age even without paying premiums from the agreed annuity.


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