Lux Investing

simple interest with linear growth?or compound w expontial?

If you were to invest $1000 today to save for your retirement in about 50 years, would you want to invest it in an account that paid 10% simple interest with linear growth, or would you want to invest it in an account that paid 5% compound interest with exponential growth? Explain the reasons for your choice. Include work.

Public Comments

1. Simple interest on $1000 at 10% per year for 50 years yields: $1000 * (1 + 50 * 10 / 100) = $1000 * 6 = $6000. Compound interest at 5% yields: $1000(1 + 0.05)^50 = $11467.40. The choice is obviously the second option. Simple interest over 50 years with the interest left invested doesn't make logical sense. You are getting the same return every year on an investment which is growing. To offset that difference over such a long period, the interest interest rate would need to be over 20%. However, if you can take the simple interest out each year, the higher rate is the better choice. You could then open a new account each year with the interest, and effectively compound the higher 10% rate. There's sure to be a restriction stopping that.