Now! The basic fact is this: it’s never too early to start saving for retirement
Research indicates that most individuals will need a retirement income equal to between 70% and 90% of their pre-retirement income in order to maintain their current standard of living during their retirement years.
Some costs may no longer apply, for example travelling to work or school fees, while other costs such as medical costs may increase significantly.
To achieve at least 70% of preretirement income most of us will have to start saving for retirement at the first available opportunity. By starting early and not delaying your savings, you can considerably enhance the amount you have available to spend in retirement (or, seen from another point of view, significantly reduce the cost of saving for retirement).
Let me use an example to illustrate the point.
Jane and John are both 25 years old when they begin working.
During her first month at work Jane decides to begin investing R1,000 a month as part of her saving-for-retirement plan.
John, however, wants to wait until he is older to begin saving.
Assuming a real rate of return of 8%, by the time Jane is 40 she would have accumulated approximately R380,000.
It is at this point that John decides to start saving for retirement.
He realises that he needs to start saving aggressively to achieve his retirement goals and decides to invest R1,600 a month (60% more than Jane saves each month). He achieves the same real rate of return of 8%.
Both retire (and terminate their monthly contributions) at age 65. At this point Jane and John have contributed R480,000 towards their retirement by way of monthly contributions.
Now comes an astonishing point: Jane’s R480,000 contribution has grown to R3.5 m while John’s R480,000 contribution has only grown to R1.6 m. The huge difference between Jane’s and John’s retirement nest eggs can be attributed to compound interest.
Compounding is the effect of earning interest on interest. The phenomenon of compound interest is a potent force and is often referred to as the eighth wonder of the world. In John and Jane’s case it was the difference between a modest retirement and comfortable retirement.
Note that the calculation uses real rates of return (the amounts are calculated in today’s rands).
Early financial planning helps to ensure a financially secure retirement. If you plan to start saving later, later may never arrive. Reasons to delay saving are always readily available (mortgage bond payments, children’s educational expenses and so on).
The latest excuse is market volatility. Investment markets are volatile. Sitting on the sidelines may seem like the safest thing to do for the time being. However, history shows that if you want to achieve your goals over the long term, you have to stay in the market – no matter how rough it gets.
Over the last few years investors have become accustomed to very good returns from their investments. Indications are that returns are going to be more pedestrian in the near future. It is in times of uncertainty that it becomes really important to choose the correct investment team to manage your investment.
Remember that many South Africans are starting to retire at an earlier age. Retiring early has a double impact on your retirement. First, your savings will accumulate for a shorter period (fewer contributions and less compounding). Second, you begin drawing from your savings at an earlier age. The results can be quite astounding.
Your financial planner should be able to assist you to determine how much will be required for your retirement.
Engage an independent, fee-based CERTIFIED FINANCIAL PLANNER® who is focused on your best interests and can provide impartial advice. If you do not already have a CFP®, visit the Financial Planning Institute’s website on www.fpi.co.za to select one.
Morné Bezuidenhout CFP® is a financial planner at Netto Financial Services.
