Saving for retirement from a young age pays big dividends.
The start of a year should ignite refreshing ideas and commitment to goals and challenges for the year ahead; this generally entails the next 12 months and what one would like to achieve from a health, work or social perspective. More often than not, however, our financial goals go unnoticed, or are quickly considered but rather delayed for another time … after all, our financial milestones always seem so far off!
It is unfortunate that many do not consider closely enough their longer-term financial plans, whether it be planning for education costs, retirement or having appropriate risk cover. We need to plan to ensure we are on track to financial freedom. But it’s not too late to pass on this sound financial advice to our children and grandchildren.
Lack of planning is the reason that so many people struggle to retire financially free! The common pitfalls have not changed – starting to save too late, not saving enough, not preserving funds when resigning from a job, poor investor behaviour, poor asset allocation …
Time flies while you are not saving
In your 20s and 30s saving for retirement may seem like a waste of time and money, especially when your current lifestyle has a way of consuming all of your income. The benefits, however, of starting to save from a young age, and hence reaping the immense benefits of compounded growth, are huge.
At 6% real growth, every R1 invested at age 25 grows to more than R10 in real terms at age 65; in other words, you contribute less than 10% of the final purchasing power of that retirement savings – compounding gives you the other 90% (for ‘free’). In comparison, every R1 invested at 45 grows to just over R3 at age 65 and every R1 invested at age 55 grows to R1.79 by age 65.
The key to accumulating enough is the age at which you begin contributing, allowing the power of compounding to work its magic. As a rule of thumb, for every 10 years you delay saving, the required contribution rate – expressed as a percentage of salary – doubles.
Benefits of starting young:
Make savings count
When investing money we all want the same thing, no risk and plenty of return! Unfortunately life does not work this way. Despite the risk involved, we need to understand the importance of investing in the appropriate asset classes (shares, listed property) which can add significant value over a period of time. Investing in too conservative an investment is as dangerous to your financial well-being as too risky an investment. You need to get the balance right.
The opportunity cost of being in too conservative an investment can be significant. Assuming inflation is 6%, if one takes an investment of R100,000 growing at 10% a year over 30 years, the investment would be worth R1.74 million. Invest that R100,000 at 12% a year and your investment would come to R2.96 million. The additional 2% per year makes a material difference to your investment capital.
One of the biggest destroyers of value is Investor Behaviour. Investors should avoid inappropriate short-term decisions based on emotions, i.e. switching to chase past performance, switching due to panic, being overly conservative.
It’s the age-old mantra of ‘time in the market’ vs ‘timing the market’. Timing the market is extremely difficult. Better reward will come from a long-term disciplined approach in the appropriate asset classes.
Consider your options
Prior to retirement, consider the possibility of delaying this milestone. If you have underprovided for retirement, consider working for an extra few years. While deferring retirement may not be the most attractive option, it can have a positive impact; you have more years to save for retirement and fewer years to live off your savings.
Saving is not a get rich quick scheme, it is not about chance and it will not suddenly happen. It is about starting early, planning and being disciplined. A clear and considered strategic plan and sound investment behaviour will go a long way in contributing to financial freedom. We recommend that you advise your children and grandchildren to take a long-term approach – one day they will be very thankful for this advice!