You might think that you have years to go before you need to invest in your retirement. You’re young. As a professional, you make good money and stand to make much more in time. And, you plan to work for many years to come. So, retirement savings can wait, right? The truth is quite the opposite!
The ‘problem’ of longevity
We are living longer than ever before but this does not mean that we are continuing to work into our later years. Many working people find themselves retiring at 60 and then living till 90. That’s 30 years of having to support yourself without any active income. How long before your basic savings (if you have them) run out?
Along with the ‘problem’ of longevity is this simple fact – you can’t beat the power of compound interest. This is when your interest keeps earning interest, year after year. The sooner you start saving money for your retirement, the better your returns will be as a result of exponential growth. Here’s a simple example:
John sets aside R1 000 a year, from the age of 25, in a retirement account earning 7% a year. Even if he stops investing when he turns 35, his investment will be worth R113 000 by the time he is 65 and ready to retire.
Tom invests the same yearly amount but only starts at the age of 35. Then, he continues to invest that same amount, every year, until he turns 65. That’s 30 years of investing versus John’s 10 years. At 65, Tom only has R101 000. That’s less than John and that’s the power of compound interest.
So, it’s not so much the amount that counts as the age at which you start. Don’t wait - invest at a young age, return the proceeds to the investments, and reap the benefits years later.
When your company scheme isn’t enough
Do you believe that you don’t have to worry about saving for retirement because you contribute to a company retirement scheme or pension fund? Even if you stay with your company for a lifetime career, are you sure you will have enough money for your retirement at the end of the day?
Start at the end. Using a retirement calculator, work out how much you would need to survive (or, better yet, live well) after you retire. You might be shocked at the answer. Taking into account lifestyle requirements and factors such as inflation, this exercise will allow you to determine how much you need to save for retirement on an annual or monthly basis.