The idea of retirement is a distant thought for most people especially those in their 20s and therefore saving for it is typically not at the top of one’s priority list. However, it is imperative to start saving for retirement from early on in one’s working life. While saving is perhaps a challenge in the early stages of one’s working life, for many people there are some compelling reasons why saving towards retirement from early on is an absolute necessity and important to do.
A financial planning principle is that you need to save at least 15% of your salary before tax for a period of 40 years and theoretically you should therefore retire comfortably. This means saving without withdrawing any of your savings along the way from age 20 or age 25. If you start saving 10 years later at an age of 30, to accumulate the same amount of savings over a 30-year period than you would have over the 40-year period, you would now need to save 30% of your salary each month over the 30-year period. Therefore, one could conclude that for an individual the latter option would pose greater difficulty than simply beginning to save for retirement much earlier in one’s working life.
Starting retirement savings early also means you have a longer investment time. This enables you to invest a higher proportion of your savings in growth assets (which tend to deliver superior gains over the long-term compared to other assets).
Another compelling factor is that people are also tending to live longer than previous generations and thus need to accumulate more money for retirement.
The power of compound interest lies in when you start saving. The nature of compound interest is such that savings that have been made early on have a longer time to multiply or compound and hence this results in having more money at the time of retirement.
Another important advantage for retirement savings is the tax deduction which tends to give you additional cash on a monthly basis by reducing the income tax which you pay.
We can see that it is important for every worker earning an income to make some provision for their retirement by saving earlier than later. When you save much later in life, much of your income is diverted towards the retirement saving and this may cause much strain on one’s finances and cashflows.
This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted. (E&OE)