It is a scenario that we as financial planners see time and again. Individuals who reach their forties, crossing the threshold from youth to middle age, and suddenly realise that they are halfway through their careers, that retirement is a lot closer than they thought and that they have yet to start planning for it. Cue panic.
While it is never too late to start saving for retirement – and always better late than never – it’s obvious that trying to save the amount you require for a comfortable retirement which could last three, or even four, decades is going to be a lot harder if you start at forty than if you start saving as soon as you begin working in your twenties. Starting early will not only give you more time to save, which means you will need to save less each month, but the longer you are saving, the more time your savings will be subject to compounding growth.
Here’s a stark illustration of the difference which starting to save early can make (these figures assume a 10% annual return and do not provide for inflation):
If you want to retire at 65 with $1million and you start saving at the age of 25, you will need to save $180 a month.
Delay saving until the age of 45 and the monthly required saving rises to $1,400 per month.
That is why the biggest financial mistake young people make is believing that they don’t have to worry about retirement saving just yet. These are some of the most common excuses young people use to justify putting off saving, and why I don’t believe they stand up.
I want to enjoy myself now
Yes, life is for living while you have relatively few responsibilities. It is a great time to travel, socialise and be merry, but it’s all about striking that balance between blowing everything you earn to live life to the fullest now and starting a nest egg to secure your financial future. With a sound financial plan you can achieve both.
I will save when I earn more
Ah, this old chestnut. It’s a common belief that as your salary goes up your disposable income will also increase making it easier to save in the future. The problem is that it rarely works out that way. As most people make their way up the career ladder their monthly expenses tend to rise in line with any salary increases. We want bigger houses and more luxurious holidays, we get married and suddenly have children to support and that extra income just gets eaten up. It’s really much better to get into a savings habit early on and to increase the amount you save exponentially as your earnings rise. To paraphrase Warren Buffet: ‘save first and spend what is left, not the other way around’.
I have retirement covered with my monthly employer deductions
That may be the case, but more often it is not. While it is a no brainer to contribute to any work pension scheme to make the most of employer contributions, assuming that your work pension will be enough to support you through retirement is not a good idea. I recommend sitting down with a financial adviser to compare your current situation to your retirement expectations and determine whether there is a shortfall – in most cases there is. If that’s the case, your adviser will explain what you should be doing to address it. Of course, if you are self-employed with no employer contributions, it is even more important to put a retirement savings plan in place.
If you are one of the forty something individuals I mentioned at the beginning of this article, it doesn’t mean that you won’t be able to retire comfortably but it does mean that you will have to work harder and smarter. You can free up more money to save by cutting back on expenses and dropping your standard of living. You may have to work longer or work part-time once you are officially retired to meet any shortfall in pension savings. This can pay huge dividends at a time when compounding is starting to have its biggest effect.
Whatever your situation, a financial planner can assist with clarifying your retirement goals and working out effective investment solutions to achieving them. Professional advice will not only ensure that you get the best out of your savings while taking into account your parameters of risk, but will also help you strike the right balance of assets within your portfolio based on how close you are to retirement.
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