Delaying saving money for retirement is not uncommon as often other life costs seem more important (there is a wedding to pay for, a deposit for a new car or house, a baby and school fees). Furthermore, even for those of us who have been forced to save in occupation and state pension funds, it might not be sufficient to live a comfortable retirement off of those savings. To answer the question, it certainly pays to start saving for retirement, as early as possible.
The importance of starting now.
When it comes to retirement planning it is not only the amount of money saved that counts, but also the time at which we start saving. The earlier you start, the more affordable the amount of money you need to save each month will be and vice-versa. Research reveals that more than half of us only start saving for retirement when they are in their mid-30s, instead of when they start working. Additionally, there are many people who only start saving for retirement when they reach 40.
The thing is, it is not just about saving, but it is also about taking the advantage of compound interest as early as possible so that one can accumulate enough retirement capital. Take an example of Thabo, who starts saving for his retirement at the age of 25. Saving M2 000 (USD 135) a month, at an average 8% return per year, he will have saved more than M4 million (USD 270’000) by the age of 60. Thabo’s friend, Teboho, only started saving at the age of 35. Teboho will only have more than M3 million (USD 202’000) at age 60. To get anywhere close to Thabo’s amount of savings, he will need to save M4 000 (USD 270) per month to reach the M4 million of savings in his 25-year investment horizon.
Starting to save at an older age, say at the age of 50, puts you in a more difficult scenario. Even saving M6 000 (USD 405) a month, which is three times what Thabo started saving at age 25, will not even get you to M2.5 million (USD 169’000) when you reach retirement. This is exactly why it is so important to follow Thabo’s example and start saving for retirement as early as you can. However, even if you start retirement savings late, the most important thing is that you are starting!
How much money do you need for retirement?
Figuring out how much money you need for a comfortable retirement is a difficult task. The general rule is that you will need to be able to replace 75% of your income to have a comfortable retirement. This assumption relies on the fact that you will not have any debt nor care needed children by that age, which means that your monthly expenses will be lower. However, financial planners are beginning to question the 75% replacement ratio, as medical expenses tend to increase considerably after retirement age. In our African context, black tax remains an issue at retirement as well.
Increasing your retirement savings.
If you are nearing retirement, and you have concluded that you need more savings to retire comfortably, you need to consider the following options:
1) The easiest way to try to solve this problem is to save more and finding ways to increase your monthly savings is probably the best option. Aim to save at least a 20% of your monthly income. This is not easy and to do so you are going to need to ruthlessly cut back on your expenses. You will also need to be more aggressive when it comes to investing. Consult your broker or insurance company - the last thing you want is to make an uninformed decision and take unnecessary risk.
2) Never cash out. Statistics reveal that 99% of employees who are paid withdrawal benefits opt to take cash rather than preserve their benefits. You can protect your savings in products like preservation funds and retirement annuities. At this stage, make sure your money stays invested and do not be tempted to use your money for non-essentials. By this stage you should be adding to your savings rather than eroding them.
If you have not started saving for retirement, please start doing so as quickly as possible. Consult your broker or insurance company to make informed decisions and avoid taking unnecessary risk when it comes to determining the amount to be saved on a monthly basis and how to optimise retirement savings.
Tsepo Mokake ǀ New Business Consultant ǀ Minet Lesotho
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