Benefits of getting a head start on your retirement
When you are in your 20’s the last thing on your mind is retirement. In fact, it seems so far off that it doesn’t feel real at all. However, anyone who is approaching their retirement will probably tell you about how they let valuable years slip by and that building a sufficient and comfortable reserve becomes more and more difficult if you don’t start early. Additionally, as you get older you will acquire other expenses that you may not have in your 20’s, such as a mortgage and family demands.
While you may not earn much money as your career kicks off, you have one thing that wealthier and older people don’t - Time. With time on your side, saving and preparing for retirement becomes an easier prospect. Even small amounts per month adds up and makes a massive difference in the distant future.
Here are a few reasons why starting a retirement fund in your 20’s is the ideal time to save for those golden years.
One: Compound interest has got your back.
One of the best reasons it is beneficial to start saving for retirement early is compound interest. For those of you who have not come across this term, it refers to the process by which a sum of money grows exponentially as a result of interest more or less developing upon itself over a period of time.
An example of how compound interest works is, let’s say that you invest R10 000 in a unit trust that earns 3% interest per year. At the end of the first year, your investment will have increased by R300 (3% of R10 000), which means that your current investment will stand at R10 300. The next year you gain 3% of R10 300, which means your investment will now increase by R309. This is a slight improvement, but not much. Now, let’s fast forward to the 39th year of investment. Your money will have grown to R31 670 and on the 40th year you will have R32 620. That’s a one-year difference of R950.
The fact is, your money is now growing more than three times as quickly than it did in the first year. But wait, there's more! Your retirement savings will have been more drastic if you chose to invest in higher-earning vehicles, such as Equities.
Two: Saving a little earlier may be better than saving a lot later.
Think that you have all the time in the world to start saving for retirement? While that is true to a certain extent, why would you put off saving for tomorrow when you can start today? Let’s consider another scenario to emphasise the point we are trying to make.
Imagine you are 25 and you decide to start investing R100 a month. You achieve a positive return of 1% a month (or 12% annually) and it is compounded monthly over 40 years. Your friend, who is also 25, doesn’t start saving until he’s 55 (30 years later) but invests R1000 a month for 10 years at the same return rates. Quick math will reveal that, at retirement age (65 years) your friend will have saved about R210 600.00. Sounds like a lot until you realise that at the same age you will have saved a little over R920 000.00! Therefore, while your friend is investing 10 times the amount you are, the power of compound interest could not be overcome, and would make your savings significantly larger.
This means that the longer you wait to plan and save for retirement, the more you will need to invest each month, so much so that you may even have to postpone your retirement!
The moral of the story is that the sooner you start saving for retirement, the better off you will be. If you start earlier, you have the luxury of saving less money per month since compound interest has your back. The most important thing for young adults is to get started early.
Let PBA walk you through the process!