Saving for Retirement: Why Earlier is Always Better

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Saving for retirement seems to be an aspect that many people choose to ignore while they’re young.

This mentality is the reason why the majority of our population won’t be able to afford to retire.

People instead choose to procrastinate and hope to miraculously catch up at a later point in time, which is wishful thinking to say the very least.

Small sacrifices from an early age will have a tremendous impact over the long term.

The following example illustrates the importance of saving for retirement early:

MR X AGE 20
MR Y AGE 28
MR Z AGE 36

For the purpose of this example, each of these clients decides to start putting aside R2 000 monthly towards his retirement savings. 

The following assumptions are made for this example:

INFLATION 6%
ANNUAL CONTRIBUTION INCREASE 6%
RETURN ON INVESTMENT 10%

Accumulated retirement savings by age 65: 

Present Value

Future Value (after taking 6% inflation into account)

MR X

R2 835 029

R39 023 076

MR Y

R1 938 701

R16 742 788

MR Z

R1 225 979

R6 642 832

 

Income that will be provided from age 65 until age 90 in today’s terms based on accumulated capital after taking 6% inflation into account:

MR X R19 297
MR Y R9 511
MR Z R5 822

As can be seen by these figures the longer one waits to start saving for retirement the more significant the loss in terms of retirement capital and subsequent retirement income.

In the event of each of these clients wishing to retire, with a monthly income of R20 000 (in today’s terms) from age 65 up until age 90, they will have to save as follows at their respective ages taking the above-mentioned assumptions into account:

MR X R2 050
MR Y R4 225
MR Z R6 675

By starting early and saving for retirement consistently, more of your retirement capital will accumulate from growth on investment instead of contributions.

Growth increases as a result of compound interest.

The power of compound interest lies in its ability to make your money work for you: earning returns on your returns.

The only way in which this can be done is if your investment is given time to do so.

Pension Funds, Provident Funds and Retirement Annuities were specifically designed for the purpose of saving for retirement and would therefore be the best products to utilise as they offer beneficial tax treatment to investors.

[tip title=”moneysmart tip”]Look at the articles below for more information regarding the tax treatment of Pension Funds, Provident Funds and Retirement Annuities.[/tip]

In conclusion one has to be realistic when it comes to saving for retirement and realise that if you don’t put aside enough money towards your golden years they might not be so golden after all.

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For further assistance be sure to discuss your retirement planning with an independent financial advisor. You can also email Raul Jorge directly.

Comment below and tell us about your experience saving for your retirement.

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About Author

Raul Jorge is a CFP® professional at PSG. He specialises in estate, investment, retirement and risk planning. Prior to joining PSG, Raul completed his BSc (Honours) in Business Administration through the University of Wales and more recently completed his Postgraduate Diploma in Financial Planning through the University of Stellenbosch.

  • Hi Raul, i might have the cat by the tail here, but this is my two cents… Just felt like sharing it.

    With the current rate of inflation vs the anticipated average salary increase amongst most people in the job sector, people are actually loosing at-least 3% year-on-year on their retirement savings and have to invest up to 20% of their net income to achieve an income of 65% of their last annual salary per their working year, just to live for around 20 years at day of retirement to death. Another problem i see these days is that we outlive retirement. Retirement annuities, is more and more becoming a last resort for long term investing for retirement and an expensive one too, expensive meaning more monies required after your net income to invest to make it. These day’s Joe Soap pays around 70% of his net income to credit cards, debts and other bad financial habbits. Would you say that i am out of line here? Or do you perhaps have an alternative view to this?

    Great article by the way!

    • Guest

      Hi Tobie,

      Thanks for your comment and interest in the article.

      Problem 1:

      With the current rate of inflation vs. the anticipated average
      salary increase amongst most people in the job sector, people are actually losing at-least 3% year-on-year on their retirement savings and have to invest up to 20% of their net income to achieve an income of 65% of their last annual salary per their working year, just to live for around 20 years at day of retirement to death.

      Problem 1 response:

      The idea of saving towards your retirement is to utilize
      financial instruments that will allow you to beat inflation so as to maintain or ideally increase the purchasing power of your retirement savings. Pension Funds, Provident Funds and Retirement Annuities are ideal for fulfilling this purpose due to the tax incentives they offer. As illustrated by the article
      above, the earlier you start saving towards retirement the lower the percentage of your net income that you will have to contribute towards your retirement savings.

      Problem 2:

      Another problem I see these days is that we outlive retirement.

      Problem 2 response:

      Due to improved healthcare life expectancy has increased and
      investors that do not take this into account face the risk of depleting their capital before death. This is why it is of the utmost importance to review your retirement portfolio on a regular basis so as to ensure that you are realistic in terms of the life expectancy assumptions and contributions made towards your retirement planning.

      Problem 3:

      Retirement Annuities, are more and more becoming a last resort
      for long term investing for retirement and an expensive one too, expensive meaning more monies required after your net income to invest to make it.

      Problem 3 response:

      Retirement funds provide the cheapest option to save towards
      retirement due to the tax incentives offered such as the following:

      – Does not attract Capital Gains Tax

      – Does not attract Dividend Withholding Tax

      – Reduces the investors overall taxable income which reduces
      overall tax payable

      Retirement funds should therefore be the first products
      considered for retirement savings as these tax incentives lead to more accumulated capital at retirement as opposed to other financial products which are not taxed as favorably.

      For more information see:

      Retirement
      Funds: Provident and Pension Funds vs Retirement Annuities

      Retirement
      Funds: Withdrawal Options and Tax Implications

      What
      is a Retirement Annuity?

      Problem 4:

      These day’s Joe Soap pays around 70% of his net income to credit cards, debts and other bad financial habits. Would you say that I am out of line here? Or do you perhaps have an alternative view to this?

      Problem 4 response:

      This is mainly due to modern society’s mentality of instant
      gratification. Individuals that allocate such a large portion of their net income towards the repayment of debt could possibly require assistance in getting back ahead (see The
      Debt Counselling Process Explained).The overriding financial planning principal is to eliminate debt first so as to earn interest instead of paying it. Once debt is eliminated more attention can be given to aspects such as retirement planning.

      I hope this sheds some light on your concerns.

    • Raul Jorge

      Hi Tobie,

      Thanks for your comment and interest in the article.

      Problem 1

      With the current rate of inflation vs. the anticipated average
      salary increase amongst most people in the job sector, people are actually losing at-least 3% year-on-year on their retirement savings and have to invest up to 20% of their net income to achieve an income of 65% of their last annual salary per their working year, just to live for around 20 years at day of
      retirement to death.

      Problem 1 response

      The idea of saving towards your retirement is to utilize
      financial instruments that will allow you to beat inflation so as to maintain or ideally increase the purchasing power of your retirement savings. Pension Funds, Provident Funds and Retirement Annuities are ideal for fulfilling this purpose due to the tax incentives they offer. As illustrated by the article above, the earlier you start saving towards retirement the lower the percentage of your net income that you will have to contribute towards your retirement savings.

      Problem 2

      Another problem I see these days is that we outlive retirement.

      Problem 2 response

      Due to improved healthcare life expectancy has increased and
      investors that do not take this into account face the risk of depleting their capital before death. This is why it is of the utmost importance to review your retirement portfolio on a regular basis so as to ensure that you are realistic in terms of the life expectancy assumptions and contributions made towards your retirement planning.

      Problem 3

      Retirement Annuities, are more and more becoming a last resort
      for long term investing for retirement and an expensive one too, expensive meaning more monies required after your net income to invest to make it.

      Problem 3 response

      Retirement funds provide the cheapest option to save towards
      retirement due to the tax incentives offered such as the following:

      – Do not attract Capital Gains Tax

      – Do not attract Dividend Withholding Tax

      – Reduces the investors overall taxable income which reduces
      overall tax payable

      Retirement funds should therefore be the first products
      considered for retirement savings as these tax incentives lead to more accumulated capital at retirement as opposed to other financial products which are not taxed as favorably.

      For more information see:

      https://blog.moneysmart.co.za/community/2013/04/retirement-funds-provident-and-pension-funds-vs-retirement-annuities/

      https://blog.moneysmart.co.za/community/2013/04/retirement-funds-withdrawal-options-and-tax-implications/

      https://blog.moneysmart.co.za/community/2012/09/what-is-a-retirement-annuity/

      Problem 4

      These day’s Joe Soap pays around 70% of his net income to credit cards, debts and other bad financial habits. Would you say that I am out of line here? Or do you perhaps have an alternative view to this?

      Problem 4 response

      This is mainly due to modern society’s mentality of instant
      gratification. Individuals that allocate such a large portion of their net income towards the repayment of debt could possibly require assistance in getting back ahead (see https://blog.moneysmart.co.za/community/2013/03/the-debt-counselling-process-explained/).The overriding financial planning principal is to eliminate debt first so as to earn interest instead of paying it. Once debt is eliminated more attention can be given to aspects such as retirement planning.

      I hope this sheds some light on your concerns.