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]
- Retirement Funds: Provident and Pension Funds vs Retirement Annuities
- Retirement Funds: Withdrawal Options and Tax Implications
- What is a Retirement Annuity?
- The Importance of Retirement Planning
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.
For further assistance be sure to discuss your retirement planning with an independent financial advisor. You can also email Raul Jorge directly.