Why is it important to start saving for retirement early, and what should newly employed people be doing in terms of investing?
These are questions I’ve been thinking about recently, especially when looking at what Journey Man has to say about the fact that he has left things very late and has a fair amount of catching up to do.
I spoke to Nola Rae, author of Money Wit about the subject. (You can see a short bio of Nola at the bottom of the post)
Time is the best commodity when it comes to saving. The earlier you start the better opportunity you have to grow your savings, benefit from compound interest and alleviate the pressures of trying to catch up when you get older.
The best way is to illustrate by means of an example: If you start saving R200 per month (increasing the amount every year by 10%) from the age of 22 and then when you start earning more, let’s say from the age of 30 you increase that savings amount to R1 000 per month – again increasing it by 10% every year, at the age of 65 you could have R9,3m in your savings account. It’s all about compound interest!
To illustrate the catch up that you would have to make to get the same result: At age 30 you would have to start saving with a lump-sum of R36k and at age 40 you would have to start with a lump-sum of about R355k.
The percentage depends on when you start your retirement fund, but rule of thumb is to start with 15% of your salary from your first full-time job. In some companies, part of the benefits offered may include contributions to a pension or provident fund, so it may already start there.
If you cannot afford this, start with a smaller amount like R100 or R200 per month and commit to growing this contribution every year. When you start working it feels like you now have the freedom to buy whatever you want, but rather feel that this is the opportunity to start developing good financial habits, like saving for your future.
If you put money aside from the start, you don’t have to try and find it to save it. There are also other ways to fund your retirement. As your earnings grow you can consider investing in a second property that you can rent out, or as you get closer to retirement, consider how you can utilise your skills and knowledge to start a small business that could derive income but not require you to work as hard as you did in your younger years. We are living longer and we need to be creative about the ways that we fund those retirement or as I like to call it – the working less years.
Retirement always seems so far away, but the motivation should be the results of the growth in your savings. Unfortunately we cannot go back in time, so when we have an attitude of “I’ll start later”, when is later? Later can sometimes be more difficult because we are then committed to costs and debts and then finding that extra cash becomes harder to find.
Whenever you invest your money, consider the risks and rewards. Do research, ask questions and make an informed decision. Don’t only listen to the hero stories about the riches made, find out as much as possible. For everyone who has made it big, there are others who have also lost. Bitcoin is currently not a regulated currency and as a cryptocurrency it is extremely volatile. This makes the risk investing in it much higher. If you want to invest in Bitcoin, make a fully informed decision but don’t put all your eggs in one basket. Rather consider also investing in more regulated funds so that your risk is ultimately more balanced. Remain aware of changes and also consult a professional to guide you.
It is not an exact science, but you can generally base it on the assumption that when you retire your big debts should be settled, like your house and car. When you retire you will need money for day-to-day expenses and you may also want to have money to do some extras like travelling. You can work out how much that will be in today’s value of money, but you may need some assistance from a professional who can assist you with working out what that value will be when you retire. Think of this. In 2006 a loaf of sliced white bread cost R3.75. 12 years later in 2018 that same loaf costs R13. When you plan for your retirement, you need to understand that R1 today will not carry the same buying power when you retire. This is why if you start saving early, and you invest your savings correctly, your savings can grow to ensure that you accommodate this change in buying power.
The best advice for any 25 year-old is to develop good financial habits. Plan your monthly spend. Know where your money is going and start managing your money instead of your money managing you. Start saving now.
Start with any amount. Develop and build the habit so that you can start seeing the rewards of the growth on your savings. You have time on your side. In 10 years’ time you will have something to show for all your hard work and it will give you a sense of personal achievement and encourage and motivate you to keep up these habits. Live a balanced life. Enjoy your working years and plan so that you can also enjoy your later years.
Nola’s inspiration for writing Money Wit stemmed from 26 years of acquired industry experience and took her just one month to pen the book. She found her motivation after research into the corporate wellness sector revealed to her the enormous need for debt counselling. Rae realised that the best way to address the need for this service is by equipping people – especially the youth – with a better understanding of money and how to manage it proactively, rather than reactively.
Money Wit is based on a no-nonsense approach that aims to make an understanding of finances and money management accessible to everyone. Simple terminology helps to create a practical, user-friendly guide to getting the basics right; important because, as Rae says, “If we make more informed decisions, perhaps we can make better decisions.”
Although Rae eschews the stereotype of the “grey accountant”, she lives by her philosophy of sound money management. Her best tip for managing finances? “I budget every month, as this allows me to know where my money is going, and I force myself to save money every month. Planning is the most important part of managing your money.”