The thought of saving enough to be financially independent once you’ve retired might seem like a pipe dream, but by starting to save as early as possible, coupled with a sound strategy, it can become a reality.
Unwillingness to sacrifice some lifestyle expenses to save even 10% of our salaries is a significant reason for not investing towards retirement. However, we then expect a pension that pays 75% of our salaries – often for the same amount of time as our potential saving years.
A long-term commitment and levelheaded behaviour towards investment is a sensible strategy to achieve the replacement ratio to help you become financially independent.
Benefits of saving early for retirement
- By starting to save early and consistently over a long-term period, you will extract the full potential of compound interest, meaning that less of the total amount you’ve saved will come from your contributions.
- Investing can help your money maintain its value. Due to inflation, spending power decreases and therefore the returns on your investment should be able to compensate for the length of your investment period.
Here’s an example to illustrate the benefits of starting to save earlier:
Taking historic inflation of a certain fund and returns in line with long-term returns, it can be assumed that an investor who contributes $100 per month for 10 years (equaling $12,000) and then stops contributing but remains invested for another 30 years will accumulate just as much as one who delays starting for ten years and then contributes $100 a month for 30 years ($36,000).
Therefore, it can be deduced that saving a small amount sooner than later is worth it in the long term.
It’s a good idea to speak to a financial advisor who will be able to help you outline your financial goals and based on this, recommend a retirement savings product that suits your needs. An example of a product that he/she may suggest is a retirement annuity (RA).
Reasons to consider a RA
- Your contributions are tax-deductible, and the money is safeguarded due to restrictions relating to this type of investment.
- You can invest a nominal amount per month, catered to your financial needs.
- An RA must comply with the prescribed legal investment limits – these limits control the amount of exposure to certain asset classes. This allows you to spread your investment across a number of asset classes which can lessen investment risk.
- Barring specific circumstances, you’re unable to access the money until you retire (from 55 years of age) so your retirement savings are safeguarded for their intended purpose. The longer the investment period, the more you can benefit from compound growth.
This shows that starting to save a small amount is really worth the sacrifice in the long term.
It’s also important to understand that investment performance is not linear and so the success of the investment also depends on your behaviour. The key is to keep a level head so that you don’t make rapid decisions, especially during times of performance dips. By panicking and selling at the wrong time, you may miss out on a sizeable part of the return.
The time to consider rethinking your investment strategy is when personal circumstances change. Don’t be swayed by short-term market fluctuations.