Retirement, Insights | 31 May 2020
When do I start saving for retirement?
When is a right time to start planning or even saving for retirement? 20s? 30s? 40s? Just right before retirement itself? When you’re in your 20s, retirement seems so far off that it hardly feels real at all. In fact, its one of the most heard excuses people make to justify not saving for retirement.
Anyone nearing retirement age will tell you the years slip by, and building a sizable golden egg becomes increasingly more difficult if you don’t start early. You’ll also be caught up in more expenses you may not currently have yet like housing loan and a family.
At the start of anyone’s career, you may be not earning that much money but there’s one thing you have more of than richer, older folks: time. With time on your side, saving for your retirement is easier as you are younger and may have fewer responsibilities.
Goals
With time on your side, the sooner you decide to start saving for retirement, the better it will be for you down the road. But if you are not able to do it yourself, it is necessary to hire a professional to help you out.
Make sure you set realistic expectations and goals. These are a few things that you may need to consider during your analysis:
- Your current age
- The age you plan to retire
- All income sources (current and projected)
- Your expenses (current and projected)
- How much can you afford to set aside for your retirement
- How and where you plan to live after you retire
- Any savings account/plans that you have
- Your insurances coverage (to make sure you are well protected in any events)
Compound interest is your friend
Compound interest might be the most compelling reason for you to start as early as possible to save for your retirement as it increases your savings significantly with time. If you are unfamiliar with the term, compound interest is the interest earned on your interests, which grows exponentially due to the interest building on itself over time.
A simple example would be:
Say you invest $1,000 in safe long-term bond that earns 3% interest per year. At the end of the first year, your investment will grow by $30 (3% of $1000). You will now have $1,030.
However, in the following year you will gain 3% on $1,030, which means your investment will grow by $30.90. A little more but not much.
Granted the first few years the interest on interest might not be as fanciful but if you were to fast forward into the 20th, 30th or even 40th year, your interest will be so much higher due the compounding effect.
The savings would be even more dramatic if you invest the money in a stock market, mutual fund of other higher earning instruments.
Saving a little early vs. Saving a lot later
One might think that they have plenty of time to start saving for retirement. After all, you are in your 20s and have your whole life ahead of you. It might be true, but why put off saving for tomorrow when you are able to start today?
That’s why CPF contribution kicks in as early as your first paycheck, because the government realise the need to start saving for retirement early when expenses are usually lower.
You can also put money outside of CPF. Let’s say you start investment $100 a month, and you average a positive return of 1% a month or 12% a year, compounded monthly over 40 years whereas your friend, who is of the same age, only begins 30 years later and invest $1,000 per month for 10 years also yielding the same return, compounded monthly.
Who do you think will have saved up more money in the end?
Your friend would have saved around $230,000 and your retirement funds will be a little over $1,17 million. Even though your friend invested 10 times more as much as you towards the end, the power of compounded interest makes your portfolio significantly bigger.
The long you wait to plan and save for retirement, the more you’ll need to invest each month. While it may be more enjoyable in your 20s with your full income at your disposal, it will make your life harder as you must put away more money as you age. And if you wait too long, you maybe need to postpone your retirement.