Procrastination has serious consequences when it comes to saving for retirement

Procrastination is defined as “the action of delaying or postponing something”. By this definition, let’s face it, we’ve all been guilty of procrastination. In fact, research has shown that 95%* of us have procrastinated at some point and that a staggerin

When it comes to saving for retirement naive comments such as “I’ll start saving next year, I’m still young” or “I’ll start saving later in life when I earn the big bucks” are good examples of procrastination. These comments also highlight how people, to their detriment, favour instant over deferred gratification. In this article we will illustrate the serious consequences of procrastination when it comes to saving for retirement.

The following assumptions are used (all fees include VAT):

· Annual platform fees of 0.57%

· Annual intermediary fee of 0.85%

· Inflation rate of 7%

· Recurring premiums will increase by inflation

· Retirement age is 65

· Target investment amount at retirement is R5 000 000

· Risk profile of investment is aggressive and a real return of 7% per annum is assumed

How does procrastination impact your monthly salary?

When it comes to saving for retirement, procrastination will have a significant impact on your monthly disposable income. This is due to the fact that the longer you wait, the higher the monthly contribution needed to achieve the same targeted investment amount of R5 000 000 at retirement.

We will now look at exactly how much of your monthly salary will have to be sacrificed, at different ages, in order to achieve a targeted investment amount of R5 000 000 at retirement. Please note that, in the table below, we make the assumption that your salary will increase annually with inflation. As a result the actual buying power of your monthly salary (R15 000) will remain static, irrespective of your age.

From the table above you will see that if you start investing at the age of 27 and earn a monthly salary of R15 000 you will have to sacrifice 21% or R3 199 of that R15 000 in order to achieve your investment goal of R5 000 000. If, however, you wait until the age of 33, you will have to contribute 32% or R4 737 of your monthly salary – which is 11% or R1 538 p.m. more than the contribution needed at the age of 27. If, in an extreme case, you wait until the age of 45 you will have to contribute a massive 77% of your monthly salary in order to achieve the same investment target of R5 000 000.

From the above-mentioned examples it‘s clear that it becomes increasingly difficult to achieve the target amount of R5 000 000 the longer you delay saving for retirement. It not only means that you have to sacrifice a bigger portion of your monthly salary, but it also translates into making “ends meet” on a tighter budget due to a smaller disposable income.

How does procrastination affect your contributions if your salary increases by more than inflation?

What if you are one of the fortunate few who receive above inflation annual increases? How would procrastination affect your monthly contribution towards retirement?

Before we look at the actual effects of delaying to start saving for retirement, let’s first look at the impact that above inflation annual increases will have on your monthly salary over time.
 (Click on image to enlarge)

From the graph above it’s clear how significant an additional 1% above inflation increase can have on your monthly salary over time. Just as an example, if you compared an inflation + 0% salary to an inflation + 1% salary over time, the difference in monthly salary at age 48 would be R3 485.88. If you compared an inflation + 2% salary to an inflation + 3% salary you would see that, over time, the difference in monthly salary at the age of 48 would be equal to R5 169.42.

So let’s now turn our focus to the effects of procrastination if you consistently received higher-than-inflation increases.
 (Click on image to enlarge)

From the graph above you can see that if you just received annual inflation increases and started investing at the age of 30, you would be in the same position as the person who received inflation + 3% salary increases and only started saving at the age of 33. Even though the person with the higher salary could delay investing by three years – he/she had to consistently earn an inflation + 3% salary for those three years in order to be in the same position (26% of salary going towards saving for retirement).

Another example would be if you started saving at the age of 39 and again only received annual inflation increases, you would have had to contribute 48% of your monthly salary in order to achieve your R5 000 000 target at retirement. A person who delays investing and only starts saving at the age of 45 will have to rely on inflation + 3% increases year after year for those six years in order to achieve roughly the same target (48% vs. 45%).

At the end of the day consistently large, above-inflation increases can make a difference if you have delayed saving for retirement, but relying on such increases in today’s day and age would be to your own peril. In this article we have seen what impact your age can have when saving towards retirement. It has hopefully also illustrated that when you start investing early in life, you don’t have the additional stress of having to contribute a significant portion of your monthly salary in order to reach the same investment target.

A very important point that should be taken note of is the fact that in this example we used an aggressive risk profile which assumes a real return of 7%. As you know, many investors are risk averse and as a result will be invested more conservatively, making the desired outcome (target retirement amount of R5 000 000) even more difficult to achieve.

At the end of the day if there’s one thing that we ought to delay - it would be our constant desire for instant gratification. What we should be doing is looking at the long term benefits of deferring instant gratification, and start making decisions that will not necessarily benefit us in the short term but those where we will reap the rewards in the long run.

*Research conducted by Prof Piers Steel of the Haskayne School of Business at the University of Calgary, author of The Procrastination Equation.

**Research conducted by Prof Joseph Ferrari of DePaul University Chicago, the author of Still Procrastinating?