Young people must start saving for retirement

It’s important to start saving for retirement from an early age, in most instances young people often ignore saving for retirement because they don’t see it as priority.

According to Kieran Godden, Divisional Director of Liberty Corporate Consultants & Actuaries, most people can remember the excitement of their first pay checque. Landing the first job opens a new horizon for young people, and while essential expenses such as repaying a study loan, transport and food costs are unavoidable, new spending patterns emerge.

“It is easy to get excited at the prospect of what to buy if one has some extra cash left over. The temptations are boundless, including new clothes, the latest techno gadget or a new set of wheels. Newly employed young people seldom consider saving for retirement because the thought of needing to provide for old age is quite boring, and seems too far into the future to worry about. But it’s important to plan and the sooner the better” cautions Godden.

Lesson 1 – If you have it now, don’t spend it (all)!

You may think: “Surely I have a lot of time before retirement to start saving?” The short answer is – the sooner you do, the better. The reason for this is the impact of compound interest over time. The effect of compound interest is that the interest earned on your savings earns further interest in future years. This compounding effect increases with time. Table 1 illustrates the impact of waiting to start saving. As an example, say that if you started saving now you could secure a potential retirement income of R10,000 per month. However, if you start in 10 years time you would only secure R6,000 per month. To appreciate this, just imagine taking a 40% cut in your current salary!

Perhaps you decide that starting to save is a good idea. How much is enough? Of course, the answer depends on the amount of cash you have left over at the end of the month. The rule is simple: the more you save the better off you will be. Table 2 illustrates that your ability to retire comfortably is significantly influenced by the proportion of your income saved towards retirement. For example, let us say your current retirement savings is 12% of salary, and this will secure a potential retirement income of R10,000. Increasing your contribution rate by just 2% of salary will increase your potential retirement income from R10,000 to almost R12,000 per month. Imagine the possibilities with an additional 20% in your back pocket each month!

Lesson 2 – The most important investment is investing in you.

The complexity of the investment world means that we are often not sure where to start, this is where your own financial education comes in. Your financial education is however a lifelong pursuit; It will involve making some mistakes along the way. The most dangerous mistake however, is to not get started.

Many of the investment pitfalls in life can be avoided by seeking the appropriate financial advice. When receiving advice it is critical to ensure that the person providing the advice is suitably qualified and experienced, and explains options and concepts in a way that you can clearly understand. Where you are in doubt about financial advice, ask questions. If these questions are not answered properly, get a second opinion.

We live in a world where having the latest and greatest is highly valued. Be wary of keeping pace with friends with fast cars, nice clothes and fancy credit cards. Statistics show that most of them do not save sufficiently for retirement. Sooner or later that debt will catch up with you and it could be nasty if it does. Reward yourself every so often, but stick to your savings plan.

(Click on images to enlarge)

Table 1

Table 2