IT'S always difficult to explain the importance of saving for retirement to young working couples. There are so many other consumable items they wish to accumulate. Saving is something they can do tomorrow. It is not so, as I'll explain in this article.
Individuals who fully comprehend the importance of retirement saving are often close to retirement; people in their 50s and 60s, who suddenly find that they've left it far too late. Even if they then saved large sums of money they will not benefit from the eighth wonder of the world- compound interest.
It's not difficult to understand that the longer you have until retirement and the longer you have saved, the larger your retirement nest egg. This is not only achieved by the additional amount contributed, but also through the increase in capital where interest is earned on interest, commonly known as compound interest.
I'd like to compare what the difference is between a 30-year-old, 35 and 40-year-old and 45-year-old who each invest R200 a month to age 65. The comparison assumes that each year they will escalate their R200 by 8percent and achieve a growth rate of 10percent per annum.
Age value at age 65 difference in saving:
Thirty-year-old R1,83million - R14079.
Thirty-five-year-old R1million - R33235.
Forty-year-old R534000 - R59296.
Forty-five-year-old R273000 - R97587.
It's a salutary lesson to see the difference between a 30-year-old and 45-year-old, whereby the 30-year-old will have contributed R97587 more than a 45-year-old, but will receive R1,557million more.
Retirement planning and wealth creation are two very different strategies. While it is true that creating wealth and amassing funds will provide many generations with their financial requirements, it is important to remember that most people will never achieve this and will need to live off what money they have managed to save during their economically active lives.
We all hope to retire in comfort and not be reliant on a state pension.
Though we are living much longer due to improvements in medical technology and a healthier way of life, a large nest egg does not necessarily mean that one is going to be able to draw income from the capital without eating into the capital many years before one's demise. The last thing anyone wants to do is outlive their capital.
For this reason, financial planning aspects have to start 30 to 45 years before retirement in order to have sufficient income to see you through your golden years.
If you are older and haven't made provision, do not be put off.
The easiest way to calculate whether you've set enough aside for retirement is to divide your capital into how many more years you expect to live. Seems easy enough doesn't it? But, it still does not take into account how many years you may be allotted. What if you run out of capital at say age 78? Would you like to rely on the support of your children?
I suggest you evaluate your situation without delay so that you are not faced with a dismal retirement.
l The writer is a director of Bryan Hirsch Colley