By Gary Marsh

You might think reading about retirement is for old people but not this article. In fact, the younger you are the more important it is. If you never read another thing about retirement until you get there, you’ll want to remember these two most important lessons.

Lesson 1: Sooner Is Easier Than Later

Financially speaking, the earlier you start saving for retirement the easier it is. Time is your friend.

To illustrate how this works, let’s say you want to have $1 million when you retire at 65. Depending upon when you start to save for your retirement, it can be a walk in the park or a huge uphill climb. The graph below shows the difference between starting early verses later.

Put aside $60 per week from age 20 and your $1million goal is easily achievable. Conversely leave your run until 60 and it’s a whopping $3,321 per week. I know starting at 20 sounds boringly practical, but the graph also shows what 30, 40 and 50 starting lines look like. At 40 it still looks quite achievable and perhaps even at 50 but after that things start to get harder, a lot harder.

Now this happens not just because you have more time to save, but because your savings have more time to grow and work for you. The sooner you have more capital working for you the faster it grows in value over time. This is illustrated in the next graph which shows how much of the $1 million retirement goal is from savings (capital) versus how much is generated in capital returns (growth).

Starting at 20 over 86% of the $1million is from accumulated returns (growth) whereas starting at 60 it’s less than 14% of the final balance. In this scenario starting at 40 is better than starting at 50 as you’ll need to save less due to capital compounding, but by 50 that reverses.

Lesson 2: Go The Distance

Life is a winding path with many financial hurdles and demands. Demands which might tempt or require you to draw down on savings and investments to meet short-term needs. That’s understandable but in terms of planning for retirement it’s worth considering the impact of a reduced savings rate.

The graph below shows a scenario over the 45-year journey for our saver starting at 20. By year 9 investment earnings are compounding (growing) faster than yearly savings, and by year 18 accumulated growth is equal to accumulated savings. But here’s the big one, 50% of the capital growth at retirement is created in the last 8 – 9 years of employment.

This is an incredibly import point, as this period offers the greatest dollar returns for the investor due to large capital balances, similarly, it also exposes the investor to significant capital losses due to such large account balances and the reduced time to retirement.

So just imagine saving a little more right now to get on the path to an easy retirement. For example, if at 20 the saving rate of $60 per week were doubled to say $120 per week for the first 10 years and then stopped i.e. no further savings, the outcome would be pretty much the same – $1 million at age 65. This is the power of time and compounding investment capital.

Here’s another thought, this compounding growth doesn’t just stop at 65, it keeps growing beyond retirement day. So depending on your spending needs at retirement your capital could keep climbing.

In terms of retirement lifestyle, it’s important realise that going the distance on your saving/investment journey can be highly financially rewarding and a decision to step off that journey wholly or partially should be made understanding what you’re sacrificing in the longer term.

A Final Word of Qualification and Advice

These scenarios have been developed to help you visualize the points I’m making. They are based on a consistent average annual rate of return on investment of 7% and an annual inflation rate of 2.5%. But of course, real life isn’t that simple and changing economic conditions and personal circumstances mean that outcomes will vary.

There are many options for saving and investing including inside or outside superannuation, via property or shares. Planning, structuring and implementing a financial plan is an important part in achieving a good retirement financial outcome.

While a financial advisor provides investment advice, they also play an important role in helping you determine your personal financial journey as well help you stay on track.

Disclaimer

People & Partners Wealth Management Pty Ltd ABN 67 127 250 613 is a corporate authorised representative of Fortnum Private Wealth Ltd ABN 54 139 889 535, holder of Australian Financial Services Licence (AFSL) No. 357 306. The content of this article is for general informational purposes only and does not constitute personal financial advice. It does not take into account your individual objectives, financial situation, or needs. Any advice we provide will be detailed in a formal advice document. The opinions expressed in this article are those of the authors at the time of writing and should not be taken as a recommendation to act. To the extent permitted by law, Fortnum Private Wealth Ltd and its associates accept no liability for any loss or damage incurred as a result of reliance on this communication.