Start saving for retirement in your 20s

One of the biggest questions about retirement is when to start saving. The idea to start saving for something 40 years in the future can be hard when you’re early in your career, sitting with a student loan and earning a small salary. Even though you might be in your early 20s and retirement may seem a long way off, it’s vital to start sooner rather than later. In conjunction with having youth on your side, you also have time on your side, which means your money can grow over a longer period.

Why start early?

Here are three reasons why you shouldn’t delay retirement planning:

  1. If you think about it carefully, when you’re in your 20’s you still have minimal financial obligations, making it the best time to set money aside. You’re probably still free from expenses such as childrens’ university fees or a home loan.

The miracle of compounding

If you’re unfamiliar with the phrase, it’s interest earned on your initial invested amount as well as the accumulated interest from previous periods. The more the number of compounding periods, the quicker you can reach your investment goal.

To get the basics right, let’s look at two examples:

Example 1: this shows the importance of starting with retirement planning straight away. If someone was to invest R500 per month and earn an annual return of 7%, this is how much money they would have at retirement age based on when they start:

Example 2: Let’s look at the difference between compound and simple interest.

Paul invests a once-off sum of R500 000 for 5 years at an annual simple interest rate of 7%. This means he earns 7% interest on the initial R500 000 only:

Liz invests a once-off sum of R500 000 for 5 years at an annual interest rate of 7% compounded. This means she earns interest on the initial R500 000, plus the interest that gets reinvested as soon as it’s earned:

Retirement planning is an ongoing process where you need to regularly update your retirement objectives as your financial situation changes. If you start early, you can afford to put away less as you’ll be earning ‘’interest on interest’’ for the coming years. If all of this is a bit overwhelming, you can always approach a financial adviser to help you map out a retirement plan.

Written by Marnia

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