One of the main goals of financial planner is to gain independence during retirement. However many people procrastinate when it comes to retirement planning.
Common Reasons for Delay
- There are still many years before I retire
- I can depend entirely on my CPF savings
- Retirement Planning is too complicated
While the above reasons may apply for some people, for the majority it is necessary to start retirement planning as early as possible.
Benefits of Starting Early
The Rule of 72 is a method used to estimate how long a savings or investment will double in value if there is compound interest.
The rule states that the number of years it will take to double, is 72 divided by the interest rate.
For example, if you put $100,000 into an investment with an annual return of 8% with compounding, it would take about 9 years to double into $200,000. As time is a limited resource, it makes sense to start accumulating and compounding your retirement funds as early as possible.
Consequences of Starting Late
There are competing demands on a person’s financial resources in various phases of his life.
For individuals in their 20s to 30s, it is often difficult for them to set aside money for a retirement plan. This is because they usually prioritize more immediate needs, such as paying for a house, paying for child care, maintaining parents’ needs, etc.
Most of the time, the short-term financial objectives would overshadow the longer-term goals, like retirement planning, which they deem as less urgent.
Unfortunately, if retirement planning is started late, they will have less time to build their retirement fund. This may result in not being able to retire as early as one would have liked.
Fortunately if this group start saving and investing early, they will have a long time horizon to invest. This would enable them to take moderately higher risk, for a potentially higher return over time.
Saving Too Little
Another common pitfall of retirement planning is not saving enough.
Most individuals in their 20s to 30s tend to spend their money now, rather than save it for future use. As a result, even though they may set aside some money towards a retirement goal, it is usually too little.
However, with effective financial planning and budgeting, a more meaningful sum could be set aside.
Investing Too Conservatively
Most people tend to be far too conservative in the way they invest for retirement. While one should never speculate with something as important as retirement funds, it does not mean that one should avoid risk totally.
Caution is necessary, but an overly cautious stance may make the difference between just getting by and enjoying a comfortable retirement. How much risk one takes would usually depend on which phase of the life cycle one is at. To some investors, taking risk is acceptable as long as there are potentially higher returns.
It is a delicate balance and there is no one formula that is applicable to all.
Conclusion
It is advantageous to start retirement planning early to maximize the benefits of compounding interest.
A meaningful sum should be set aside based on your desired retirement lifestyle.
One should also invest according to which phase of the life cycle one is at, and also their risk tolerance.
If you are haven’t started retirement planning, “save a little, but save often” may be a good way to start. To learn more, contact our Financial Planners for consultation today.
