If you ask youngsters about saving for retirement, they may frown at you with surprise. They may have just finished their studies and started working barely for a year, how do you expect them to save for retirement. To them, it is too early to even think of retirement. Most of them have short-term to medium-term plan. Retirement plan is never in the mind of a young working adult.
Some may have study loans to pay while others are thinking of which holiday destination after receiving their year-end bonus. Most of us, including myself would not think of saving for retirement when we don’t have much money left after paying our daily necessities. For married couples, they may have mortgage loan, car loan, young children and old aged parents to take care.
Why you need to save for retirement as soon as you started working?
(1) SAVING IS A HABIT WHICH YOU NEED TO CULTIVATE. Nowadays, people are looking for instant or short-term gratification through acquiring more material stuff. A branded new car, a bigger house, a new iPad or a new iPhone are common things that most people will not hesitate to purchase to satisfy their quest to keep up with the Jones-es and the latest technology.
It takes discipline and determination to save for the long-term. Regardless of the amount of money earn, you should be able to save, provided you want to. It can be very stressful for some people as saving is tough since you have too many bills to pay. Who doesn’t have? If you cannot save 10% of your income when you are earning $2,000, what make you think that you will when your income increases to $4,000? You cannot save unless you change your spending habit and lifestyle. Don’t wait, start saving when you get your first pay check. When you are young and single, you have a longer time frame to plan.
(2) TO TAKE ADVANTAGE OF THE COMPOUND INTEREST RULE. Albert Einstein discovered the Compound Interest Rule of 72. He said that compound interest is the Greatest Invention because it provides a systematic way of increasing wealth! What is the Rule of 72? It simply states that, it estimates how many years it would take for your money or debt to double in value. Divide the number 72 by the Annual Rate of Returns you get from savings or investment. Tale for example 3% Annual Returns on your investment. It would take 72 divided by 3, i.e. 24 years for you to double your money. If you earn 3% on $10,000, it would take 24 years for you to double the money to $20,000. By saving what you have today; you can build financial stability for your future. How you spend your future life, depends on how you spend, save and invest your money now.
(3) INFLATION. In economics, inflation is defined as a sustained increase in the general price level of goods and services over a period of time. When the general prices level rises, each unit of currency buys fewer goods and services. As a result, inflation is a reduction in the purchasing power of each unit of money. The real value of money decreases when inflation rises. This simply means that with the same amount of money, you can afford to buy lesser things. Twenty years ago, a beef burger costs around SGD 2.00. However, it costs SGD 5 now. If you do not save, your income is not rising fast enough to match with the general price increases in the economy, you are likely not have enough money for your retirement in twenty or thirty years’ time.
To calculate the impact of inflation, simply apply ‘Rule of 70′. For example, if the inflation rate is 5%, using the Rule of 70, it takes 70 divided by 5, i.e. 14 years for $1 to become 50 cents. It also means that your $1 million will shrink to half a million dollar in 14 years’ time; unless your investment gives you a higher rate of return on investment than that of a 5% inflation rate.
The longer you delay saving, the lesser money you will accumulate. Having a longer time frame to save for retirement, you are able to benefit from the effect of compound interest; provided you re-invest the interest earned from your investment or saving. You will not see your money snowball with multiplier effect if you keep withdrawing your interests for consumer goods.
How much do you need for retirement? It depends on your lifestyle requirement. Some may say that they have little needs, they only require USD 3000 a month to live comfortably. However, others may wish to have USD 10,000 a month to maintain their lifestyle after retirement. You decide how much you need in twenty or thirty years’ time when you intend to retire from work. Remember to factor in inflation when you do the Math. If you need $3000 a month now, you may need $6000 a month in twenty-three years’ time; if you factor in the rate of inflation e.g. 3% a year. When you retire at age 60, you need to have sufficient fund to support your lifestyle for the next 25 years, considering an average lifespan of a person is 85. As such, your retirement fund should last for at least another 25 years or more from the time you retire at age 60. Start planning as early as possible if you want to have a blissful life after retirement from work.