The power of compounding interest still blows my mind, and I often use the following example which financial advisor Sunel Veldtman uses in her Feminine Touch on Finances workshop.
If you saved R1 000 a month for 10 years between the ages of 25 and 35, the R120 000 you invested will grow to around R2,5-million by the age of 60.
In comparison, if you only start saving R1 000 per month at the age of 35 and save for 25 years until age 60, you will have invested more than double (R300 000) but will only have a R1,4-million nest egg.
While these examples are there to motivate young people to start saving, it usually has the unintended consequence of demotivating the poor 35-year-olds who just throw up their arms in despair and believe it is just too late to even start.
And then you have the investment companies who show lots of stats that prove that unless you save 15% of your salary from your first pay cheque you are doomed to a retirement eating cat food.
But let me tell all the 35-year-olds out there some good news — there is a fundamental flaw in this assumption, as it assumes you will retire at the age of 55.
If you are 35 years old, you could still have 30 years of work and savings ahead of you by working until 65.
If you commit to saving 15% of your salary (increasing each year by your salary increase) you will avoid poverty in retirement.
Sure, you won’t be rich and you will not have the same choices about retiring early as your peers who preserved their retirement savings from age 25, but you will be comfortable and you will be able to maintain your current lifestyle (minus the children upkeep and mortgage repayments).
Even if you are in your early 40’s, there is still hope. You would have to commit more than 15% to savings. With the new pension rules that come into effect next year, you will be allowed you to save up to 22,5% of your income before tax — and you would need to take full advantage of that to play catch up, but the taxman would be helping you.
Also remember that once the kids grow up and leave home and your mortgage is settled (hopefully you have not been taking on more debt) you will have more income to save and boost your retirement savings. It just means you can’t live the post-kids carefree lifestyle you were planning.
If you can find work that provides an income until the age of 70 (with longevity now looking closer to 90 years old, working until 70 is not unrealistic), you would be able to further boost your retirement savings which would grow by about 60%, if you could leave it untouched for those additional five years.
I am certainly not advocating waiting until a later age to take action. The sooner you start the more choices you have, both in retirement and pre-retirement. By allowing a portion of your first and subsequent paycheques to work for you, you effectively make money for nothing.
But what these figures do show is that there is hope if you have waited too long. The worst thing you can do at any stage is throw up your arms in despair — you may have to cut back or revise your retirement plans — but there is always something you can do, as long as you start today.
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