/ 10 June 2011

You’re young — start saving for retirement now

When you’re young and earning a salary for the first time, the temptation is to spend because you have cash. If you’ve paid off your student loan and you’re still at home and not paying rent, it’s tempting to buy the latest iPod, new clothes and a fancy car. Providing for your old age seems irrelevant, even boring.

Kieran Godden, divisional director of Liberty Corporate Consultants & Actuaries, says you don’t need to live frugally — you can still spend some hard-earned cash. Just put money away each month to get started. These are his tips:

Lesson 1 — If you have it now, don’t spend it (all)
The sooner you start saving, the better, due to the impact of compound interest. As an example, say that if you started saving now you could secure a potential retirement income of R10 000 per month. However, if you start in 10 years’ time you would secure only R6 000 per month.

To appreciate this, just imagine taking a 40% cut in your current salary.

How much of a saving is enough? Of course, the answer depends on the amount of cash you have left over at the end of the month. The rule is simple: the more you save, the better off you will be. For example, let’s say your current retirement savings is 12% of salary, and this will secure a potential retirement income of R10 000. Increasing your contribution rate by just 2% of salary will increase your potential retirement income from R10 000 to almost R12 000 per month. Imagine the possibilities with an additional 20% in your back pocket each month.

Lesson 2 — The most important investment is investing in yourself
The complexity of the investment world means that we are often not sure where to start. This is where your own financial education comes in. Your financial education is a lifelong pursuit and you will make some mistakes along the way. The most dangerous mistake, however, is to not get started.

Be wary of keeping pace with friends with fast cars, nice clothes and fancy credit cards. Statistics show that most of them do not save sufficiently for retirement. Sooner or later, that debt will catch up with you and it could be nasty. Reward yourself every so often, but stick to your savings plan and take professional financial advice. The payoff will be worth it.

Read more news, blogs, tips and Q&As in our Smart Money section. Post questions on the site for independent and researched information