Retirement Planning – Is it a marathon or a sprint?
As an independent advisor I assist my clients with all aspects of their financial planning but by far the majority of enquiries I receive are from people in their 40’s and 50’s who are suddenly panicking about their retirement savings.
Quite often, this is the first time they have considered it and as yet have set aside very little for what is going to be the longest holiday of their lives.
At the same time, I have this conversation with much younger generations, people in their 20’s or 30’s, and encourage them to save diligently for retirement now and not later in life. Typically what they want to know is how much they actually need to save so that they can make the decision to retire at a time when they CHOOSE.
The people in their 40’s and 50’sobviously spent the majority of their adult life not saving for retirement. This gave them more free money in their 20’s and 30’s than people who were already saving for retirement, and possibly indulged themselves more.
The knock on effect of this is how much they NEED to save now to afford the lifestyle they desire in retirement. When you look at the numbers it is startling to see the difference between saving early or leaving it until it’s probably too late.
A select few argue that you are better off starting later in life and enjoying your younger years whilst you can, the majority will agree that they should have started earlier and planned consistently without any major impact on their lifestyle.
Detailed below are the numbers, you can decide yourself which way looks more favourable.
For this example let’s start with a young adult – twenty years old. They are looking for an annual income of €50,000 when they choose to retire at the age of 65. To ensure they have this €50,000 ongoing and not depleting all assets you will need an asset basket of around €1,000,000. This is based on having that asset basket invested and generating 5% net return per annum.
So, we already know that you are looking for €1,000,000 set aside for retirement at age 65 and let’s say you have a balanced investment portfolio that will return 7% a year.
• If you start investing at age 20, you’ll need to put aside about €265 a month to reach this goal.
• From age 25, you’ll need to set aside about €380 a month to reach this goal. (you don’t save anything from ages 20 to 25)
• From age 30, you’ll need to set aside about €555 a month to reach this goal. (you don’t save anything from ages 20 to 30)
• From age 35, you’ll need to set aside about €815 a month to reach this goal. (you don’t save anything from ages 20 to 35)
• From age 40, you’ll need to set aside about €1,230 a month to reach this goal. (you don’t save anything from ages 20 to 40)
• From age 45, you’ll need to set aside about €1,925 a month to reach this goal. (you don’t save anything from ages 20 to 45)
• From age 50, you’ll need to set aside about €3,150 a month to reach this goal. (you don’t save anything from ages 20 to 50.
As you go through these numbers you are probably thinking that the amounts to save early on were quite manageable, but when you got to age 50, you’re thinking it’s impossible.
So now you are aware of the numbers you can decide what the easiest option is, planning early or leaving it late.
The main point I want you to consider is that you can ignore the chance to plan early and forego the retirement savings until a later date but catching up later on can be incredibly punishing, even impossible.
So my advice to everyone I meet is to start saving for retirement right now, no matter how old you are. Even if you can’t save very much, start by saving something.
Further examples using the same 7% investment portfolio: • If you just save €100 per month starting at age 20 that would equate to over €380,000 at the age of 65. • If you start saving €300 per month at the age of 30 that would equate to over €540,000 at the age of 65
Something IS always better than nothing. Start with a smaller, more comfortable amount, and increase it as and when you can. Reviewing the amount in line with salary increases is the most effective way to do this.