When you’re young, retirement can feel far away, but if you ask a lot of people who are approaching it or are already retired, they’ll tell you how quickly it sneaks up on you. As much as you need to prioritise saving for your golden years, it’s equally important to still maintain a good quality of life. So how do you strike up a good balance? To make things easier, here’s a breakdown of when you should start saving for retirement.
When should you start your retirement plan?
Ideally, retirement planning should start as soon as you have the finances available to save towards it. Why? Well, most retirement funds, like your superannuation fund, work on a compound interest basis—so the longer your money is tied up in the fund, the greater your return on investment will be.
For example, if you start putting money away from the age of 21 and your retirement age is 65, your money will have 44 years to compound at the given interest rate. If you put away $1,200 in your first year with an interest rate of 8%, your interest would be $96 for that year.
In the early years of your fund being active, these returns might not be huge, but as the fund grows, the interest compounded will increase the amount significantly till you finally decide to retire.
The benefits of saving for retirement at an early age
Aside from ending up with more money than those who start saving for retirement later, the earlier you start, the more other benefits there are for you. Starting your retirement savings early puts you ahead. Life often throws curve balls that involve other costly expenses that would otherwise take preference over your retirement savings if you hadn’t locked it in early. Ensuring your retirement savings are active before you take on these other obligations allows you to prioritise saving for your future amongst other financial commitments.
In addition to that, you’re also securing your financial independence and security for when you retire. Too often we’ve seen those who retire having to rely on support from their kids, relying on government grants, or having to continue working because they didn’t prioritise or couldn’t prioritise saving for their retirement. This unfortunately leaves individuals like this in a place of financial uncertainty and dependence on others to survive.
Assuming you would like to enjoy your retirement, investing in a retirement plan early can open up opportunities for you to have the lifestyle you want during your retirement without worrying about your kids. In fact, it may even allow you to assist them when they need help.
Considering how much retirement will cost you
So, how much is it going to cost you to retire if you retire at the age of 65? Well, there is no standard answer here. The amount of money you need to put away every month will largely depend on the standard of living you want when you retire and how much the cost of living is in 40+ years’ time, essentially, when you sign up for a retirement plan you would need to estimate your costs to live for the ideal lifestyle you would like to lead.
For example, would you like to travel internationally yearly, go to restaurants whenever you like, or spend on items you’d like without worrying about it, then the amount you put away every month would need to correspond. We always recommend overestimating the amount you’ll need to be safe. As a standard, you should be putting between 10% to 15% of your salary away into an RA a month.
Tips for preparing for retirement
Before you sign a retirement contract, there are a few things you should know:
Understand what you’re saving towards
Saving for retirement can be a struggle, especially if you’re young and don’t earn a huge salary. This is because you don’t see an immediate return on your investment. Trust us, when retirement comes, and you receive your first payout, it’ll all be worth it.
Some retirements are contractual
Some retirements are a contract, and as a result, they can’t be left without you receiving some kind of penalty. For example, if you enter into a retirement annuity agreement that stipulates that you’ll put $100 away every month for 40 years, you may incur a penalty if you drop this amount during this course of the contract.
Paying into a retirement fund has tax benefits
Saving into a retirement fund like a super fund can count as a tax-deductible expense, reducing the amount of tax you need to pay. This is done to incentivise Australians to prioritise saving for their retirement.
Hire an expert
Ready to start planning for retirement? Great, you’ll need to get in touch with a financial planner to help you. Solace Finacial Advisors is one of the best brokerages in Australia, and you can utilise their expert retirement planning services to get yourself on the right track for your retirement.
Final Thoughts
If you can start saving for retirement with your first paycheck and allow the amount you put away to grow progressively as you advance in your career, you’ll be smiling when retirement comes. The whole idea is to ensure that you’re financially secure at retirement age. So, get your retirement plan sorted and plan for your future security today.
Veeramachineni Lalitha
I am Finance Content Writer. I write Personal Finance, banking, investment, and insurance related content for top clients including Kotak Mahindra Bank, Edelweiss, ICICI BANK and IDFC FIRST Bank. My experience details : Linkedin