“I am living so far beyond my income that we may almost be said to be living apart”. E.E.Cummings.
Why do you think we save for retirement and particularly when it seems so far away? When we first start in the work force, still wet behind the ears, is this something we should be thinking about? Obviously in most cases we do not think of this first.
We face two main risks in life. The first is that we may not make retirement so we take life cover out to protect our families against this possibility. We may also reach retirement in poor health or have suffered a major illness, which has impacted upon our ability to earn an income before then. Again, we insure to minimise the impact of this.
The other risk we face is that we retire and live too long! That is, we outlive our savings. As none of us know when we will die, we must guess and begin planning to save for our retirement income as soon as possible. It is not very likely we will all win Lotto. The odds of winning Powerball are less than 1 in 38 million. You could be waiting 730 years before it’s your turn. As far as us getting a pension in retirement goes, how likely do you think this is? We have what is known as an ageing population so there will be less people in the work force in twenty years time than there are now, per retired person. We need these people paying taxes which will provide for our healthcare and government pensions in the future. The government determines the age of eligibility for such pensions (currently 65) and who is eligible to receive them. At present the retirement income for a couple is approximately $25,000 p.a. after tax. Do you think you would like to manage on this? Why not plan for the sort of retirement you want rather than the sort you are dished out?
It makes sense to start investing as early as possible to take maximum advantage of the time effect – Right? Yes, that’s right. Below is an example of the effect of investing $10,000 per year for ten years, twenty years and thirty years. We have assumed a real rate of return of 6%. This assumes no adjustment for inflation is made.
Ten years investing $10,000 p.a. at 6% = $139,716
Twenty years investing $10,000 p.a. at 6% = $389,927
Thirty years investing $10,000 p.a. at 6% = $838,016
Obviously, every ten years you are investing a further $100,000 but the effect of compounding cannot be ignored.