"I’m not earning enough to save for retirement”.
“Retirement is so far away; I’ll worry about it closer to the time”
“I’ll start saving once I start earning more”
“I first want to do X, Y, and Z”
These are all some of the common reasons why millennial's are not saving for retirement. In South Africa, only 6% of people are able to retire comfortably. To avoid being part of the 94%, future generations should be aware of what is possible. It’s no secret that millennial's seek instant gratification over long-term potential. Being a millennial myself, I too am incredibly guilty of this. It’s more important for us to give the impression of success even if it means drowning in credit card debts or high interest loans. As long as we get our likes and retweets, we’re happy.
Below I try and demonstrate the importance of starting to save early in life and the overall impact this can have later in life. To illustrate this as simply has possible, we consider four friends and their different stages in life:
Michael has just turned 22. He has just started at first job which pays a very entry-level salary. Michael was fortunate enough to study a financial degree, so he knows the importance of saving and how compound interest works. Michael is able to save R500 per month at his job. He saves this amount of R500 for 12 years and stops contributing to his investment at age 34, because, by now he has kids and a house to pay for and that R500 pm would be better off paying off debt, so he completely stops the R500 payment per month. For these 12 years, he would have contributed a total of R72,000 into his retirement investment and received a return of 10%*. Michael aims to retire at 55.
For the next 21 years, Michael allows his investment to grow but does not add any more to this investment. He earns 10%** pa annualised for the next 21 years. By the time Michael retires at 55, his total amount for this investment*** would be R1,022,854
So, in summary, he contributed only R72,000 from ages 22-34 and was able to retire with an amount of R1,022,854.
Jason decided that for his first 10 years after university he is going to use his money to travel the world and not worry too much about saving for later in life. Eventually, at age 34, Jason decides now he has to start thinking about his future.
He decides that from now (age 34) until retirement (him and Michael are friends so he will also retire at 55 so the two of them can hang out together) he will save R1,000 pm. He also receives a 10% pa return. By retirement, Jason would have contributed a total of R252,000 to his retirement pot. By 55, he would have a total of R851,450 in his retirement savings.
In summary, Jason contributed R252,000 total from ages 34 to 55 and was able to retire with an amount of R851,450. So even though he contributed 3.5 times as much as Michael, by starting late, he will end up having R171,404 less.
Pamela is Michael’s wife. Up until she was 45, she wanted to look after their kids. But now the kids all grown up and she can go back to work. Pamela understands the importance of saving and from the get-go she saves R2,500 pm for her retirement. She would like to retire with her husband, so her retirement age is also 55. Pamela receives 10% return on her investment over 10 years. By the time she retires, Pamela would have contributed a total of R300,000 but would only have R512,112 in retirement savings by the time she reaches 55.
In summary, Pamela contributed R300,000 from ages 45-55 and was able to retire with an amount of R512,112. So even though her contributions are 4 times as much as her husbands, she will have almost R510,742 less in retirement.
Lastly, Megan. Megan is Jason’s wife and although working her whole life, her income went into paying off debt and school fees. Now, at the age of 50, with all her debt paid off, she wants to try and save as much as she can before she turns 55. Megan has a great job at a hospital and is able to save R6,000 pm for the next 5 years. Megan also is able to receive an annualized return of 10% pa over the next 5 years. By the time she reaches retirement, Megan would have contributed a huge amount of R360,000 to her retirement savings, but because she started so late in life, she will only have R464,622 by the time she reaches 55 even though she was contributing R5,500 MORE than Michael per month.
In summary for Megan, she contributed R360,000 from ages 50-55 and therefore only had R464,622 by the time she reaches 55. She contributed 5 times the amount Michael contributed but ended up with almost R560,000 less.
What can be seen from the above scenarios is how important it is to just start! And the earlier you start, the less you have to worry about later in life. What may seem to be an insignificant amount when you start saving can turn into something bigger thanks to the wonders of compound interest. The first 10-12 years of working have the potential to be the most important in terms of your future after work. Often, saving for retirement seems like something that only “old” people have to worry about. But as evident from the above scenarios, the younger you can begin, the greater the benefit can be later in life. It’s time that we, as millennials, start taking control of our finances, both now and in the future.
* Past returns are not an indicator of future returns. A flat 10% pa return was used for all returns to highlight the principle of starting early and not that of returns.
** Returns are not guaranteed and are purely for illustrative purposes
*** Retirement investments mentioned though out the article are not specified and could be pension or provident funds, retirement annuities, or unit trusts. There are tax benefits and limitations to different investment vehicles. Investment and financial planning should be spoken with a qualified and professional financial planner.
BCom (Hons), PostGrad Diploma: Financial Planning
Original Post: LinkedIn