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By Nirdev Desai*
There is more information at our fingertips than ever before. Yet, many people make the mistake of not adequately planning for retirement. This is the first article in a series of three looking at what readers at different life stages (20s, 30s, 40s) should be doing now to plan ahead for a comfortable retirement.
Start saving now to benefit from compounding
Starting as early as possible is the best way to achieve your retirement goals since the longer you’re invested in the market, the more your accumulated savings will benefit from compounding effects. If you start saving at age 20, you’ll need to put aside half as much in total, compared to if you only start at age 35.
Don’t use your debt situation or low income levels as an excuse to start saving later
Many people will claim to have other priorities that prohibit them from starting to save early. Paying-off tertiary student debt, costs of setting yourself up for independent living, or saving for a deposit for a home loan on top of paying rent are common excuses.
As income earners grow in their career, their lifestyles change, and with that their expenditure patterns. Instead of student debt for yourself, you’ll have the school fees of your children, more expensive holidays, and increased medical costs at later stages of your life. Lifestyle creep is almost unavoidable, and the best way to provide for the future is to make saving a priority from the start.
Draw up a budget
Once you have decided on your financial goals and where retirement planning fits in to your broader financial plan, you should commit to a budget to prioritise expenses, and make this a way of life. In your budget, there should be at least five elements, which a qualified financial adviser can assist with too.
- Paying off debt: Paying off debt with higher interest first makes sense.
- Saving for the short-term: The rainy day fund (3-6 months of cash flow needs); the next holiday; the deposit for your car or your house.
- Investing for the longer term: Retirement planning fits in here, and for most people the largest asset they should be accumulating towards. There is no better time to budget for it than now
- Living expenses: Expenses your salary needs to cover every month, including living costs, food, transport, entertainment, etc.
- Remainder: Ideally, there should always be a remainder, and you can choose to add this to your short-term or long-term savings – but this should be over and above what you have already set aside for these. Too many people opt to save the remainder as and when they’re able to (which often isn’t every month), but this is an unreliable and usually insufficient approach to saving and financial planning.
Consult your adviser on big ticket items
Often, financial advisers lament that clients did not speak to them before making the leap on the new car, new property, or private schooling for their children. It is crucial to address these life changing events as your plan will need to be adjusted to cater for them. If you are hesitant to approach your adviser for fear of them talking you out of that big ticket purchase, then that is exactly why you should discuss it with them, or at the very least get professional advice.
Don’t be afraid to be in the market – take advantage of the growth potential of equities
Growth assets, like equities, is the only asset class that will reliably deliver returns in excess of inflation, but you need to be invested for long enough. Even 10 years may not be enough if your entry and exit points in the market are poorly planned. Being invested in the market for longer than 10 years improves the reliability of achieving these returns, and having more than 30 years until retirement means you are well positioned to take advantage of these returns.
Be aware that equity valuations will fluctuate in the short-term, and you’ll need a steady hand to remain invested as you experience both the peaks and the troughs in the short- to medium-term. Ensure fear and greed biases don’t get the better of you – guidance from your adviser will ensure you navigate the markets as you execute on achieving your plan to retire comfortably.
As you get older, your older self will thank you for starting earlier, and for investing in the market. These two advantages slip away more quickly than you think, and once they’re gone, you can’t get them back.
A note on love
Far be it for a financial adviser to provide romantic advice, but this is typically the decade when you will meet and decide on a partner for life. Tread carefully if you’re thinking about getting married. Hopefully it will be the best decision of your life, but it is probably prudent to remember that half of all marriages end in divorce, and the financial implications can be catastrophic. It may pay off in the long run to take your time and do your due diligence before tying the knot.
Following these guidelines early on in your financial life, can help set you up for financial success later in life. Meeting with a financial adviser earlier rather than later, can further help to tip the scales in your favour.
- Nirdev Desai is the Head of Sales at PSG Wealth.