Saving for your retirement is a term most of you have heard thrown about when receiving advice on financial planning. If you are anything like the rest of us, you’re probably wondering why you should bother saving for your retirement when there are so many other good things to spend the money on now. Won’t the future sort itself out? In a word, no.
Anyone nearing retirement age will tell you the years slip by and building a sizable nest egg becomes more difficult if you don’t start early. You may not earn a lot of money as you begin your career, but there’s one thing you have more of than richer, older folks: time.
You may think you have plenty of time to start saving for your retirement. After all, you are in your 20s and have your whole life ahead of you, right? That may be true, but why put off saving for tomorrow when you can start today? Below are some of the reasons you should start saving for retirement
Seemingly tiny contributions made at an early age will over the years multiply… “The power of compound interest”. Therefore, the sooner you start saving and investing, the earlier you take advantage of compound interest; making it easier to achieve that financial goal. Consider a scenario where you start investing in the market at Kshs. 1,000 a month, and you average a positive return of 12% a year, compounded monthly over 40 years.
Your friend, who is the same age, doesn’t begin investing until 30 years later, and invests Kshs. 10,000 a month for 10 years, also averaging 1% a month or 12% a year, compounded monthly.
Who will have more money saved up in the end?
Your friend will have saved up around Ksh. 2,300, 000. Your retirement account will be a little over Kshs. 11,700,000. Even though your friend was investing over 10 times as much as you toward the end, the power of compound interest makes your portfolio significantly bigger.
Employer Matching contribution:
If you have access to an employer-based retirement plan, take advantage of it. Most employers will match some of your contributions, so you’ll benefit from having an extra boost to your savings. When you choose not to consider saving for your retirement, you are quite literally saying “NO!” to money that the employer is freely giving to you.
The Government, which most of us feel takes too much from us, actually gives tax breaks to all who contribute to retirement schemes. You can get as high as KSh.20, 000 as a relief before your salary is assessed for tax! For example, an individual earning KSh50, 000 and making a monthly contribution of KSh. 5,000 will be taxed on KSh. 45,000.
Remember, the longer you wait to plan and save for retirement, the more you’ll need to invest each month. While it may be easier to enjoy your 20s with your full income at your disposal, it will be harder saving for your retirement since you have to put money away each month as you get older. And if you wait too long, you may even need to postpone your retirement. You are young and the future is in your hands
To learn more about high-returning investments, check out our other blogs.
This article was written by Rose Ellah Ngari, Chief Executive Officer at Vasili Africa.
Get in touch with Rose for free investment advice via email@example.com or fill in your details below.