In our previous article on retirement planning, we highlighted some of the potential pitfalls of failing to plan for retirement. The young adults we interviewed expressed interest in saving for retirement, but they had yet to start due to more immediate concerns.
Planning for retirement shouldn’t be neglected, as you will only have more financial commitments as life goes along (eg. home, children). You stand to reap a whole host of benefits if you start planning earlier rather than later.
Compounding interest is when the money you’ve earned from your investments is reinvested to earn more. The earlier you start planning, the more compounding interest you stand to gain. One option you can use to achieve this is the Supplementary Retirement Scheme (SRS), which is a voluntary plan that encourages people to save more beyond their CPF commitments.
Funds in your SRS are tax deductible up to a certain limit and you can choose to invest them into a wide variety of instruments. Putting money into an SRS in your late 20s or early 30s while using it to invest could result in much higher returns versus if you were to start later in your career.
Even if you only make a one-time deposit, the magic of compound interest can turn it into much more. Earning an average return of 5% per year for 30 years on a S$10,000 deposit will give you a final figure of S$43,219.42.
In contrast, waiting 10 years will only give you 20 years to compound that amount, and you end up with S$26,532.98 instead. Thus, waiting resulted in a loss of nearly half the amount you could’ve gotten if you had started earlier.
Having a longer time horizon is usually preferable when you plan for anything as it allows you more leeway to experiment or make mistakes. Planning for retirement is no different.
If you choose to increase your retirement savings with higher risk investments like equities, derivatives, or even the forex market, having more time could allow you to recover from any market volatility.
On the flip side, you also stand to make much more since you’ll have invested for much longer than people who started investing later. These funds can add significantly to your retirement nest egg, and you will benefit from the compounding interest mentioned in the first point.
Let’s take the example of the Singapore Savings Bond (SSB), which is a low-risk instrument introduced by the government to encourage long-term saving. If you plan to use the SSB as part of your retirement plan, holding it until maturity (10 years) will give you the best returns.
If you put S$5,000 into the April 2018 bond and only redeem it in April 2028, you will have earned S$1,170, which is an effective interest rate of 2.31%. If you needed to redeem it only after 5 years, your effective interest rate becomes 1.96% instead. Thus, without a long time horizon, you would lose out on its full returns.
The two examples that were used to illustrate the benefits assume that you have a stable amount in your regular savings and are able to channel them into specific retirement tools. If you have not reached that stage yet, there are still steps you can take to start planning for your retirement.
The simplest way is to start saving as soon as possible, and you can try allocating a certain amount of your salary each month to a specific ‘retirement account’. A recurring transfer will ensure that the amount you have predetermined will be automatically transferred when you receive your salary.
Putting aside as much as you can would be ideal, but at least 10% of your salary is a good starting point. When you’re more financially stable, you might want to try saving 20-25% instead, as that is the rough amount that we think you need to save to cover your basic needs during retirement.
Once you have set this money aside, it’s best if you don’t touch it for any reason. When you have accumulated an amount that you’re comfortable with, you can start looking into other instruments that will provide you with higher returns than your savings account.
All of us have multiple financial responsibilities that range from bills to giving our parents an allowance. In addition, when we have specific goals that feel incredibly large (saving for a home, paying for our children’s education), it can be difficult to start planning for another big goal like retirement.
The good news is this – when you start early enough, a retirement goal doesn’t have to be a burden. You don’t have to start by allocating a huge percentage of your salary to your retirement account.
Even something as small as S$50 can still ensure that you reap the benefits mentioned above, and when you’re in a better financial situation, you can gradually increase your contribution.
Planning for your retirement doesn’t have to be a stressful affair if you break it down into smaller and more achievable goals. The important thing is that you’re aware of the costs of waiting and include retirement in your financial plans as soon as you are able to.
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