Retirement can seem a long way off, especially for those in their first decade of work. But in order to have a successful retirement at a reasonable age it’s important to plan well ahead. Here’s why you should start saving now:
1. Life expectancy is going up
The average New Zealander is expected to live up to 82 years of age, according to the OECD’s How is life in NZ report. That means if you want to retire at 65 you will have to support yourself for almost two decades without income from your job. Adding in the higher healthcare costs you’ll have to contend with in your twilight years, this is a significant sum of money and one that must be planned for sooner rather than later.
2. NZ Super may not be enough to support you
Relying solely on NZ Super may not be enough for many people. The current Super payment for a married couple in which both people qualify is $617 per week. If you aspire to a lifestyle above the basics you are going to have to rely on your own assets and savings for support.
3. Reap the rewards of compounding returns
Known as the eighth wonder of the world, according to Albert Einstein, compounding returns over time has the potential to significantly increase the value of your investment. Put simply, compounding returns is when you earn returns on top of the returns your investment previously produced. Therefore the sooner you start saving the more your investments can build.
Investing is not a skill that comes naturally, so its important to give yourself time to learn what works.Let’s say you start with an initial investment of $10,000. And on that you earn 10% p.a. every year after fees and tax. After your first year you’d have $11,000 (10% return on initial $10,000 = $1,000).
By the end of year two, your investment is now $12,100 (10% return on $11,000 = $1,100). The thing to note is that compared to the previous year your returns have increased by an extra $100. That’s because you earned 10% on your invested sum, and also 10% on the returns from the previous year. Now that extra $100 might not seem like much. But using this example, after ten years your initial investment would have grown to $25,937 and the returns earned that year would have risen to $2,358 from just $1,000 in year one. That’s the power of compounding.
4. Give yourself time to learn how to invest
We are not good investors by nature. Following our instincts often leads to buying shares at high prices and selling them in a panic when they drop. Starting your investment journey early gives you the chance to learn how to best utilise your investments and recover from mistakes well before your chosen retirement age. Getting in touch with an Authorised Financial Adviser and securing your investment plan early can help you become a mature investor and prepare you for retirement.
If you are thinking of saving for your retirement and want some advice to get you started, contact the experts at Milford Asset Management to learn more about our award-winning KiwiSaver Plan.