Investing Early for Retirement
Many of us procrastinate for a variety reasons when it comes to saving or investing for retirement. Such behavior can have a profound impact on the amount of funds we have available to us during our retirement years. For example, an individual at age twenty (20) starts saving $100.00 every month until he/she reaches the age of sixty-five (65) would accumulate $1,733,983.00 based on an average rate of return of 12% per annum.
However, if that same individual procrastinates and did not begin to save for retirement until age twenty-five (25), he/she will accumulate $979,307.00 using the same 12% rate of return on the investment over the same period. The difference between both situations is $754,676.00 when compared with a difference in saving between ages 20 and 25 of $6000.00 (i.e. $100.00 per month x 60 months).
This illustration clearly shows that the earlier you start investing for your retirement the better off you will be in the long run.
It is quite evident that many persons today are living much longer than in previous generations and the number of years spent in retirement is constantly increasing. This longevity has created some level of anxiety, not only with persons nearing retirement but also with other sectors in society as a whole. A significant number of individuals and organizations have recognized that more and more persons can be expected to live an average of 20-30 years in retirement and have started planning accordingly.
Retirement is a very important phase in our life cycle and careful planning for and during this period is necessary and critical. The sooner we start planning for our retirement, the better prepared we will be in providing adequate source of income during our retirement years. It is never too soon to begin nor too late to start planning for our retirement. The sooner we do so the better, because time is one of our greatest investment assets.
Planning for the future can be quite challenging. Determining how much you and/or your companion would need to support yourself from the beginning of your retirement years to the end is very difficult to do with absolute certainty. However, having a realistic estimate of your cash flow needs based on your lifestyle and life expectancy and planning for it will go a long way to avoid you outliving your money. The thought of this situation happening with your savings could be very frightening so you need to make every effort to guard against it.
Knowing your present lifestyle cost and anticipating how this could change more or less over the next couple of years and during your retirement is very important. By the time most people retire, they would have already grown accustomed to a certain standard of living based on having a regular income from salaries or wages. In some cases, their spending pattern would have become so well established that it might be extremely difficult for them to adjust to new living conditions. Like most people, we would like to retire with no less a lifestyle than we have now or an even better one. Therefore, it is better to adjust to these lifestyle changes by choice rather than financial stringency.
How long your financial resources will last under these constantly changing circumstances, especially during this period in your life cycle, will depend on such factors as health, investment decisions, taxes, social and vacation plans. The need to build enough financial capital and preserve it, is imperative and it is worthwhile that you consult a qualified Financial Planner to help you put a sound retirement plan in place. Doing so as soon as possible would be like having a road map in place to assist you in navigating the bumps along the way and help to ensure that you have a regular and sustainable income in your retirement years.
A retirement plan is a fundamental part of any comprehensive financial planning strategy. This plan no doubt will depend a lot on the decisions you have made in the past and the one you are about to make now for the future. Like most people, the greatest challenge we face as we consider investing for retirement, is how we commit our hard earned savings. The need to preserve our funds and avoid the risk of loosing some or most of it is always of great concern to us.
The type of assets we choose to invest into should be chosen based on our risk tolerance level and our time horizon but we cannot be too risk- averse.
If we want to seek a higher than average rate of return on our investments just to keep up or be ahead of the inflation rate we have to take some level of risk with our investment choices. To help reduce some of those risks we need to be aware of some of the risks inherent in each investment vehicle we choose. In so doing, the real choice we would face is what portion of our saving we will put in extremely safe interest bearing investments and what amount to invest in equity securities that are more volatile.
Finally, when investing for retirement it is also good to have a long term perspective in mind. Although savings in fixed term or guaranteed investment products offers very little or no risk, investing in equity type investments offers the best opportunity for longer term wealth creation. Even though you may be retired, you should not retire from investing. Remember a significant portion of your earnings during retirement can come from the growth in your longer term investments and ownership of equity; so start the process now and do not procrastinate.
