21 September 2017
For most people, retirement is the biggest financial event of their lives and “getting it wrong” is simply not an option. Perhaps the most important point is to start saving as early as you possibly can in order to let compound interest work in your favour. Albert Einstein said that “compound interest is the eighth wonder of the world. He who understands it, earns it…..he who doesn’t…pays it.”
Let’s look at an example:
Let’s look at another example of how time can be your friend:
The following graph shows Mike’s final amount of R6.7m, versus Steve’s amount of R5.1m:
The graph below shows the importance of sticking to a long-term investment plan and not cashing out of the market – even when times are volatile. The graph shows the growth of an amount invested in the JSE All Share over 20 years as at 31 December 2016, versus the amount that an investor would have received if they tried to time the market and in the process missed the best 5, 10, 30 or 50 days in the market. It is clear that an investor who remained in the market over the full 20 year period fared best.
The table below also illustrates the advantages of starting to save at a younger age. According to the table below, a 25 year old saving 8% a month, will have a 40% replacement ratio. This means they will replace 40% of their salary at retirement. If the 25 year old increases their savings rate to 16%, they will replace 80% of their salary in retirement. Figures are also provided for a 35 and 45 year old.
The table below expands on the above by including three different risk profiles – conservative, moderate and aggressive. Whether you’re a conservative or an aggressive investor essentially depends on the amount of equities you hold in your portfolio – the more equities you hold, the more aggressive your profile.
Using the table below we can see that a 25 year old investing 19% of his salary in a conservative portfolio, can expect to replace 40% of his earnings in retirement. If that same 25 year old invests in an aggressive portfolio, he will only need to invest 8% to realise that same 40% replacement ratio.
The tables above are used for illustrative purposes only and are not intended to replace professional advice.
It’s not always easy to save and invest in the current environment, but starting early makes it easier. If will power is a challenge, set up a debit order and leave compound interest to do the rest.