Time, combined with the power of compound interest, is the main ingredient required to realise better retirement success.
If you’re already invested in a retirement investment solution, it is better to not assume that your current level of savings will be enough for your retirement nest egg. It is always advisable to revisit your retirement plan with a financial adviser at least once a year, to ensure that you are maximising your money and achieving your retirement goal.
Take advantage of the power of compound interest
Investing a bonus or any additional amount into a retirement annuity (RA) allows you to reap the rewards of compound interest as you can earn growth on growth on the money you would not have had in your hand, meaning the tax-free funds. Conversely, not contributing and delaying your investing into your RA could have a negative long-term knock-on effect. With the potential difference in growth due to investment of less funds, coupled with the benefit of compound interest, this delay can mean the difference between a hassle-free retirement and having to face a lot of limitations in your retirement years.
The true cost of delay
Let’s assume that you contribute R500*a month as a recurring RA premium. Let’s add 10% after tax annual growth. For simplicity sake, let’s assume that there are no fees taken into account.
Let’s take the same example and add a 5% annual (cost of living) escalation to your retirement contributions. The benefit of increasing contributions annually makes a significant difference to the cost of delay.
You can see the benefit of increasing premiums and how the cost of delay increases substantially when you add the 5% escalation.
Consider if you can afford to lose out on the large amounts of funds that can be built through compound interest for your retirement. If your answer is no, then contact a financial adviser and take a step to making sure you are financially prepared for your financial future.
Henk Appelo is head of investments at Liberty.
* Disclaimer: For more details about fees, limitations, charges and premiums or other conditions and associated risks, please speak to your Liberty financial adviser or broker. The information contained in this article has been created for information purposes only and does not constitute tax, legal, financial, regulatory, accounting, technical or other advice. The information does not constitute advice in terms of the Financial Advisory and Intermediary Services Act of 2002. Liberty Group Ltd. is a Registered Insurer and an Authorised Financial Services Provider (FAIS no. 2409).