When young people start working, saving for retirement is not top of mind.
Yet retirement saving is one of the most important financial imperatives for young workers. Mark Lapedus, Divisional Director, Proposition Enablement, Liberty Innovation, offers some advice to make early saving for retirement less daunting.
- Probably the most important thing to do is to start saving early, and retirement saving should start from the first time you earn an income.
“Often people start working and say they will start saving next year or in five years’ time, but because of the power of compound interest, starting early makes a big difference to the outcome,” Lapedus says.
Consider a person who saving 15% if his salary from age 25 and contributes for 15 years and then stops but leaves the funds to accumulate to age 65. This person will have almost 50% more retirement savings than someone who starts saving 15% of his salary at age 40 and saves for 25 years till age 65. Even though the second person contributed nearly 5 times as much he has accumulated less because he didn’t get the same benefit of compound interest. (This is assuming a 10% market growth and 5% salary growth).
People who are just starting out have relatively low salaries and big spending commitments including paying off student loans, buying their first car or having to look after family members, so they have limited disposable income. This is often cited as a reason why they cannot start saving for retirement.
“At any stage of life, there are spending decisions to be made and people can always spend more than they should and come out with nothing at the end. It is important to start with a frank assessment of your necessary spending and saving amounts. Once you know what those amounts are, if that means the remainder to spend on a house, car, education or other spending is less than you want, that is what you have to accept. Living beyond your means puts you in an untenable financial position. You need to understand all of your necessary expenses and make sure you do all of them.”
- People change jobs far more regularly than they did in the past, increasing the risk of accessing and cashing in their retirement savings before they should.
Every time you change jobs, legislation allows you to access your retirement savings and many people tend to do that and spend their savings. “Obviously if you do start saving early and keep cashing in your retirement savings, at the end all you have to retire on is the last few years of savings. You need to retain your retirement benefit – it really is critically important that people do preserve their benefit every time they change jobs,” says Lapedus.
There has been a lot of debate around making preservation compulsory, which has been met with some resistance. Whether there is new legislation or not, it is important to preserve your retirement savings each time you change jobs.
- You have to know how much you are saving and whether is it enough.
Your company will inform you that you are a member of its retirement fund and that it contributes a certain percentage of your salary towards it. Often people assume this means their retirement savings have been taken care of.
But if the contribution is not enough, you will need to supplement this with additional contributions from your net pay.
“While there is no single answer to how much is enough, it is important to sit with a professional adviser who will run through the numbers with you and tell you if you are going to be in a good or bad position on retirement. Usually it is only when you are a few years away from retirement that you realise you have not saved enough, and at that stage you do not have enough time to change your circumstances,” says Lapedus.
- Make sure you are in the correct retirement savings product and you choose the correct underlying portfolio.
A money market portfolio or equity portfolio will have very different outcome in 30 years’ time.
The big advantage you have during your working life is that you can take on some risk within your retirement savings to boost your retirement amount.
“Because this is not money you are living off, you can endure some volatility as you have a relatively long investment time horizon,” says Lapedus.
There are many people who fear losing the money and put it into the money market, but over the long term, this investment will diminish in real terms so the ability to understand what portfolios are available is essential.
- Most people do not understand how to do this themselves, and this is where personal financial advice is very important. “People work for 40 years and need to make sure they have enough money at the end of it. They need a professional to guide them, give advice and make recommendations.”
“Many people say they don’t want to pay for advice, but if they go to a professional who is trained at knowing how to fix the problem, even though there is a cost, there will be a far better outcome.
Lapedus adds that for those people who work for themselves, additional financial discipline is required as the onus is on the individual to put a certain percentage of their earnings into a retirement fund. “Yes, there is work to be done on an ongoing basis, but get the advice, understand whether your contribution gets you to the best possible position, and the earlier you do it the more time you have to fix things.
“If you are young you can make decisions to save more, to retire later or change the underlying investment and take more risk for the best outcome.”
This article was sponsored by Liberty.