Time, risk and savings amounts are the three most important things you need to take into account when saving for retirement.
“Obviously, time is the most important,” says Mark Lapedus, head of product development at Liberty Investments. “The sooner you start saving, the better, because compound interest works, and the earlier you start, the less you have to save.”
It is well documented that saving early is the most important element of retirement saving. A person who starts at age 20 and stops saving at 40 will have saved much more than someone who starts at 40 and retires at 60, even though they have both been saving for 20 years.
The next important element is determination of one’s risk appetite. Many people invest conservatively because they have an inherent fear of losing their money. “Not taking on risk is far more costly in the long term than taking on risk,” says Lapedus. “When you have a long-term horizon, you can afford to take on some risk. If you are saving for retirement 30 years away, markets over the long term are likely to get you your best return.”
Lapedus says there are countless options available to manage risk, “but if your money is sitting in cash or conservative portfolios, you will lose out on compound interest and because of the effect of inflation, you could actually go backwards and lose money”.
The amount you put away each month will obviously determine the amount you end up with, but there is no magic number or percentage of salary that is optimal. “It all depends on the time and risk factors, and each person’s individual financial requirements on retirement,” says Lapedus. “Some people may be able to cut their financial requirements in retirement, others may not.”
Investors need to work out what their expenses are likely to be, what they are currently saving and what they can still potentially save, and what risk they are prepared to take with their savings.
They need to ascertain what they would like to withdraw in retirement, and whether they will have enough to do so.
“If not, you must look at the parameters and see if there is anything that can be changed, for example, are you able to live off less or save more now, are you willing to take more risk or defer retirement to accumulate further savings.”
“The only way to do this is to sit down with a financial advisor who can work on a cash flow projection.”
Lapedus emphasises that the earlier you do this, the better. “There is not much you can change just before retirement.”
What you must do
Save early, and as much as you can, and get advice to make sure you are saving in the investment vehicles with the level of risk that is appropriate to you.
What you must not do
Don’t delay saving and think you will have plenty time to worry about it in the future.
Don’t cash in your pension – because it is there for your retirement savings, not for a holiday or a car or to pay off debt.
Don’t try to solve all your retirement problems on your own without getting advice, because the cost of making a mistake is greater than the cost of a financial advisor.
Don’t believe that your retirement savings are covered because you work for a company and are on a pension or provident plan. “One employer may contribute 3%, another 13% and another 23%. Being part of a company retirement plan does not mean you have taken care of your savings needs.”
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