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When it comes to financial planning for retirement, we all know that the sooner you start saving and investing, the more money you’ll have. Time, combined with the power of compound interest, is the main ingredient to realise your retirement success.
If you’re already invested in a retirement investment solution, don’t assume that your current level of savings will be enough for your retirement nest egg. It’s always a good idea to revisit your retirement plan as often as possible to ensure that you’re maximising your money and achieving your retirement goal.
How to take advantage of the power of compound interest
Did you know that by investing your bonus or any additional amount into your retirement annuity, you can start reaping the rewards of compound interest? You can earn growth on money you wouldn’t have had and more growth on that growth, and so on. That extra bit of money could help you ensure a carefree retirement.
Of course, the flipside is that not contributing that money to your RA could wind up costing you dearly. The following table shows you the knock-on effect when you put off investing in an RA.
With the difference in growth, 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 golden years.
The true cost of delay
Let’s assume that you contribute R400 a month as a recurring premium. Let’s add 10% after tax annual growth. For simplicity’s sake, let’s assume that there are no fees taken into account.
| AGE |
DELAY IN YEARS |
FUND VALUE AT 65 |
COST OF DELAY |
| 25
|
0 |
R2,237,843 |
R0 |
| 30
|
5 |
R1,370,357 |
R867 486 |
| 35
|
10 |
R831 717 |
R1 406 126 |
| 40
|
15 |
R497 264 |
R1 740 579 |
| 45
|
20 |
R289 595 |
R1 948 248 |
| 50
|
25 |
R160 648 |
R2 077 194 |
| 55
|
30 |
R80 583 |
R2 157 260 |
| 60
|
35 |
R30 869 |
R2 206 974 |
| NO ESCALATION |
Now let’s take the same example and add a 5% annual escalation to your retirement contributions. The benefit of increasing contributions annually makes a significant difference.
| AGE
|
DELAY IN YEARS |
FUND VALUE AT 65 |
COST OF DELAY |
BENEFIT OF ESCALATION |
| 25 |
0 |
R3 788 458 |
R0 |
R1 550 615 |
| 30
|
5 |
R2 238 863 |
R1 549 595 |
R868 506 |
| 35
|
10 |
R1 301 250 |
R2 487 208 |
R469 533 |
| 40
|
15 |
R738 313 |
R3 050 145 |
R241 049 |
| 45
|
20 |
R403 852 |
R3 384 605 |
R114 258 |
| 50
|
25 |
R207 994 |
R3 580 463 |
R47 346 |
| 55
|
30 |
R95 640 |
R3 692 818 |
R15 057 |
| 60
|
35 |
R33 130 |
R3 755 328 |
R2 261 |
You can clearly see the benefit of increasing premiums and how the cost of delay increases substantially when you add the 5% escalation.
Now ask yourself if you can really afford to lose out on a few million extra rand in your retirement? If your answer is no, then contact your financial adviser today and make sure that you never run out of money in your golden years.
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