Retirement may seem like a distant goal for many, especially for those just starting their careers. But the earlier you start, the better, to ensure you benefit from the power of compounding over time. In this article, we’ll discuss actionable strategies that you can take to start preparing for retirement, regardless of your age.
Conversations and advice on this topic is often made more complex than it needs to be, and for this reason, many of us put off thinking about retirement, which is understandable. But this approach can have adverse consequences.
“With improving health provision and education, longevity has been increased in many parts of the world,” explains Naushad Hajiani, an independent financial advisor based in the UK. “This means that people are living longer and will require larger retirement savings over time in order to be able to live a comfortable life in retirement.”
With so many products on the market and so many banks competing for your attention, financial planning can be overwhelming for even the most astute among us. With the right mindset and strategies in place, however, anyone can take the necessary steps to secure their financial future, or that of their family.
At the heart of this effort lies the concept of compounding. This powerful tool enables one's investments or assets to grow exponentially over time, as gains are earned not only on the original principal amount, but also on these very gains accumulated over time. This compounding effect can have a profound impact on the size of one's retirement portfolio, even over the course of just a few years.
“The longer the horizon one has, the more they can save as well as allow the savings to grow with investment returns,” says Naushad.
Consider, for example, an individual who invests $5,000 in an investment account with an annual return of seven percent. After one year, the investment would earn $350, bringing the total value to $5,350. By year five, the total value would be $7,012, and by year ten it would be $9,835, thanks to the power of compounding. Over time, this effect would continue to multiply, resulting in significant gains for the individual. Even better, adding more to the account each month or year would accelerate the results.
It’s important to note — you don’t need $5,000 to begin. With consistent effort, any amount, however small, can grow over time.
To maximise these benefits, it is important to start saving — and investing — for retirement as early as possible. This enables the power of time and compounding to work in one's favour, as even small contributions can grow exponentially over time. It’s also important to be consistent with one's savings strategy, setting aside a set amount each month or year to ensure steady progress towards the ultimate goal of a comfortable retirement.
“Look for the optimal balance between current and future lifestyles,” Naushad suggests. With this in mind, here are seven actionable steps for you to consider as you plan for the years ahead.
Step 1: Determine your retirement goals
The first step is to determine your retirement goals. Think about how much you’ll need to live comfortably in retirement and how much you need to save to reach that goal. A good rule of thumb is to aim to save 10-15 percent of your income each year for retirement. However, this may vary depending on your lifestyle, retirement goals, and how much time you have left until retirement.
Step 2: Start saving early
As explained, the earlier you start saving for retirement, the better. You’ll have more time to let your money grow through compounding. For example, if you start saving $100 a month at age 25 and earn an average annual return of 7 percent, you’ll have over $311,000 by age 65. However, if you wait until age 35 to start saving the exact same amount, you will only have around $146,000 by age 65.
Step 3: Take advantage of employer retirement plans
If your employer offers a retirement plan, take advantage of it! “Most countries offer generous tax relief for pension savings,” says Naushad. “Additionally, for workplace pension arrangements, employers tend to offer to match contributions up to a certain level, meaning the savings can grow faster.” This is essentially free money, so try to contribute enough to take full advantage of the match.
Step 4: Consider individual retirement accounts
If your employer does not offer a retirement plan or if you want to save more for retirement, consider opening an individual retirement account, like an ISA or IRA, offered by a bank in your country. These are also usually tax-free, up to a certain limit, so be sure to check the current limits before opening an account and depositing funds.
Step 5: Review and adjust your plan
As you get closer to retirement, take some time to check your retirement account balances, estimate your future expenses, and determine if you need to save more to reach your retirement goals. You may also want to consider adjusting your investment strategy to be less risky as you near retirement.
Step 6: Reduce your expenses
One way to save more for retirement is to reduce your spending. This means cutting back on discretionary expenses, such as eating out or buying new clothes. You can also consider downsizing your home or moving to a cheaper area to save on housing costs. Every dollar you save can be put towards your retirement savings, so make a budget and stick to it.
Step 7: Stay disciplined
Saving for retirement requires discipline and commitment. Avoid the temptation to spend money on unnecessary large expenses. This may mean saying no to expensive vacations or delaying the purchase of a new car or the latest electronic device. However, over time, the sacrifices will be well worth the effort, as they will help you to save and invest your way to a comfortable retirement.
Other strategies to consider include diversifying your portfolio to spread risk, minimising fees and expenses, and seeking professional advice and guidance as needed. By taking a proactive and thoughtful approach to retirement planning, you can build a solid foundation for your family’s future financial security.
As is often said, the best time to start investing is yesterday, and the next best time is right now.
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The content on this page is for general informational purposes only and should not be considered as professional financial advice. It is intended to educate and empower readers to make informed financial decisions. Always conduct thorough research and seek personalised advice to ensure your financial decisions align with your unique situation and goals.
For any questions relating to financial planning and budgeting, contact the Aga Khan Economic Planning Board.
