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When Should You Start Saving for Retirement?

Are you currently saving for your retirement? If not, it’s better to start now rather than later. Because the earlier you start saving for retirement, the easier it’ll be to afford.

(Updated February 23, 2018)

If you’re still young, retirement may feel like a long way away, but in the retirement game, the early bird gets the worm. With the power of compound interest, you’ll have a whole lot more money in retirement than someone who started saving many years later.

While it’s important to think about saving for retirement now, you should also look at where to save your money, how to invest it, and how much to save. Planning for your retirement is essential if you want to live comfortably in your golden years.

Why you should start saving now

It’s best to start saving for retirement when you’re in your 20’s, as you can take advantage of the power of compound interest over the long term. You’ll only have to save a few thousand dollars a year until you reach retirement. For example, if you save $4,500 a year for 45 years (starting at age 20) with a 4% annual return, you’d have $1 million by the time you retire at age 65.

Even if you’re not in your 20’s, it’s never too late to start saving. You just need to save more each year. For instance, if you’re 30, you have to save $9,000 a year to reach $1 million. If you’re 40, you’ll need to put away $18,000 a year. And if you’re 50, you should save $40,000 a year.

On the other hand, if you start saving at age 25, and put away $3,000 a year in a tax-free retirement account for 10 years, and then you stop saving, you’ll have $338,000 when you’re 65. This assumes a 7% annual return. If you wait until you’re 35, and then save $3,000 a year for 30 years, you’ll only have $303,000 by the time you reach 65. That’s a really big difference.

No matter how old you are, don’t wait until later, save for your retirement now!

“I will have a pension when I retire anyway, so why do I still need to save?”

This might be the question you have in your head right now. Sometimes you might think that saving for retirement can be as hard as pulling your own tooth. We might not want to admit, but instant gratification seems to be far more rewarding while savings and investment look difficult to do. This can be the case if you are still young and still have so many years before retirement.

However, relying just on pension is not be enough once you get to that age. According to SMH, pension money is only enough for basic needs. But when big things come along, like shoes need repairing, you won’t have anything to fall back on.

In short, just relying on pension won’t give you funds for home maintenance, gifts, music, utilities, snacks for grandkids, medicines, or vacation. Therefore, make it your habit to save right now while you still can.

Where to save your retirement money

The best places to save your retirement money would be in a superannuation fund or in an individual retirement account. Make sure to compare super funds and retirement accounts (including interest rates, fees, etc.) and then choose the right one for your needs. Remember that the money in these accounts can only be taken out once you’re retired.

When you start working, you can choose a super fund or let your employer choose one for you where they’ll contribute at least 9.5% of your annual income into the fund every year until you retire. Moreover, you can make additional contributions into your super fund to increase your retirement savings and reduce your taxable income.

You can also put away money into a self-managed super fund (SMSF) or an individual retirement account, where the money you save can build up tax-free until you retire and start making withdrawals. Have a portion of your wages automatically deposited into the SMSF or retirement account each month to ensure that you stick to saving for retirement.

How to invest your money

There are many ways in which you can invest your money and earn a decent financial return. Look at investments that’ll help you build massive wealth over the long term, such as bonds and stocks. Investing your money in bonds will give you a return of around 5% a year, whereas stocks can give you an annual return of 10%.

Stocks, however, can go through steep downturns. If you’re more than 20 years away from retirement, you should hold 70% of your portfolio in stocks and 30% in bonds. This way, you’ll be able to handle the market downturns, as well as see more positive returns and fewer major losses. You can also invest in mutual funds, index funds (e.g. an S&P 500 index fund), target date funds and exchange-traded funds, as they offer low costs and are simple and stable.

It’s important to diversify your investments in order to reduce your overall portfolio risk. When comparing different types of investments, look at fees and expenses (lower is better) and performance. Choose an investment that performed well overall compared to other investments and also lost less money during the bad times.

How much should you save?

The amount of money you should save will depend on how much you’re earning and how much you’ll need in retirement. When your income increases, your savings should too. Generally, you should have at least 70% of your former annual income for every year you’re retired if you want to live comfortably and be able to pay the bills and unexpected expenses.

But if you also want to build your dream house, travel the world or get a PhD, you might need 100% of your yearly income. Really think about how you want to live in retirement and how much it’ll cost, as this will determine how much money you need to save. Also look at your current expenses and then estimate how they’ll change. For example, you could be finished paying off your mortgage so you won’t have commuting costs, but your medical costs will most likely rise.

Need financial help to start saving for retirement? If you have a lot of debt that’s getting in the way of you saving for retirement, why not call Credit Counsellors Australia today on 1300 003 328 and see how we can help you pay off your debt and get your finances ready for your golden years.

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