Retirement Planning – Is it a marathon or a sprint?
By Chris Webb
This article is published on: 1st October 2013
As an independent advisor I assist my clients with all aspects of their financial planning but by far the majority of enquiries I receive are from people in their 40’s and 50’s who are suddenly panicking about their retirement savings.
Quite often, this is the first time they have considered it and as yet have set aside very little for what is going to be the longest holiday of their lives.
At the same time, I have this conversation with much younger generations, people in their 20’s or 30’s, and encourage them to save diligently for retirement now and not later in life. Typically what they want to know is how much they actually need to save so that they can make the decision to retire at a time when they CHOOSE.
The people in their 40’s and 50’sobviously spent the majority of their adult life not saving for retirement. This gave them more free money in their 20’s and 30’s than people who were already saving for retirement, and possibly indulged themselves more.
The knock on effect of this is how much they NEED to save now to afford the lifestyle they desire in retirement. When you look at the numbers it is startling to see the difference between saving early or leaving it until it’s probably too late.
A select few argue that you are better off starting later in life and enjoying your younger years whilst you can, the majority will agree that they should have started earlier and planned consistently without any major impact on their lifestyle.
Detailed below are the numbers, you can decide yourself which way looks more favourable.
For this example let’s start with a young adult – twenty years old. They are looking for an annual income of €50,000 when they choose to retire at the age of 65. To ensure they have this €50,000 ongoing and not depleting all assets you will need an asset basket of around €1,000,000. This is based on having that asset basket invested and generating 5% net return per annum.
So, we already know that you are looking for €1,000,000 set aside for retirement at age 65 and let’s say you have a balanced investment portfolio that will return 7% a year.
• If you start investing at age 20, you’ll need to put aside about €265 a month to reach this goal.
• From age 25, you’ll need to set aside about €380 a month to reach this goal. (you don’t save anything from ages 20 to 25)
• From age 30, you’ll need to set aside about €555 a month to reach this goal. (you don’t save anything from ages 20 to 30)
• From age 35, you’ll need to set aside about €815 a month to reach this goal. (you don’t save anything from ages 20 to 35)
• From age 40, you’ll need to set aside about €1,230 a month to reach this goal. (you don’t save anything from ages 20 to 40)
• From age 45, you’ll need to set aside about €1,925 a month to reach this goal. (you don’t save anything from ages 20 to 45)
• From age 50, you’ll need to set aside about €3,150 a month to reach this goal. (you don’t save anything from ages 20 to 50.
As you go through these numbers you are probably thinking that the amounts to save early on were quite manageable, but when you got to age 50, you’re thinking it’s impossible.
So now you are aware of the numbers you can decide what the easiest option is, planning early or leaving it late.
The main point I want you to consider is that you can ignore the chance to plan early and forego the retirement savings until a later date but catching up later on can be incredibly punishing, even impossible.
So my advice to everyone I meet is to start saving for retirement right now, no matter how old you are. Even if you can’t save very much, start by saving something.
Further examples using the same 7% investment portfolio: • If you just save €100 per month starting at age 20 that would equate to over €380,000 at the age of 65. • If you start saving €300 per month at the age of 30 that would equate to over €540,000 at the age of 65
Something IS always better than nothing. Start with a smaller, more comfortable amount, and increase it as and when you can. Reviewing the amount in line with salary increases is the most effective way to do this.
Compound Interest “The Eighth Wonder of the World”
By Chris Webb
This article is published on: 27th September 2013
None other than Albert Einstein described this amazing fact about finance, compound interest, as “the Eighth Wonder of the World”.
So, what is compound interest and why is it so important?
Compound interest is, quite literally, a form of free money… and it is free money that grows over and over again. The example detailed below explains how……..
Imagine that you invested €1,000 today and that whatever you invested it in went up by 10% this year. In this case you would have €1,100 one year later, made up from your original sum, plus €100 of interest or return on investment.
Now comes the Compound Interest: Assume you reinvested that €1,100 for another year and achieved 10% again. The following year you would have €1,210. This time you have made €110 of interest simply because the 10% interest is paid on the new balance not the original investment. Essentially, €10 of that interest is free money.
It is the interest you have been paid on your interest or, put another way, the return on your return.
At first glance this may not seem particularly exciting but over time the effect is incredibly powerful. Let’s look more closely at some examples to see just how:
The power of compounding
Let us say you decided to start investing some of your surplus income. For the sake of the argument, you wanted to invest €1,000 each year.
These might seem like numbers to small to make a difference but are they?
The two tables below detail the difference between non compound interest and compound interest.
I have illustrated at 5%, 7% and 9% growth annually, realistic expected rates of return.
These return figures are on top of your original investment !
NON COMPOUND
| Year No. | Annual Invested |
Total Invested | Return 5% |
Return 7% |
Return 9% |
| Year 1 | 1,000 | 1,000 | 50 | 70 | 90 |
| Year 2 | 1,000 | 2,000 | 100 | 140 | 180 |
| Year 3 | 1,000 | 3,000 | 150 | 210 | 270 |
| Year 4 | 1,000 | 4,000 | 200 | 280 | 360 |
| Year 5 | 1,000 | 5,000 | 250 | 350 | 450 |
| Year 6 | 1,000 | 6,000 | 300 | 420 | 540 |
| Year 7 | 1,000 | 7,000 | 350 | 490 | 630 |
| Year 8 | 1,000 | 8,000 | 400 | 560 | 720 |
| Year 9 | 1,000 | 9,000 | 450 | 630 | 810 |
| Year 10 | 1,000 | 10,000 | 500 | 700 | 900 |
| Year 15 | 1,000 | 15,000 | 750 | 1,050 | 1,350 |
| Year 20 | 1,000 | 20,000 | 1,000 | 1,400 | 1,800 |
| Interest Earned |
4,500 | 6,300 | 8,100 |
COMPOUND
| Year No. |
Annual Invested |
Total Invested | Return 5% |
Return 7% |
Return 9% |
| Year 1 | 1,000 | 1,000 | 50 | 70 | 90 |
| Year 2 | 1,000 | 2,000 | 102.5 | 144.9 | 188.10 |
| Year 3 | 1,000 | 3,000 | 157.63 | 225.04 | 295.03 |
| Year 4 | 1,000 | 4,000 | 215.28 | 310.80 | 411.58 |
| Year 5 | 1,000 | 5,000 | 276.28 | 402.55 | 538.62 |
| Year 6 | 1,000 | 6,000 | 340.10 | 500.73 | 677.10 |
| Year 7 | 1,000 | 7,000 | 407.10 | 605.78 | 828.04 |
| Year 8 | 1,000 | 8,000 | 477.46 | 718.19 | 992.56 |
| Year 9 | 1,000 | 9,000 | 551.33 | 838.46 | 1,171.89 |
| Year 10 | 1,000 | 10,000 | 628.89 | 967.15 | 1,367.36 |
| Year 15 | 1,000 | 15,000 | 1,078.93 | 1,759.03 | 2,642.48 |
| Year 20 | 1,000 | 20,000 | 1,653.30 | 2,869.68 | 4,604.41 |
| Interest Earned |
5939.03 | 9412.31 | 13807.17 |
We can immediately see a meaningful difference between what the saver has managed to achieve after a year versus the investor. Of far more interest is what happens over a number of years.
It is clear to see the big difference between keeping your money in a savings account and investing your money, potentially life changing, even if the amounts you start with are what you describe as “small”. Imagine, the impact can be huge depending on the amount you choose to save.
Just imagine the difference if you were saving €5000 per annum or if you transferred the cash savings you hold now and not later in life.
When Compound Interest works against you…….
It is just as important to understand that if you borrow money, the power of compounding hits you in reverse:
Over time you end up paying more and more to whoever you are borrowing from.
Luke Johnson, the man behind the Pizza Express Chain and ex Chairman of Channel 4 refers to this as “…the gruesome mathematics of leverage in reverse.” This is why you must eliminate debt and get invested as soon as you can. We all know that the majority of debt is expensive. It is challenging to make a 15-20% return on your investments but almost certain you will pay at least this on your debt.
In summary
So we can see from the power of compound interest that if you can achieve a half decent return on your money, even a relatively small amount can become a very large amount in time…
This is probably the most important thing you will ever learn about money.