For most 20-something year olds, giving serious thought to retirement planning hardly ever happens. And if the thought happens to linger, it is usually dismissed by another thought along the lines of, “I’m young, I can worry about that later.” That’s actually not true.Retirement planning isn’t something that only older people have to think about. In fact, by waiting until then to (maybe) get started, you might end up “a day late and a dollar short.” Creating financial plans for retirement is ideally something we should be doing before or immediately after entering the workforce. This unfortunately isn’t taught to us in schools but luckily, we’re never too old (or young) to correct our inaction.
When most of us hear the word retirement, we immediately think about retiring from a job or career in our golden years to vacation permanently. However, the truth is that retirement isn’t always voluntary and doesn’t always look like what we imagined it to be. The possibility of involuntary retirement may occur if you are struck by any disabilities or illnesses which will prevent you from being actively or gainfully employed. It just makes sense to be as best prepared as possible for eventualities like that. Additionally, while planning for your golden years is important in and of itself, it is even more crucial to get an early head start since there are three mega benefits you might miss out on if you don’t. They are:
Time is money is literally true where retirement planning is concerned. Needless to say, the main advantage of having time on your side is that the longer your money is left to grow, the more it will grow. Having a longer time frame also means that you will be better equipped to ride the bull and bear (high and low) periods of the financial market much smoother than someone who isn’t too far away from retirement.
The economy goes through different cycles or what we call “bubbles.” When one of these bubbles burst, as is their nature, it triggers a recession or depression. That’s the not-so-good news. On the other hand, the good news is that the economy will always eventually rebound from these crashes. When you experience an economic crash as a millennial, you will have a less to worry about than, say, a 50 or 60 year old who is closer to the retirement age. Having time ahead of you will allow you to remain calm and give the economy the time it needs to recover instead of panicking.
2. Compound Interest
The Math is simple: Time + Compound Interest = MAGIC. Interest compounded with time is a powerful force, but this is one of those things that I can show you better than I can tell you. Take a look at the example and diagrams below:
Assuming two subjects: B and C (ages 25 and 35, respectively). Also assuming an agreed retirement age of 65, average market returns of 10% per annum, and each subject contributing a fixed monthly amount of JM$4,000 to their pension funds + $4,000 also being their starting principal.
As is illustrated, by getting started 10 years later, the time value of Subject C’s money decreased by $13,459,968.99 (just under 63%) when compared to Subject B’s. In order for Subject C to retire with approximately the same amount of money as Subject B, he will need to increase both his initial and monthly contributions by $6,750 more each month for a total of $10,750. That’s where the magic comes in, in our earlier equation.
If Subject C continues to delay getting started, the gap will widen even further. Time literally is money. Additionally, as your earnings increase over time, so should your contributions. This means that you may end up retiring with significantly more than was illustrated above for Subject B – providing that you start early, of course.
“Ugh, taxes!” You’re probably shuddering right now. However, as unbelievable as this sounds, taxes play a significant role in retirement planning. This is because you are legally allowed to make your retirement contributions with pre-income tax dollars! This is known as an income tax deduction and in it’s simplest form, means that you can subtract specific, eligible expenses (retirement contributions, for example) from your gross salary or business revenue to reduce your taxable income. Basically, you give the government less of your money each year and instead put it to work for you over time compound with interest.
It you are thinking that this is too good to be true, you can rest assured that the government has their own agenda. By providing you with such a generous incentive to plan for your future, they will have one less person clamoring for social security benefits as a means of survival in their later years. Simply put: If your hands are in your own pockets, you won't stretch it out to the government for help. Click To Tweet
Your retirement fund usually doubles as an insurance policy. This means that if you die before actually retiring, the money in your retirement fund will be paid out to your estate.
After making your contributions, the money in your retirement fund will be invested by professional investors in different securities in order to yield the best possible returns. This is referred to as your return on investment or ROI. Where and how your money is invested depends largely on your personal risk tolerance level which may be conservative, moderate, or aggressive. Speak with a Financial Advisor or Planner for further guidance.
By now, I hope that this post has helped to drive home the point that it is important for you to get an early head start on planning for and securing your financial future. Here’s a final thought: If you don't start planning for your future NOW, you will literally pay double later. Click To Tweet