The truth is, retirement management is far more complicated than one may expect and that is why getting the best retirement plan is one of the more important things a youth must consider.
Yes, a youth!
Even though retirement can seem so distant to a youth in his mid-twenties, one should always get a retirement plan best suited for them as soon as they possibly can, preferably right after they get their first job. Here are 3 reasons why.
Reason 1: Compounding Interest
For the sake of clarity, let’s say that we live in a world where every investment yields a return of 100% per annum (p.a.). In other words, for every dollar you invest in this mystical world, you’d get an extra dollar one year later. This means that if you invest $1 today, you’d receive an extra $1 in a year, giving you a total of $2 in your account. The $2 will then be invested again and the following year will yield another $2 return, giving you a total of $4 in your account.
Let’s say you decided to retire at 65 years old and invested $1 into a retirement account at the age of 25. This means that the $1 you invest today will remain in your account for the next 40 years. In this mystical world, your account would have a balance of $2 when you reach 26 years old. At 27, you’d have $4 in your account and so on. Like a rolling snowball, your retirement fund will grow bigger and by 65, your account would have garnered…
$1 x 240 = $1,099,511,627,776.
Bear in mind, however, that investments in the real world would more likely yield an average return of 6% only. Hence, your investment in the real world would’ve brought you…
$1 x 1.0640 = $10.29
Which is more than 10 times your initial investment. Using the same formula, let’s assume that instead of planning at the age of 25, you plan for your retirement at the age of 35. You would, therefore, lose 10 years’ worth of compounding interest, giving you a return of….
$1 x 1.0630 = $5.74
Which is only more than 5 times your initial investment. That’s right, a measly 10-year difference can double your retirement fund. Similarly, getting a retirement plan that suits you best can yield the best return.
Do note that, for investments, it is only through long period of time that one can enjoy the benefit of compounded returns – which arise because the stock market has an upward bias over time.
Reason 2: Unforeseeable Expenses
Human beings, in general, prefer looking away when it comes to their mortality because picturing themselves as immortal gods is much easier than dealing with the fact that they will someday leave this place. If you look past that, however, you’d realise that facing your mortality is the best gift you can give your future self.
The truth is, as we grow old, we’ll need more vitamins, supplements and medical attention to stay healthy. Hence, it is crucial that we plan for the financial complications that will bring. After all, medicines are getting more expensive and a single medical emergency could derail our initial plan.
And there’s more.
Lay-offs due to economic downturn, permanent disability from car accidents, family obligations such as taking care of aging parents – these are just a few of the countless situations that could exert downward pressure on your income and upward pressure on your costs. Instead of getting to live off your savings for the next 20 years, you now have to stretch your life savings – which are diminished due to these pressures – to cover your expenses for the upcoming years, possibly decades, depending on the age at which you these situations affect you.
Admittedly, starting to plan your retirement early can do little to prevent economic downturns or stop the opposing car from crashing into your lane. However, planning ahead can put you in a better position to deal with such issues and help you get back up on your feet sooner.
Reason 3: Time to Recover
Typically, a stock market cycle denoted by an up and down trend and back to its starting point is around 7 years, so having enough time in the market to ride through a few market cycles ensure that you have enough time to recover from any market crashes and still come out on top.
Therefore, it is best to start planning for your retirement early so that you and your financial plan have time to bounce back from market shocks. Note, however, that it is impossible to eliminate risks. The best you can do is to minimise your risk by engaging independent financial advisory firms such as Financial Alliance (https://www.fa.com.sg/) to help you plan your retirement with the best financial solutions calibrated to your risk appetite and financial situation. As an independent financial advisory firm, Financial Alliance is able to provide its customers with objective financial advice because it steers clear from any undue selling pressure from financial product issuers.
Important: The information and opinions in this article are for general information purposes only. They should not be relied on as professional financial advice. Readers should seek independent financial advice that is customised to their specific financial objectives, situations & needs.