It's an age-old personal finance debate: When is the best time to start saving for your golden years to sustain your lifestyle during retirement?
While there is no exact age to begin preparing for retirement, financial experts say the earlier you start saving the better.
“The simple answer to what is the right age one needs to start saving for retirement is … as soon as one can,” says Rupert Connor, partner at Abacus Financial Consultants.
“Ideally, this would be when an individual is in their 20s and first starts working and has earnings from employment.
“This is because the sooner one can, the more time the money has to grow [because there is a cost to delaying] – each year’s gains can generate their own gains the next year – a powerful wealth-building phenomenon known as compounding.”
However, an August report by the Milken Institute, an economic think tank, found that young adults need to start saving regularly by age 25 to have a least $1 million to retire on.
This is to leverage the effect of compounding returns. The Milken Institute calculated that a weekly $100 investment in the stock market, earning a 7 per cent annual rate of return, will over time compound into savings that top $1.1 million by the age of 65.
Twenty-five is also the age Fidelity Investments and other financial service companies often use when offering guidelines on how much money a person should aspire to save for retirement.
If savers waited to start putting away $100 a week until they turned 35, they’d have slightly more than $300,000 by age 65, according to the report.
If investors can only save $50 a week, or $200 a month, over the same period, they would still have more than $550,000 by age 65.
Similarly, if investors save $100 a month over that same time, they would save more than $250,000 by age 65, according to the report.
The need for financial preparedness during retirement is more acute today as people are living longer.
Across the Organisation for Economic Co-operation and Development countries, people aged 65 can expect to live for another 19.7 years, on average.
In addition, at least 25 per cent of people in the US lack any retirement savings, and roughly half have no access to employer-sponsored retirement plans, according to a 2021 report by Yahoo Finance.
Retirement savings is also the biggest financial challenge faced by employees in Gulf Co-operation Council countries, according to a survey by global advisory company Willis Towers Watson in January.
End-of-service gratuities are lump-sum payments that all employed residents are entitled to after completing at least one year of service with a company.
The scheme will involve the formation of savings and investment funds that will be overseen by the Securities and Commodities Authority in collaboration with the Ministry of Human Resources and Emiratisation.
“Pension or retirement planning is a critical piece to the retirement puzzle,” Mr Connor says.
“From understanding pension entitlements with one’s company to managing private pensions, navigating taxation, addressing currency risks, and sustaining a pension throughout retirement, there are various factors to consider when it comes to securing one’s financial future as an expat – one of them being to commence contributing to a pension structure from an early age.”
Here, personal finance experts offer their insights on the optimal age to start saving for retirement.
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When to start retirement saving
Saving for retirement, like any other long-term goal, is essential. The earlier you start, the better and the key is to be consistent in saving towards the goal, according to Rasheda Khatun Khan, a wealth and wellness expert, founder of Design Your Life and the author of Millionaire Mindset – 6 Steps To A Wealthy Life.
“As soon as you start earning an income, start putting money away for that point in time when you no longer rely on an employer for income but on your own portfolio,” she says.
“You’ll probably never retire unless you have to because of ill health or you’re too old. However, you do want to reach a point where your life is not dependent on your employer salary.”
Time in the market is one of the most important factors for how much you will have in your “retirement pot” due to compound interest working in your favour, says Alison Soltani, founder of Leap Savvy Savers.
“For example, investing just $200 a month at 7 per cent annual interest rate gives you about $60,000 over 15 years, but over 35 years, you can expect a return of $333,000 without any changes to your monthly contribution,” she says.
“The older you get, you may have to contribute more monthly to reach your goal. That being said, starting today is always better than putting it off until tomorrow.”
The “golden years” should be a time of relaxation and fulfilment, and proper retirement planning can make that vision a reality, so starting early in life can only be a good thing, Mr Connor says.
How much to save?
How much you will need to accumulate for retirement depends on how much income you want on a monthly basis during your twilight years.
“Let’s put it this way, $1 million will give you about $50,000 per year, that’s $4,166 per month, is that enough?” Ms Khan says.
“So if you’re looking at accumulating millions, then you better get started now.”
Many people have no idea how much they need to have saved for retirement, according to a survey of 10,000 adults in the US last year by the non-profit Transamerica Centre for Retirement Studies, in collaboration with the Transamerica Institute.
Workers polled estimated they will need $500,000 by the time they retire to feel financially secure.
Financial needs vary by generation, with Baby Boomers estimating they will need $750,000, Generation X and millennials estimating $500,000, and Generation Z estimating $250,000, the survey found.
Strategies to save for retirement
The first thing to do is get your financial house in order. Ensure you create a budget and know what your income and outgoings are, pay off high-interest debt and save three to six months of expenses in an emergency fund, Ms Soltani says.
“This creates a solid financial foundation from which you can build,” she adds.
There are three ways of building wealth: investing in the stock market, investing in property or founding or acquiring a successful business, she says.
The most accessible asset class for most people is the stock market.
“You can start with a very small upfront investment. You will need to open a brokerage account and, for most people, a low-cost globally diversified exchange-traded fund is sufficient for purpose,” Ms Soltani explains.
“Assessing your risk tolerance and choosing your asset allocation are also important steps in the process. But once you have it all set up, investing is simple, quick and inexpensive – probably the most effective way to build a nest egg for most people.”
Gone are the days when a retirement plan was this one policy you could access only at 65, Ms Khan notes.
Today, a retirement plan is an investment portfolio. Be sure to diversify between asset classes, be it stocks and shares, real estate, business equity, commodities like gold, silver, cryptocurrencies, and bonds, she suggests.
“The key is to start with one and keep going. Remember to keep your number in mind of how much you need and be sure to keep that portfolio allocated for it,” she says.
Meanwhile, Mr Connor picks asset allocation as the most important building block in generating long-term investment returns.
Asset allocation involves the distribution of capital to various asset classes (such as stocks and bonds) and geographies. It is based on the principle that values of different assets react in different ways to changes in economic and market conditions, he explains.
“A long-term investment outlook is ideal for retirement planning and, thereby, help to avoid the risk of emotional knee-jerk reactions during more volatile markets, like what has been experienced over the past few years,” he says.
“Rather than trying to time the market, it is time in the market [through a diversified asset allocation] which can help to target someone saving for retirement long-term investment performance goals.”
Portfolio rebalancing, which usually takes place each month, is also key to successful asset allocation investing, he says.
Rebalancing is the bringing of investment portfolios back to the target allocation mix. This is necessary because over time, some investment may grow faster than others, Mr Connor adds.