IS 45 TOO LATE TO START SAVING FOR RETIREMENT?

IN ITS simplest form, saving for retirement depends on three factors: time, contributions and returns. If you lag behind in one area, you’ll have to pick up the slack elsewhere.

Although you can shift your focus between these three factors, you cannot neglect any of them for too long.

Financial advisers are often asked about the time aspect, with many people wanting to know if it’s still possible to save for retirement at 45 and if so, how? Although this is not the ideal situation in which to be, there is still time to act, provided you understand how these three factors work together.

If you only start saving in your forties, your money has less time to work for you, which means you will need one of the other factors (in other words, contributions or returns) to work in your favour.

As an example, let’s compare two investors who both start saving in a retirement annuity and aim to retire at the age of 65.

Investor A starts saving for retirement at the age of 20, with a monthly contribution of R500 (so the investment term is 45 years). Investor B, who only starts saving 15 years later, at the age of 35 (investment term: 30 years), will have to contribute R2500 a month to end up with the same amount at retirement. This is five times more per month than Investor A’s contribution.

If you lost most of your accumulation-phase years, you need to be more aggressive with your monthly retirement fund contributions. The old “save 10percent of your income” guideline isn’t enough.

The more you save, the better your chances of reaching your ideal retirement goal. Incremental increases can have a substantial impact on how much you accumulate – especially when you combine retirement savings with the use of other tax-efficient vehicles such as tax-free investment plans.

A 45-year-old investor making a modest R2500 contribution a month (escalated by inflation of 6percent a year) and earning a hypothetical annual return of 9percent will save R2.512 million by the age of 65.

If the same investor increased his or her monthly contribution to R5000, he or she would have an accumulated value of R5.025m at 65. This equates to a living annuity payment of roughly R11170 a month.

The total return on your initial capital investment is one of the most important components of any good retirement plan.

The higher your return after costs, the larger the sum you will have at retirement.

More aggressive asset classes generally offer a higher rate of return in the long run, although this might expose you to more risk.

At 45, you still have a 15- to 20-year time horizon until retirement and, since you can still expect to spend another 20 years (or more) in retirement, taking on additional risk is likely to work in your favour.

By “risk” I don’t mean speculative investment (such as Bitcoin or the “hot” stock tip you heard about at the last braai).

Rather, I mean investment in growth assets like shares, which involve short-term price movements that might be unpredictable but provide returns that are smoothed out over time to achieve inflationbeating growth.