How long do you think you’ll live?
Given the current pace of technological change, that question remains uncertain. Instinctively, we believe ten or twenty years past retirement. But the reality could be dramatically different.
For these reasons, retirement planning should start early in life. It doesn’t have to be constantly at the forefront of your mind, but it should feature in your thinking from time to time. Small changes you make today will have tremendous ripple effects in the decades to come.
The purpose of this post is to explain why you should start retirement planning now and the difference it can make to your quality of life.
State Payouts Are Not Guaranteed
Many people imagine that state pensions will continue forever. After all, society keeps getting richer, and entitlement is law.
But that might change, especially given current demographic trends. Providing everyone over the age of 65 could become hard, if not impossible, if there aren’t enough working people.
These problems are already hurting countries like Italy and Japan. High taxes on working people will eventually reach a tipping point where it is no longer feasible to continue paying for the healthcare that older people need. Many may give up work, or simply go overseas for a better life. Population projections suggest that something similar is likely to happen in virtually every Western country over the next thirty to fifty years.
You Could Increase Tax-Advantaged Contributions
Another benefit of starting early is to maximize tax-advantaged contributions. You have more time to enable interest to accrue, without paying the government a penny upfront.
Increasing your tax-advantaged contributions is a significant effort. However, once you get contributions flowing, they build quickly. You can have a sizable pension pot after just ten years if you work on it constantly, with the numbers increasing from there.
Unlike conventional pensions, these contributions grow over time. The state doesn’t fix them. If you know what you are doing, you can even manage them yourself.
Compound Interest Has More Time To Work
Perhaps the biggest benefit of starting retirement savings early is that compound interest has more time to work. Every year, the amount of money being added passively to the pension pot gets bigger.
Compound interest is essentially what enables some individuals to become wealthy. The ever-increasing returns on investments increase the value of their portfolios considerably.
With that said, stock market returns are not guaranteed. Some markets, like Japan’s, have stagnated for more than 25 years. The same could happen in the UK, and even the US if technological and demographic trends don’t change.
The reason for this is clear: if fewer people are at work and more of society’s resources are going towards taking care of the elderly, there is less available for innovation and dynamism. Companies are less profitable, and so their stock values begin to decline, just as happened in the Far East.
For this reason, many people are now exploring the possibility of alternative SMSFs. Instead of relying on the stock market, these are based on crypto-related assets instead. The idea isn’t to buy Bitcoin but to instead invest in the mining infrastructure and cloud technology that underpins it.
It Could Make Your Life More Comfortable
Another reason to start retirement planning now is simply that it could make your life more comfortable. Building up more investments today increases the likelihood of a larger payoff in the future.
The amount of money you need to retire comfortably at the age of 65 is considerably larger than you might imagine for the average person. Many couples wind up spending more than $700,000 on healthcare costs alone in the last two decades of life, leaving precious little for spending money on other things.
You’ll also want to consider what other things you might want to spend money on during retirement, including cruises and vacations, education for grandchildren, and other general expenses. The amount of money you have available could be deceptively small.
It Provides A Cushion For Market Volatility
Finally, another reason for starting your retirement saving process early is that it provides a cushion against market volatility. Markets can remain stagnant for decades before shooting off to higher figures. Just look at what happened in the 1970s and 2000s. Stock returns were poor during those eras, but came roaring back in the years and decades that followed, to the surprise of money.
Saving now means that these short-term fluctuations won’t matter as much. No matter what happens, global equities will increase in value over time, and you’ll be able to benefit in the future.
