The power of time – start saving early
If you are in your 20s, or even your 30s, you might see little need to save for a retirement that is decades in the future. Actually, it is the best time to begin.
The “power of compounding” means that starting to invest early will earn you lots more than waiting until later.
Compounding refers to accumulating interest or dividends on both the amount you put into an investment initially as well as the dividends or interest that you earn on that investment.
To illustrate the benefits, if you save or invest S$10,000 and earn an interest or dividend of 5 per cent, or S$500 per year, you will have S$10,500 at the end of the first year.
When you keep this investment untouched, you will earn interest or dividends on S$10,500 the following year rather than just on your original S$10,000.
Assuming the pay-out rates are still the same at 5 per cent, you will receive S$525 in the second year rather than just another S$500, so you will end up with S$11,025 rather than just S$11,000.
The longer you stay invested, the more time your money has for compounding to work its magic. And the great thing about compounding is that your money increases automatically.
HOW MUCH MORE?
Several scenarios illustrate just how much compounding matters.
To use a simple example, investing S$10,000 when you are 22 and earning 5 per cent per year would give you S$73,584 when you retire at 62, whereas you would only end up with S$27,126 if you start investing that S$10,000 when you are 42.
Another example shows how compounding makes a dramatically bigger difference than you might imagine when you start saving early.
If you start investing at the age of 21 and stop at 30, for example, you will end up with a bigger retirement fund than an investor who starts at 30 and puts money aside for the next 40 years.
Investment research firm CLSA looked at savers who each contributed S$2,500 a year to a retirement investment and earned 7 per cent per year, according to The Telegraph.
A person who starts investing at 21 and stops at 30 would have a retirement fund worth about S$553,000 by the age of 70, assuming that no further contributions were made and that the gains of 7 per cent per year are reinvested.
A second saver who starts at 31 and contributes S$2,500 per year every year until the age of 70 ends up with about S$534,000, again assuming 7 per cent annual growth.
Whereas the second person put in S$100,000 in total over 40 years, the first person put in just S$25,000 over 10 years and actually ends up with more in his retirement account.
The differences for someone who starts investing at age 41 or 51 would be even more pronounced. Start saving at 51, for instance, and you will need to invest more than S$12,000 per year to hit that same S$534,000 by the age of 70.
The longer you wait to start investing, then, the more you will need to put aside or the less you will have in the end. Starting to invest early makes a real difference.
MAXIMISING BENEFITS
What millennials need to do to accumulate higher amounts for retirement, experts advise, is to invest in a diversified portfolio of investments that offers better returns than just a savings account.
While stocks have historically had the highest returns, including bonds and property assets such as real estate investment trusts (Reits) in your retirement investments can reduce risk.
That advice contrasts markedly with what people here are actually doing.
The Blackrock 2017 Investor Pulse Survey, for example, found that 47 per cent of Singaporeans’ savings are in cash.
“With current savings interest rates at less than 1 per cent and inflation ticking up,” Blackrock commented, “they (Singaporeans) are going backwards.”
Consulting firm Milliman similarly found that 68 per cent of respondents in the Retirement Attitudes Pulse Survey 2018 here said they plan to use bank savings to fund retirement, while 57 per cent will use life insurance plans and 51 per cent will use their Central Provident Fund.
Although using multiple sources for retirement funding is good, the heavy reliance on savings that earn low interest is a concern.
Investing into a diversified portfolio that offers the potential for higher returns is easier than you might expect, even with small amounts.
POSB InvestSaver, for instance, allows you to put as little as S$100 a month into either bonds or stocks via two Exchange Traded Funds (ETFs) listed on the Singapore Exchange.
Robo-advisors such as Smartly allow you to start by putting as little as S$50 into a diversified portfolio that they select based on your investment profile and manage for you, then to add as much or as little as you would like each month.
While you may not think much about retirement when you are in your 20s, you will still eventually need money when you stop working.
Investing early will make it much easier to accumulate what you need and live the life you want in the future.
