Simply squirreling money away each month in your regular savings account might effectively help you build wealth. We’ve mentioned it several times in this series but it’s worth repeating: The value of your money will diminish, thanks to the inevitability that is inflation. And the only way to counter this and build your future fund is to make informed investment decisions that counter inflation (However do take note that there are risks involved and it is advisable to speak to a professional for better advice and planning).
However, “investment” is a word that tends to make some people nervous. It isn’t surprising, seeing how risky investments have hurt the world economy on more than one occasion. But not all investments are created equal, and you can build a portfolio that suits your needs and risk appetite, which may involve relatively safer investments in government bonds or perhaps a diversified portfolio of investments.
Stay with us. You’ll understand it all in just a bit.
The truth is it’s never too late to think about how you’re going to support yourself once you retire. That said, the best time to start your retirement fund is when you are young, because your funds will have more time to grow in value.
Let’s look at the numbers, given the following assumptions: Say, bank interest rates are 0.35 per cent a year (based on DBS’ current 12-month fixed deposit rates), and one can expect a conservative average of around 5 to 6 per cent returns per annum from a balanced portfolio of investments. We’ll take three investors, aged 25, 35 and 45, and let’s assume a retirement age of 65.
This chart shows at a glance what each investor will retire with by the age of 65:
Capital = sum invested till age 65
Fixed Deposit = capital plus returns from fixed deposits giving 0.35% interest per annum.
Investment = capital plus growth from investments yielding returns of 5-6% per annum.
As you can see, while putting money in fixed deposits will grow savings better than regular bank interest, it isn’t as significant as a balanced range of investments. On top of that, you will need to consider inflation — by the time you get to use your savings, the sum accumulated will get you much less than what it was worth 40 years ago.
Compare the 25 year old’s nest egg to the 45 year old’s. Time can help young investors compound their returns and retirement savings growth. This is despite the fact the 45-year-old invests a greater sum. It’s in your best interest not to procrastinate when it comes to starting your retirement plan.
The chart above is a simplistic theoretical calculation, but life is never that straightforward.
"Income, maturity, aspiration, time and a sense of responsibility are some of the main factors of a persons’ lifestyle that will affect investment and savings decisions — and these change over time," said Dennis Tan, Senior Director of Financial Services at Manulife Singapore.
"Most in their mid-20s would be more concerned with the pursuit of career and increasing their income to satisfy their primary needs like entertainment, holidays, car and credit card. Retirement would probably be the last thing on their minds," continued Tan. " But should they decide to start a well-planned savings and / or investment strategy and stick to it, they would be able to reap in the rewards of the time they have in front of them with compounded interests."
According to Tan, your mid-30s is usually when you’d expect your career to stabilise at a higher income level. "This is also probably one of the most crucial stages for them to talk about mid- to long-term financial planning," he said, due to concerns such as healthcare, the cost of supporting aging parents, or perhaps planning a family.
Remember: Your lifestyle and needs will change at different stages of your life — and so will your financial and protection needs. "It’s important to remember that a plan that’s good for today may likely not be suitable tomorrow," said Tan. "Periodical reviews are important to help ensure the insurance portfolios prevailing are enhanced, modified or upgraded accordingly, if necessary."
Speak to a professional financial planner for an insurance plan that’s right for you.
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