The following is a guest post. Enjoy!
The thought of saving enough to be financially independent once you’ve retired might seem daunting, but by starting to save as early as possible, combined with an effective long-term strategy, it can be achieved.
However, proper financial planning is essential. A long-term commitment and levelheaded approach when making financial investment decisions are key; don’t let emotions cloud your judgment.
Start saving as early as possible
By starting to save early and consistently in a product such as a retirement annuity, you will be able to reap the full benefits of compound interest; this means that less of the total amount you’ve saved will come from your contributions but rather from the compound growth of the investment.
Due to inflation, spending power decreases and therefore you should aim for the returns on your investment to maintain the value of your money.
Here’s an example to illustrate the benefits of starting to save earlier:
Taking historic inflation of a particular fund and the returns in line with long-term returns, it can be assumed that an investor who contributes $100 per month for 10 years (equaling $12,000) and then stops contributing but remains invested for another 30 years will accumulate just as much as one who delays starting for 10 years and then contributes $100 a month for 30 years ($36,000).
Therefore, it can be determined that saving a small amount sooner than later is worth it in the long term.
Reasons to consider a retirement annuity
- Your contributions are tax-deductible, and the money is safeguarded due to restrictions relating to this type of investment.
- Your investment can be spread across asset classes. The diversification helps lessen investment risk.
- You aren’t able to access the investment until you retire. This is beneficial because a longer investment period allows you to take full advantage of compound interest.
It’s useful speaking to a financial advisor about your financial goals and based on this, he/she can help you determine whether a retirement savings product such as a retirement annuity will suit your needs.
Don’t let emotions sway your decisions
It’s also important to understand that investment performance is not linear and so the success of the investment also depends on the decisions that you make. It’s imperative to keep calm so that you don’t make impulsive, irrational choices.
This is especially true during times of short-term underperformance. Panicking can heighten investment risk and selling at the wrong time, may cause you to miss out on a sizeable part of the return at a later stage.
Keep a level head, rather focus on – and continue to follow – your long-term plan; don’t let your decisions be influenced by short-term market fluctuations.
The time to consider rethinking your investment strategy is when personal circumstances and risk capacity change. For example, if you get married or decide to start a family. If this is the case, it’s best to speak to a financial advisor and he/she can help you change your investments according to your new financial objectives.
***Photo courtesy of https://www.flickr.com/photos/typyshotshot/6045512165/in/
