The secret of the simple retirement calculator is that all it needs to work really well is time.
However when you're in your 20's sixty seems so far away (it's even older than your parents!) and life is all about having a good time … spending money on the things, that up to now, you couldn't afford.
Any suggestion that this is the time to start thinking about saving for retirement is the farthest thing from your mind … although the thought of not working might be attractive! But the earlier you start the better off you'll be.
Obviously, over the years, your retirement planning priorities will change but the important thing is that you clearly understand that thesooner you start the easier it'll be. Many young people today must be aware of the concerns that their parents have about retirement. What will it be like in 40 years time?
So as you start saving for your retirement you have to make only two simple rules:
Rule 1 – Never use your retirement savings for anything other than retirement funding
Rule 2 – Never forget Rule 1
Then take a pledge that you will never break these rules … consider them as the 11th commandment! Time and consistency will be critical factors in whether your financial retirement planning is a success.
Your simple retirement calculator is based on the principle of compounding which is very dependent on time. Simply the longer you do it for, the better it gets.
Assume that you:
This is simplistic but all we are trying to understand is the overall concept.
Lets also assume that you will retire on the same salary that you are earning at the time you retire. But that 30% of this amount will be made up by social security. This is assumed for those countries fortunate enough to have social security and for the rest of us we will have to live on the 70%!
So you'll be drawing down on your retirement savings at a rate of 70% of your final salary (the full salary amount you require minus the 30% provided by the social security). As in the savings assumption your pension payments will increase by the rate of inflation and you will earn 4% above inflation on your savings.
After saving for 30 years guess how long you'll have in retirement before your money runs out? … a measly 9 years!
However if you carry on saving your 10% for another 10 years, making the total period 40 years, your money will now last for 19 years of retirement.
The conclusion is that the first 30 years of saving buys 9 years of retirement and the last 10 years of saving buys 10 years of retirement.
Making the same assumptions as above but now increasing the savings rate from 10% to 15%.
In this case after 30 years of saving your pension will last for 16 years and after 40 years of saving will last for 37 years! So in the last 10 years the power of compounding gets you 21 years of pension income!
Put another way for the first 30 years you have to work about 2 years to buy a year of retirement in the last 10 years you get 2 years of retirement for every year of work.