Retirement planning – why start early?
When you are 25, retirement is a long way away! You are very likely to have other more pressing commitments, like buying a car or a house, raising a young family or repaying student loans. This is why most people don’t get around to thinking about retirement until they are in their 40s.
But the more you can stash away for retirement early in life, the better retirement outcome you are likely to enjoy.
Why? Because of the maths of compounding. Albert Einstein famously said that compound interest is the most powerful force in the universe. He said, “Compound interest is the 8th wonder of the world. He who understands it earns it; he who doesn’t pay it.”
Let’s look at numbers.
If you invest $10,000 at an annual rate of 5% when you are 25, you will have $70,400 when you turn 65. That $70,400 is made of $10,000 from your investment, $20,000 from earning 5% on it for 40 years, and $40,400 on earning a 5% return on the accumulated 5% returns. These compounded returns make the majority of the final balance.
If you invest the same $10,000 at 45, you will have $26,533 at 65, with $10,000 from earning 5% on the $10,000 for 20 years and only $6,533 from the compounded returns.
This makes a huge difference!
This is why you need to join KiwiSaver as soon as you can and put as much as you can afford into it, particularly if your employer makes a contribution.