Saving during the last few years of your working life could be vital for your pension.
Many people are tempted to retire early with the view to enjoying life whilst they are still young. As is the case with most temptations, retiring early comes at a cost. For most people, the cost of retiring five or 10 years earlier than their normal retirement age will have a huge impact on their ability to enjoy a financially secure retirement.
The principle of compound interest has a tremendous impact on the final value of your retirement fund. This, together with the likelihood that you would be earning more in the latter years of your career than in your earlier years, accentuates why it is important for you to try to save for as long as you possibly can. Research undertaken by Sanlam has shown that if you work for an additional five years instead of retiring early and continue to contribute to your retirement fund, you could nearly double the value of your retirement fund and thereby almost double your monthly pension.
The few years closest to retirement provide you with the perfect opportunity to save more than you were able to before you had children to educate and debts such as home-loans to settle. As you near the end of your career you will hopefully have been able to repay most of your debts, your children will have finished school and university and there will potentially be some extra cash available to be invested.
There are a number of reasons why you should avoid retiring early. For most people, retirement lasts longer than expected. The life expectancy for all South Africans is now on average 64 years, where in the 1950s this figure was around 43 years. The average age at which people tend to retire from working has not changed much over the same period of time. If you retire early, instead of adding to your retirement fund you will start depleting it, potentially to a situation where you may need to significantly reduce your standard of living.
For most people the older you are the more you spend on health care. For the past few decades, medical inflation has been substantially greater than CPI, making it more and more difficult to fund medical expenses. This is another reason for earning an income for as long as you possibly can.
Working and saving for longer will not only ensure that you have a larger income in retirement, but will also keep you economically active for longer. This has important psychological benefits. Your working environment, even under lockdown conditions, provides a social outlet which is often underappreciated.
Sometimes a working environment is so toxic that to continue working there may impact your health. It is always advisable to first secure alternative employment before resigning from a position, especially in the current economic climate. It is sensible to discuss your options with an experienced Certified Financial Planner® before making any decisions relating to your retirement, be it at your normal retirement age or if you are considering taking early retirement.
- Rands and Sense is a monthly column, written by Ross Marriner, a CERTIFIED FINANCIAL PLANNER® with PSG Wealth. His Financial Planning Office number is 046 622 2891
