The art of managing money
When you’re in your 20s, retirement seems like it’s an awfully long way off, so it’s not surprising that saving for such a distant event is difficult to comprehend, let alone do. On top of that, people in their 20s are likely to be at or near the bottom of the rung in terms of earning power, so finding spare money to put aside for retirement can be difficult once the costs of living are taken out of your pay packet. However, twenty-somethings have one great advantage over the rest of us when it comes to saving -- compound interest. Here are four ways to get started on your retirement plan.
1. How much do I need to retire on?
The Commission for Financial Capability recommends sitting down and figuring out how much money you’ll need to save for retirement as a way of cementing in your mind the need to start saving now.
While the future is impossible to predict, let’s say you live until you’re 90 and retire when you’re 67, that’s a full 23 years’ worth of living to be done without a wage. Ask yourself, “How much money will I need to live comfortably for each of those 1196 weeks?”
Using the retirement planner on Sorted.org, here’s an example using the timeframe we just laid out above. Say you want $1000 per week to live on during retirement. You can assume $390 will come from NZ Superannuation, however that leaves $580,164 or $610 per week still to come from you.
For a 22-year old, this means saving or investing around $201 per week from now until you turn 67, just to make that total. This figure doesn’t take into account things like any Kiwisaver or assets you may have, but it’s a good eye-opener when it comes to just how much money you’ll need to live on.
Tip: Be realistic setting your goals
Be realistic about how much you’ll need by using one of the many calculators found on sites including your bank or Sorted.org to help figure out how much you’ll need to retire on. Sorted.org calculators have moveable sliders that let you quickly see the differences a small adjustment made now can have further down the track.
2. Time is on your side so start saving early
The good news is, in terms of making a solid plan for retirement, for those in their 20s, time is on your side. Starting sooner means you’ll have more by the time retirement day rolls around.
The reason for this is something called compounding interest. In a nutshell, it means you’re earning interest on the interest - $100 saved now will leave you with considerably more than if you waited another 20 years to put that same amount of money in the bank.
For example: If you put away $100 per month for 20 years earning 2% interest, you’d end up with $27,800. But if you managed to save that same amount for 40 years, you’d end up with $64,803 -- an extra $9203 earned through interest alone. There are plenty of variables of course, however, you get the general idea.
Tip: Choose the right savings account
Some savings accounts offer bonuses if you don’t touch your money. If you have the discipline, they can be a great way of boosting your savings over time. On the flip side, these accounts often discourage withdrawals by adding fees whenever you dip into them.
3. Explore the KiwiSaver option
While saving can be hard, the benefits and incentives to getting started make short term pain worth the long term gain.
KiwiSaver is one way to get started. Not only does it bring a range of benefits, such as Member Tax Credits and compulsory employer contributions, but because the money comes out of your pay before you even see it, you’ll barely notice it’s not there to spend.
Tip: Find out more about KiwiSaver
We’ve covered the ins and outs of KiwiSaver in this article, if you haven’t signed up yet, have a read to make sure you’ll get the most out of it if you do. More about the BNZ KiwiSaver Scheme can be found here.
4. Find the money to save
It’s easy to tell you to start saving early, however, reality is often more complicated. Unexpected costs come and go, income dries up, the cost of living is continually rising, however, it can be done – but it will require some sacrifice. Going cold turkey is a recipe for disaster, so instead of giving up all your usual treats (coffee, clothes, concert tickets etc), try cutting back rather than going without by identifying needs versus wants.
Tip: How to identify needs versus wants
Deep down, most of us probably know places where we can make cuts in order to save, the hard part is actually doing it. Try budgeting as a way of visualising all the places you might be able to find savings.
BNZ Investment Services Limited, a wholly owned subsidiary of BNZ, is the Issuer and Manager of the [BNZ KiwiSaver Scheme].
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