While many celebrate the New Year with hopes of positivity and better things to come, there is one thing that does not benefit from one less year: retirement savings. One less year to boost retirement savings means less money in your pocket for your retirement years.
The question is, does one year really make a difference in saving for retirement?
What difference does one year make to retirement savings?
Time is the most valuable commodity when it comes to compounding interest. Considered the 8th world wonder, this is one of the most important ways to save and reach retirement goals. Compounding interest is basically interest on interest. Interest is calculated on the initial investment amount plus all interest that has been accumulated.
Below is an example of how much compound interest can be earned on a retirement investment of 20 years and the interest lost if the investment were reduced by one year.
Compounding interest example
A 20-year investment of £500 a month at 7% p.a. will amount to £262,482 = £120,500 in deposits and £141,982 in interest. The difference in interest between years 19 and 20 is £17,474. That’s almost three years’ worth of contributions.
On 19 years, monthly contributions would have to be increased to £550 to achieve the same 20-year goal.
A 20-year once-off investment of £100,000 at 7% p.a. would produce £403,874. That’s £303,874 in compounding interest. Year 20’s interest would amount to around £27,227. That is almost a third of the initial investment.
On 19 years, the once-off investment would have to be increased to £107,000 to achieve the same 20-year retirement goal. To answer the question of whether one year makes a difference in retirement planning, Yes.
Review your retirement plan
It is essential to review a retirement plan regularly to adjust for any changes that may have occurred over the previous year. These include retirement lifestyle changes, career changes, and even changes in family or marriage status. If something significant has changed in your lifestyle, then contact your financial advisor immediately to adjust and adapt your retirement accordingly, or you might end up having to downgrade your retirement lifestyle.
Lifestyle changes
Any changes in lifestyle may affect retirement plan goals. For example, a permanent illness or disability will affect retirement. You may need more retirement income to cover medical costs and care. Perhaps you have inherited money and now can afford to up your lifestyle. The higher the lifestyle, the more money is needed for retirement. The inheritance could also have given a significant boost to retirement savings.
Retirement Lifestyle changes
This is changing the kind of lifestyle that you want to lead during retirement. This directly affects the amount of retirement savings that is needed to sustain the lifestyle. An inheritance may afford a more luxurious lifestyle at retirement, or perhaps a decision to retire abroad in a country with a cheaper cost of living could allow for more luxuries.
Career changes
Any changes in career trajectory could significantly influence retirement goals. A significant promotion or change in jobs could allow for more disposable income that could increase retirement contributions.
Children and Family
The addition of children or a spouse to a professional’s lifestyle will affect retirement planning. Children are expensive, and disposable income may shrink significantly with childcare costs. A newly married professional may want to include their spouse in their retirement planning goals, or perhaps a combined retirement plan for both spouses could afford a more luxurious lifestyle. These are all aspects that need to be reviewed with a financial advisor.
Please note, the above is for educational purposes only and does not constitute advice. You should always contact your advisor for a personal consultation.
* No liability can be accepted for any actions taken or refrained from being taken, as a result of reading the above.