It’s important to understand the cost of retirement in the 21st Century. We are predicted to live longer than ever yet receive inferior pension benefits generally from employment. This means that a far greater burden of financial planning is required than was the case for previous generations.
Use your supports
There are a number of critical supports available that make retirement planning much easier than through standard investing. For example, in addition to one’s own funds, tax benefits called tax-relief are also granted to those saving for retirement. Plus, in many workplaces, employers offer “matching” amounts to varying degrees as an employee benefit. Finally, and most important, tax-free compound growth also adds to the enormous growth potential of a personal retirement fund.
The key pillars to building a retirement fund (employee example)
- Your investment – this is the monthly you have taken from salary
- Tax-relief – this is the value of the tax that would have been taken from your wages that is re-directed back into your retirement fund.
- Employers (where they offer it at work, this is often granted after probationary periods have expired and also, there are so-called 2-year rules).
- Compound growth – this is the secret ingredient and the golden rule to make this really make a difference to your final retirement nest-egg is time. The sooner you begin, the more time tax-free compounding has to provide benefit.
How to use the retirement calculator
The calculator is designed to provide a broad overview of the impact of the growth of money over time. So, as you apply the amount of money being deposited into your retirement account, it is really IMPORTANT to remember that of the funds going into your retirement account, some of this will come from you, some from tax-relief and some from employers (where they participate). So, not all of the money going in is coming from your income, only some if it is.
Impact of compound growth
What is key in retirement planning is the impact of compound growth. Simply, this is the impact of money earning money each and every year. Provided one starts a retirement account at a reasonable young age, the final retirement fund is likely to have grown more from the combined compound interest than from the combined contributions (from you, your employer and the value of the tax-relief).