by Monique_P

Created on: September 16, 2008

It is easy to procrastinate when it comes to saving for retirement. We hear retirement is still years away' or the little I can afford to save now will not make much of a difference' as common objections to starting a retirement plan.

More often than not, people are putting off retirement plans due to either extreme fear or optimism. The fearful ones' apprehension comes from the belief that the amount require for retirement is so horrendously huge that at best one have to make tremendous sacrifice on current standard of living or, at worst, one can never afford it. This fear cripples the person from moving forward and some avoid facing the issue completely. The hopeful ones however are positive that the respective pension plans their government lay out for the citizens are sufficient to see them through old age.

In both cases, the fearful and the hopeful ones will not consider a realistic plan for retirement; and therefore they risk making their retirement considerably less rewarding or in some cases may even delay it from taking place.

Are all hope lost for people who think they do not have enough money to save?

The liberator from that fear could come from a simple formula - Start early + Be Consistent = Power of Compound Interest.

Let us use an example to illustrate the points.

Assuming there are 2 friends- Kelly and Sally. Both are of age 20 and have the same disposable income after they started work following graduation.

1. When you are young, time is your friend - Start early

Kelly was introduced to the concept of saving early. Although she is a fresh graduate just started out working, she aims to save $100 per month. After the first year, she managed to save a grand total of $1200. (Hardly a fortune is it?)

Sally, on the other hand decides that $100 a month is not going to make a significant impact to her retirement plan, thus she choose to spend the money instead.

2. Be Consistent

Kelly continues with her savings of $100 per month for 15 years. On top of that, she makes a decision to invest her yearly savings of $1200 into a global equity mutual fund which generates an average return of 15% per annum.

Sally however chooses to believe that she is still have a long way to retirement (after all she is only 35, retirement is for the 50s!) thus she did not start any planning.

At the end of 15 years, Kelly's yearly investment of $1200 for 15 years generates a return of $66,860. Her total capital is $1800.

3. Power of Compound Interest

Now, both have reached 35 years old.

Due to unforeseen family commitments, Kelly could not carry on with her monthly savings. However, she leaves her asset of $66,860 to continue investing in the same fund.

Sally finally realized that time is not on her side. To make up for lost investable time, she cut down on her standard of living and saves $500 a month. On the yearly basis, she invests her savings of $6000 into the same global equity mutual fund as Kelly.

After 20 years, both Kelly and Sally have now reached the retirement age of 55.

You may be surprised to find out that although Kelly did not add on to her investment for 20 years, due to the power of compounding interest, her retirement fund has grown to $1,094,266! (Not bad for an initial capital of $18,000!)

Sally on the other hand has consistently saved 5 times as much as Kelly in the last 20 years. Through the course of that time, she has saved and invested a total of $120,000, but her retirement fund stands at a total of only $712,860.

The above illustration shows us that putting off your financial planning can be a very expensive lesson. Time, coupled with the right investment tools brings most people's retirement dreams nearer.

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