Is age 45 too late to start saving for retirement?

Adriaan Pask, Chief Investment Officer, PSG Wealth

In its simplest form, saving for retirement depends on three factors: time, contributions and returns. If you lag behind in one area, you’ll have to pick up the slack elsewhere. Although you can shift your focus between these three factors, you cannot neglect any of them for too long.

Financial advisers are often asked about the time aspect, with many people wanting to know if it’s still possible to save for retirement at age 45, and if so, how? While this is not the ideal situation to be in, there is still time to act, provided you understand how these three factors work together.

If you only start saving in your forties, your money has less time to work for you, which means you will need one of the other factors (i.e. contributions or returns) to work in your favour.

Time and the power of compound interest

As an example, let’s compare two investors who both start saving in a retirement annuity, and who both aim to retire at the age of 65. Investor A starts saving for retirement at the age of 20 with a monthly contribution of R500 (so the investment term is 45 years). Investor B, who only starts saving 15 years later, at the age of 35 (investment term 30 years), will have to contribute R2 500 per month to end up with the same amount at retirement. This is 5 times more per month than investor A’s contribution.

Your contribution rate: a little extra makes a big difference

If you lost most of your accumulation-phase years, you need to be more aggressive with your monthly retirement fund contributions. The old ‘save 10% of your income’ guideline isn’t enough. The more you save, the better your chances of reaching your ideal retirement goal. Incremental increases can have a substantial impact on how much you accumulate – especially when you combine retirement savings with the use of other tax-efficient vehicles like Tax Free Investment Plans.

A 45-year-old investor making a modest R2 500 contribution per month (escalated by inflation of 6% p.a.) and earning a hypothetical annual return of 9%, will save R2.512 million by the age of 65. If the same investor increased their monthly contribution to R5 000, they would have an accumulated value of R5.025 million at age 65. This equates to a living annuity payment of roughly R11 170 per month.

Seek better returns

The total return on your initial capital investment is one of the most important components of any good retirement plan. The higher your return after costs, the larger the sum you will have at retirement. More aggressive asset classes generally offer a higher rate of return in the long run, although this might expose you to more risk. At age 45, you still have a 15- to 20-year time horizon until retirement, and since you can still expect to spend another 20 years (or more) in retirement, taking on additional risk is likely to work in your favour.

By ‘risk’ I don’t mean speculative investments (like bitcoin or the ‘hot’ stock tip you heard about at the last braai). Rather, I mean investment in growth assets like shares, with short-term price movements that may be unpredictable, but returns that are smoothed out over time to achieve inflation-beating growth. An equity investment, properly managed by an experienced and a skilled manager (as part of a diversified portfolio), will help to diversify your risk and optimise your returns. The ‘right’ level of risk will depend on your personal circumstances and risk tolerance.

Let’s compare two investors, both 45 years old. If investor A contributes R5 000 per month towards retirement at an annual return of 9%, this investor could have an end value of R5.025 million. If investor B also contributes R5 000 per month, but at a growth rate of 13%, this investor could have an end value of R7.620 million at retirement. That’s a difference of R2.595 million, which can be achieved by selecting a fund that targets a higher long-term return.

There is always something you can do

It is never a bad idea to put money aside for the future and to start saving for retirement. If you have missed your mark on one of the three key factors, pick up the slack elsewhere. Although this is a very simple rule, many people still struggle with it. A good retirement plan should therefore incorporate all three factors, and understand the interdependence between them.

The most important thing is to make a decisive start as soon as possible, save as much as possible, and opt for investment vehicles that have higher returns at the least possible risk. A qualified financial adviser can help you devise a savings plan that will bring you closer to your retirement goals. However, a plan is only ‘good’ if you actually implement it – so turn your good intentions into actions today.