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Growth & Jobs | Avoid Pension Crisis

Published:Tuesday | July 25, 2017 | 7:00 AMStacey-Ann Mighty Whyte
Stacey-Ann Mighty Whyte

Recently, I had a conversation with a group of young adults about the importance of preparing for retirement. Some were of the view that they had all the time in the world to prepare for their retirement years and that saving for a pension was not something that they should be concerned about. The others were more concerned and full of dread, as they considered the inadequate savings that their parents, other family members and friends have accumulated for their retirement years.

I shared with the group the experience of someone I will refer to as Germaine, who was happy at work, but was looking forward to retirement. He worked for a company that offered a pension fund for its employees, and he contributed faithfully and consistently to that fund for more than 30 years and was ready to reap the rewards. He had also invested wisely with the help of his financial adviser and had a solid portfolio of more than $10 million suitable for his age and risk tolerance. The mortgage on his home was fully repaid and he had no debt except his credit cards which he paid off each month. This placed him on the right path for his retirement and removed any financial worries he may otherwise have had.

I told the group that they too could be like Germaine but they had to take action immediately. I encouraged them to heed the advice of H. Jackson Brown who wrote, "The best preparation for tomorrow is doing your best today", and start saving for their own retirement immediately, to take advantage of the amazingly powerful effects of compound interest.

... Start saving early and avoid the tension

Consider a recent graduate who is 25 years old and earns $1.2 million per annum and is willing to save 10 per cent of her income ($10,000 per month) in an approved superannuation fund or retirement scheme that earns a return of seven per cent per annum. If she starts saving in a pension fund or retirement scheme towards this goal, she would accumulate over $26 million at age 65. However, if our hypothetical person delays for 10 years and starts saving at age 35, she would accumulate just over $12 million. The power of compound interest is illustrated even more clearly if she starts saving at age 50 and saves the same $10,000 per month. Our hypothetical citizen would only accumulate roughly $3 million at age 65, assuming a seven per cent annual return.

There is no doubt that the key to accumulating an adequate pension is starting early. The 25-year-old is able to accumulate - at age 65 - almost 800 per cent more than if she had started at age 50 years old.

With this knowledge, you too can say goodbye to tension, and achieve the peace of mind you get from having an adequate pension, by immediately commencing saving for your own retirement.

- Stacey-Ann Mighty Whyte is pensions manager, JN Fund Managers Limited.