If you have debt it is almost always best to get rid of it before you start saving. This is because the interest you receive on the savings plan (after tax and fees) is unlikely to be as great as the interest you can save by having lower debt.
However, if you have access to an employer-subsidised scheme, then this could well be worth considering. The subsidy might reward your own savings by a greater amount than you can achieve by reducing debt.
Many people have a target date when they want to have their debt eliminated so they can then start putting money aside for retirement income. The earlier this can happen the better off you’ll be in the long run. If you can have your debt under control by the time you are 40 or 45, you are well on the way.
Starting early gives you more years to save, meaning the amounts you put away each week can be smaller for a given retirement goal. For example, Jane wants to have $100,000 tucked away by the time she’s 65. If she starts at 40 she must save $56 a week . But if she starts at 55 she must save $170.
Starting early also helps you harness the power of compound interest. When you save, the bank (or financial institution) adds interest to your savings at regular intervals. If you don't touch the interest, but let it add to your lump sum, then you start to earn interest on your interest as well as on the original amount you saved. This is called compound interest. The longer you leave your money, the more powerful the compound interest effect. So the earlier you start saving, the more you can make.
But it’s never too late to harness the power of compound interest, or to start a retirement fund. Even small amounts saved later in life can make a big difference to your lifestyle in retirement.
It’s important that people in their forties and fifties don’t feel so daunted by the prospect of preparing for retirement that they give up and do nothing, says Retirement Commissioner Diana Crossan. “While it’s great to start early, it’s also never too late to make a start,” she says. “I try to encourage people who are starting to panic at 40 or 45 to put as much away as they can over the next ten years. If they can pay off their debts or start a saving fund, it will all help later down the line.”
Remember, starting early is good. But the most important thing is to start. The key is managing your money well from an early stage.
Find out more:
To find out more about saving for retirement, visited Sorted (www.sorted.org.nz). Sorted is packed with helpful information, tools and calculators.
The
Goal Machine shows the amount you need to save regularly to reach a specific goal.
The
Regular Savings Calculator shows the amount your regular savings will grow to over the years.
The
Quick Retirement Calculator shows how much you need to save to have a particular income in retirement.
