Most people have a firm understanding that if you save while you’re young, this will set you on your way to achieving your long-term goals. However, life is what happens when you’re making other plans and, even with the best intentions and a basic financial awareness, planning for your future can easily fall to the bottom of a long to-do list.
During your twenties, you may have focused on having fun, then had various pressures in your thirties, such as a home-loan, young family or new business, that pulled the reigns on your financial planning. All of a sudden, you can find yourself in your forties and realise you haven’t stashed enough under the metaphorical mattress to maintain your lifestyle into your golden years.
Many a 40-something unfortunately doesn’t have a well-defined savings strategy, and very few have taken the necessary steps to sufficiently prepare for the future. However, the thing about saving is that the longer you wait to save, the harder it is to grow a sizeable sum, as the benefits of compound interest are best reaped from early on.
Lots of people take the attitude of simply saving what they can, when they can; then counting their chips later on. However, the easiest way to save for future goals is by working backwards — calculate what you will need to support your lifestyle choices (be that a comfortable retirement, your children’s education, an around-the-world trip), then work out how much you need to save in order to achieve your goal(s).
As a rule of thumb, it is often recommended to have saved at least eight times your final salary before you retire. If you save that amount, you should be able to consistently enjoy approximately 85% of your final salary during retirement.
By setting yourself early milestones, you should be able to stay on track to achieving this goal. For example, it’s a good idea to aim to have saved one whole year’s salary by the time you’re 35 years old, three times your annual salary by the age of 45, and five times your salary by 55. So, if you’re 35 years old and making ZAR240,000 a year, then you should have saved ZAR240,000 by this age too.
- Save as much money as you can from as young an age as possible. If you’re in your forties and have been saving at least 10% of your salary for the past two decades, then you should be in a good position and may just need to make a few adjustments to reach your financial targets. However, if you’ve neglected your future entirely up until this point, then you’ll need to run the extra mile to make it to the finish line.
- Trust the professionals and relax in the knowledge that your investments are in good hands — with experts who have experience in financial management, along with the time and resources to manage your portfolio. By having an independent savings plan, in addition to anything that your employer offers, you will also diversify and spread your risk.
- Maximise your savings by making the most of any tax advantages for which you are entitled. Don’t hesitate to arrange a meeting to discuss your options.
- Asset allocation and diversification are always important, but they may need to be adapted as you get older. At 40 you still have a while before you retire, so you arguably don’t need to play it too safe just yet. In an article published on Business Insider, Ellen Rinaldi, former Executive Director of Investment Planning and Research at Vanguard, recommends simply “scaling back stocks to 80% of your portfolio and putting the balance in conservative holdings like bonds.”
- Be accountable to your goals. It may mean that you have to make some difficult decisions with regards to other expenses, but you do need to prioritise your future while you still have the time, choices and means. It is exponentially easier to save bit by bit to prepare for goals, rather than divert huge sums of cash at the last minute. This is especially the case if you have two big financial considerations, such as retirement and your children’s higher education. However, retirement should arguably be the top priority, as you don’t want to be a burden on your kids, and there are sadly no scholarships for reaching 65.