But the truth is that saving for retirement and disability pension is a serious matter that should be planned as soon as possible. There are many reasons for this, but the main reason is to gather good savings that will not cause you to lose purchasing power when you are older.
If you ask any savings or investment specialist, they will tell you that timing is one of the keys to healthy savings. Therefore, the earlier you start saving for retirement, the better your long-term results will be. We will try to explain the reasons why.
Saving for retirement is better with plenty of time
For many people entering the labour market for the first time, retirement seems distant and of little concern. Generally, expenses in our youth are more immediate and we do not pay much attention to the future.
However, the reality is simple to understand: for most people, retirement will mean a loss of purchasing power as income is reduced. This means that an additional amount will be needed to compensate that loss of purchasing power. Time is considered as being the long-term saver’s best friend.
The reasons for this are quite clear: The longer we save the more money we will have been able to put into savings. Saving $100,000 over 40 years will not be the same (nor will it require the same financial effort) as saving it over 10 years.
By spreading the savings over more years it is possible to make smaller contributions. The same example applies here as in the previous point: if we spread an amount of money over more years, the contributions needed to collect it will be smaller. In addition to these two factors, there is another essential element to understand the importance of saving for retirement at an early age: compound interest.
Why is compound interest important for your retirement?
Compound interest is one of the main tools for retirement savings. Compound interest has traditionally been defined as the saver/investor’s best friend. To explain it simply, we could say that it is a process in which money grows exponentially by accumulation of intterest previously earned on savings.
For example: let’s imagine that we save $10,000 per year at a rate of return of 10%. The first year, the interest will be calculated on the first $10,000, but the second year it will be calculated on the capital contributed, plus the profit, plus the new contribution, i.e., $21,000. This is applied progressively, generating the so-called snowball effect which, in the long term, multiplies the capital at great speed and makes it grow exponentially.
When is it recommended to start saving for retirement?
As soon as possible. Probably the best idea would be to start saving for retirement almost as soon as you have some kind of regular income. Of course, this should be applied immediately upon entering the labour market and keep the savings constant over time.