Advantages to planning early for retirement

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April 03 2019
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It’s necessary to prepare for retirement by creating a reasonable plan to ensure financial independence during your golden years, yet some people choose to push back their retirement planning until they’re much closer to it. However, this is often one of the biggest mistakes you can make.

Advantages to planning early for retirement

Planning closer to your retirement years may force you to double or triple your efforts in order to catch up to achieve your retirement goals. It’s only by creating a retirement plan early that you get the chance to maximise your retirement savings.

Below are a few reasons why applying retirement planning strategies early may prove advantageous:

You get a clear idea of your financial standing
Time value of money
More opportunities for income-producing activities
More room to accept risks from growth assets

You get a clear idea of your financial standing

A critical part of retirement planning – regardless of which phase in the process you are in – is knowing your financial standing. Planning early can help you visualise how your financial decisions can impact your retirement savings and lifestyle.

You need to evaluate your objectives, income and expenses, and draw up a reasonable plan accordingly. Planning for retirement early would help you to look at your finances objectively and make necessary adjustments to your lifestyle and strategies as your personal and work circumstances change.

For instance, you may temporarily lower your non-concessional contributions to your super fund as you prepare to welcome a child. You may also increase your concessional and non-concessional contributions when you receive a pay raise or bonus.

What’s crucial here is for you to develop healthy money-saving habits as early as possible and acquire the knowledge and skills to achieve your financial and retirement plan. You may make more money mistakes at a younger age, but you also have more time to address issues and get back on track.

Time value of money

Time value of money (TVM) is the notion that the money you hold in the present is more valuable than the same amount of money in the future. This belief is based on the idea that the money you have in the present can be invested and will increase in value over time. The increase in value comes from the investment returns.

If you plan early and invest in your 20s for retirement, the value of money that you have can grow larger because you have TVM on your side if you keep your money in the investment market.

Likewise, investing your money in a diversified portfolio of investment assets can protect your money from the effects of inflation.

What makes TVM advantageous is that you gain more income from investment returns the longer you stay in the market because of the power of compound interest.

More opportunities for income-producing activities

Your professional life may not always go the way you envisioned it, and this may lead to inconsistent contribution to super, savings and investment. However, planning for retirement at a young age means that you also have more opportunities to take up a side job or two for extra income, which can be used as additional retirement savings.

While taking up casual jobs is not necessary, it can be a good way to earn income to invest in the present instead of waiting until you’re older when it may be more difficult to take on multiple jobs.

It may also be necessary to consider your health because it may decrease your working time and force you to retire earlier than planned.

More room to accept risks from growth assets

You expose yourself to potential partial or full loss of your investment when you accept higher risks, so it’s only logical to move a larger portion of your portfolio to safer assets, such as bonds and blue chip shares, as you get closer to retirement. However, this move may also limit your chances for growth if you start planning closer to your expected retirement age.

There are two main reasons that make investing in growth or risky investments when you’re close to retirement a bad idea:

You have to accept risks outside your comfort zone, but you may still end up losing part or all of your invested money.
If the investment declines, it may take longer (i.e. past your planned retirement age) to gain back.

By planning early for retirement, you have enough time to address losses and execute different strategies to get better investment returns. Your early planning for retirement may even afford you a comfortable early retirement.

It’s never too early to plan your retirement

Retirement professionals say that it’s never too early or too late to plan your retirement, but all of them also agree that it’s better to plan earlier to reap more benefits.

You can start with a simple retirement planning checklist that outlines all your goals so that you have an idea of what to aim for and the different ways you can potentially achieve them.

If you have difficulty creating a plan, seek advice from a licensed professional who can take your current circumstances into consideration and give appropriate recommendations.

About the author

Louise is a content producer for Momentum Media’s nestegg who likes keeping up-to-date with all the ways people can work towards financial stability in 2019. She also enjoys turning complex information into easy-to-digest, practical tips to help those who want to achieve financial independence.

About the author

Louise is a content producer for Momentum Media’s nestegg who likes keeping up-to-date with all the ways people can work towards financial stability in 2019. She also enjoys turning complex information into easy-to-digest, practical tips to help those who want to achieve financial independence.

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