Ensure you retire rich – save that raise

I’ve written before about planning early for a healthy and prosperous retirement, and in that vein, here is a simple tip to boost your retirement savings and to ensure you live within your means.

Around the world, a retirement planning heuristic involves saving about 10% of your income from the moment you start earning, over and above any Government supported retirement planning. The corollary of this implicitly means you’re spending the other 90%.

OK thats fine when you are young and your pay is meagre but continuing to do so over time means you’ll also be saving (only) 10% of any salary increase you have (and zero of any bonus you achieve) and implicitly your standard of living increases by 90% of every raise you receive in the future, and 100% of any bonuses you receive!

To boost your retirement savings how about planning to spend “just” 50% of each pay raise you receive in the future (and this implicitly means saving the other 50%). Plus consider making one time deposits into your retirement savings of 50% of any bonus, leaving you to spend the remaining half.

The end result of such an approach is that increases in the standard of living are more controlled way and positively your savings grow exponentially (to more than 20% of income within just a decade, even from a starting point of 0%!), and you can even retire early… all while feeling like your lifestyle is steadily rising as you’re still committed to spending more every year, just not increasing as rapidly as saving 10% of your income (and spending the rest).

You may not wish to do this, especially if you believe you desire to invest in a home and need to save for a deposit and then pay for the mortgage repayment. But even if done in the first decade of your working life, it will give your retirement savings a real and sustained BOOST when the impact of compounding interest is at its greatest.

How long people expect to live in retirement versus how long they expect their retirement savings to last (expressed in number of years)

retirement_planning_article_4_graph-1

 

red; Years of retirement

grey; Years of retirement savings will last

Source: The Future of Retirement: A New Reality (February 2013)