Benefits of Early Retirement Saving

By Danielle Brown

Many people in their 20s and even 30s think, “I’m young!  I have plenty of time to start saving for retirement.” But retirement age can creep up quickly. If you have relaxation and travel in mind for your retirement, you need to make sure you have enough money to support that.  The key is to start saving as early as possible and as much as possible. 

Benefit 1: Compound interest

Saving for retirement can be as simple as opening a regular savings account and depositing a set amount every month; however, if you really want to see the benefits of saving early, you need to open a pension account.  Unlike a savings account, where your money just sits there until you’re ready to use it, in a pension account, your money is invested and you benefit from two of the sweetest words in the English language: compound interest. 

According to Investopedia, compound interest is the interest on a loan or deposit calculated based on both the initial principal and the accumulated interest from previous periods. 

For example, let’s say you deposit $500 in your pension account and the interest rate is 10% per annum. At the end of the first year when interest is calculated, you would have earned $50 in interest. In other types of investment, this $50 would have been paid out as dividends; however, with a pension account, that interest is added to the money that you initially deposited, so now you have $550 saved.  In the following year, when interest is being calculated again, it will be calculated on the $550 in your account, and you will earn $55 in interest, which is added to your account and the cycle continues. While the interest rate stays the same, the principal amount increases regularly. 

When it comes to compound interest, time is your friend. The longer you save means your money goes through more cycles to earn more interest, which means more money when you’re ready to retire. The later you start saving means you have less time to benefit from compound interest, which also means that you will have to save more later in order to have enough money to live when you’re ready to retire. 

Saving later may be harder to do. The older we get, the more financial responsibilities we have such as children, health expenses and mortgages. That doesn’t leave much disposable income to save. 

Benefit #2: Pay less taxes

Another benefit from early retirement saving is that you are able to pay less taxes.  According to Head of Pensions Administration at PROVEN Wealth, Trecia Gay Clarke, you get tax benefits up front, during the life of the plan, and at retirement.

“The benefits that you get when you contribute to a pension arrangement, you don’t get elsewhere…  When you contribute to a pension plan, these contributions are the first call on your income.   Whatever you give to a pension scheme or to a pension fund, it comes out of your salary before income taxes can be calculated on it,” explained Clarke.  

Additionally, Clarke noted you receive another tax benefit through tax-free interest that accumulates on your investment.

“Whatever interest income is earned by retirement schemes and pension plans, that income is actually tax-exempt, so we don’t pay taxes on whatever interest income is earned by the fund manager when the fund manager invests those monies for pension plans,” she added.

Moreover, when you retire, you can collect up to a quarter of your pension benefit as a lump sum, tax-free.

The earlier that you start making contributions towards your pension means the more time you have to benefit from paying less taxes.

Approved retirement scheme

If the benefits of compound interest and less taxes have convinced you to look into starting a pension as soon as possible, you can look into an approved retirement scheme such as PROVEN Rock by PROVEN Wealth.  This is open to both companies and individuals. Members must be between the ages of 18 and 70. 

PROVEN Rock offers members the flexibility to decide when to retire as the Scheme allows retirement between the ages of 55 and 70. It also allows you the flexibility to decide how often you want to contribute, though you are required to contribute at least once a year to remain an active member. There’s also flexibility to decide how your money is invested through four Pooled Funds.  Members can choose an investment mix that works for them.  

The law currently does not allow you to contribute to more than one pension at the same time or to get a refund directly from an approved retirement scheme or approved superannuation fund.  If you switch jobs or transition from employed to self-employed and vice-versa, you can transfer your contributions to your company’s approved retirement scheme or approved superannuation fund and start making contributions with your company. 

Another option is to become a Deferred Member, where your accumulated contributions stay with PROVEN Rock and continue to earn interest, while you make contributions with your company. When you retire, those funds are still available along with your company pension. At any time, you’re always able to transfer back. As your employment status changes, your pension can change with you.

Start early

The idea that you have to reach a certain income bracket before you can start saving for a pension couldn’t be further from the truth. In fact, the required minimum contribution is 5% of your income, and the law does not allow you to contribute more than 20%. Five percent may not sound like a lot of money, but the earlier you start to save and compound interest means that 5% will add up.  The younger you are when you start to save means that you won’t have to contribute as much money as someone older in order to have a substantial pension when you’re ready to retire. The later you start means that you will have to save closer to 20% of your income in order to make up for lost time.  Remember that your pension is a result of how much you put in, so even if you can afford to give less because you have the benefit of time, always aim to give as close to 20% of your income as possible.