As 2013 draws to a close we would like to remind you why saving sooner is such an important principle to apply to your own life and to instil in those around you.

The two important factors that we would like to highlight here are how soon you invest and in which assets you invest.

Let us put ourselves in the shoes of a 25 year old who aims to retire at 65. This means that you will have 40 years to accumulate the capital required to retire comfortably. Next we have to decide how much money we would require at retirement to maintain our standard of living.

Let us assume that you would like to retire with R 40,000 pre-tax income per month which you extract from your investments. As we recommend that our clients do not draw an income greater than 5% of their capital per annum we have to aim to save at least R 9.6million at retirement.

Unfortunately it is not quite so simple. The purchasing power of our money is constantly eroded by inflation, which means that R 40,000 will buy considerably more today than it will in 40 years’ time. So let us assume that inflation will average 6% in the future. This means that we will need a monthly income of R 246,857.23 in 40 years’ time to purchase the same basket of goods that R 40,000 can purchase today. Our new savings target is R 98,742,892.20 in 40 years’ time.

The question we now ask ourselves is this:

How much do I have to save per month to achieve my retirement savings goal?

We assume that we want to invest the same amount every month and that we are able to achieve a return on our investment of 10% per annum. The table below illustrates the monthly contributions that would be required if you begin saving 40 years prior to retirement or delay your savings start date by 5 year increments.

The final column in the table above is the “Multiplier”. This figure is simply your final retirement capital of R 98,7422,892.20 divided by the Total Contributions made.

What is important to note above is that if you started saving 40 years prior to retirement and achieved a 10% annual return then you would only need to save a total of R 8,471,834.54 to achieve your retirement goal of R 98,7422,892.20. However if you decide to delay your savings until 20 years before your planned retirement date you would have to contribute a total of R 32,733,050.49 to achieve the same retirement goal of R 98,7422,892.20.

Now that we have illustrated how time can significantly lower the total savings required to achieve your goals we need to consider the next important factor which is the return you achieve on your investments over that period.

The table below is identical to the one above except that the annual return has been increased to 20% per annum.

The difference that the increased annual return makes is remarkable. If you are 25 and wish to retire with R 98,7422,892.20 you need only save R 1,013.71 per month if you can achieve a 20% annual return. This means that you would only need to save a total of R 486,580.34 during the 40 years prior to retirement.

This raises an important point which is the exposure that clients have to growth assets within their investments. To achieve a return of 20% annualised over the long term is no mean feat. Investment professionals that have managed to achieve these returns over long time horizons have been hailed as “geniuses” and “oracles”.

The luxury that a long time horizon gives to an investor is greater certainty. Not in terms of the absolute performance that they will achieve but in terms of the relative performance that they can expect. We know that Equity and Property assets should outperform Bonds and Money Market assets over long time horizons albeit at higher levels of short term volatility. This means that a young investor can invest with greater certainty in more volatile growth assets because they know that they are giving their savings the best possible chance of delivering a high return relative to other asset classes.

Our message is simple:

 Start saving as soon as possible and invest appropriately, a long time horizon and decent rate of return are the most important ingredients to provide you with a comfortable retirement.