Understanding retirement costs today is crucial. As people live longer and workplace pensions decline, individuals must take on more financial planning than in past generations.
Use your supports
Several key supports simplify retirement planning beyond standard investing. Alongside personal savings, savers benefit from tax relief and, often, employer matching contributions. Most importantly, tax-free compounding greatly increases the growth potential of retirement funds.
The key pillars to building a retirement fund (employee example)
- Your investment – this is the monthly you have taken from salary
- Tax-relief – this is the value of the tax that would have been taken from your wages that is re-directed back into your retirement fund.
- Employers (where they offer it at work, this is often granted after probationary periods have expired and also, there are so-called 2-year rules).
- Compound growth – this is the secret ingredient and the golden rule to make this really make a difference to your final retirement nest-egg is time. The sooner you begin, the more time tax-free compounding has to provide benefit.
Impact of compound growth
What is key in retirement planning is the impact of compound growth. Simply, this is the impact of money earning money each and every year. Provided one starts a retirement account at a reasonable young age, the final retirement fund is likely to have grown more from the combined compound interest than from the combined contributions (from you, your employer and the value of the tax-relief).
