When deciding how much money to set aside for the future, parents frequently find themselves in a pickle, given the current state of the economy.
What should you save for first? Your children’s education, but then when will you retire? As a new parent, I have been thinking about this question myself as well.
Many people put off beginning their retirement savings because they think it is more crucial to save money for their children’s education as logically, your child will go to university before you retire so funds need to be available for that first. They believe that after their children have begun working, they will be able to make up for any lost retirement savings. Many South African parents even hold the view that their children will be able to care for them in their old age if they receive a decent education.
Saving for retirement should always come first in terms of financial priorities. My reason for saying that is as follows:
While you can borrow money to pay for your child’s education, you cannot borrow money to live off in retirement.
Bursaries and student loans are some of the several possibilities that are available for your child, with student loans having better interest rates than normal loans.
Many people are financially supporting both their parents, who did not save enough for their own retirement, as well as their children. And chances are good that you’ll live longer than your parents do. Do you really want to burden your children with such a large financial load when they will have their own families to support?
Your children must begin setting aside money for their own retirement as soon as they earn their first paycheck. The most effective approach for kids to acquire this crucial lesson is through imitating your behaviour. Albert Einstein has a famous quote, “Compound interest is the eighth wonder of the world. He who understands it earns it … he who doesn’t … pays it.”
Your retirement savings will grow exponentially the sooner you begin, up to the day of retirement.
The general rule of thumb states that if you begin saving in your 20s, you will need to save at least 10% of your monthly income to receive a pension at age 65 that is equal to 60% of your final pay. However, if you start saving in your 30s, this percentage rises to 15%, and if you wait until your 40s, it rises to 20%. Seeing that most people have children later and you only start saving for retirement in your 40s, you will have to use a bigger chunk of your monthly income to fund retirement.
Retirement savings should always be prioritised, and if you still have extra cash left over, you can set aside some funds for your children’s schooling. Speak to a financial advisor to calculate your retirement needs and design an investment strategy appropriately to your needs. There are many options to consider for retirement savings plans, an advisor can guide you to use the option best suited to your specific needs.