One of the underlying attributes of Australia's superannuation system is that it starts young adults saving for retirement as soon as they join the workforce.
Without compulsory super contributions, many millennials – aged in their twenties to thirties and also known as members of Generation Y – may have second thoughts about saving for retirement early in their working lives.
Any reluctance to begin saving for retirement at a relatively early age is understandable given that their post-working days might be 40 years away or so.
A challenge, of course, is to convince millennials that saving for the really long-term is worthwhile. And part of that challenge is to persuade millennials about the value of adding to their superannuation guarantee (SG) contributions in such ways as making salary-sacrificed contributions.
A recent New York Times personal finance feature – For millennials, it's never too early to save for retirement – comments that it is “perennially true” that most young adults don't make retirement savings a priority.
However, its author tellingly adds, “millennials are in an ideal position to get started” because their perhaps seemingly modest regular savings have the opportunity to grow substantially over time.
The article is largely based on interviews with five people aged 28 to 32 about their attitudes towards savings and investing. The interviews produced some surprising and not-so-surprising responses.
For instance, a 28-year-old accountant interviewed has been saving for retirement since she was 17 and arranges with her husband for one of their salaries be saved each pay day. However, several of those interviewed recognise the need to properly save for retirement yet have never quite got around to it.
High in the reasons why young adults should begin saving and investing as early as possible is to reap the rewards of what is sometimes called “the magic of compounding”.
Compounding occurs when investors earn investment returns on past investment returns as well as on their original capital. And the compounding returns can really mount (or compound) over the long term – particularly the extremely long term.
Ways to get the most out of compounding include:
- Start to save and invest as early as possible in your working life with as much as possible. Compounding needs plenty of time to produce its best results.
- Invest regularly to keep building your investment capital and to accelerate the benefits of compounding.
- Adhere to an appropriate long-term asset allocation for your portfolio – with enough exposure to growth assets.
A perhaps overlooked attribute of compounding is that disciplined investors who reinvest their earnings are less likely to be distracted from their long-term course by the latest market noise such as a bout of higher market volatility. Meanwhile, there returns keep compounding.
Current retirees who had recognised the value of compounding at the beginning of their working lives should now be enjoying its rewards.
Head of Market Strategy and Communications at Vanguard.
29 January 2017