Millennials are typically those between the ages of 21 and 34. With a retirement age of 62 in Singapore, they have 28 to 41 years before they call it a day. And if millennials wish to retire well, investing their money is something they must do right away.
A recent survey in Singapore by Manulife showed that millennials are starting to save from a younger age, which is good. However, they are prioritising saving for their first home over retirement plans. The average millennial should start saving and investing early if he or she would like to retire well at the age of 57 with a cool S$1.45 million, as cited in the Manulife study.
Time does wonders
The famous physicist, Albert Einstein, is believed to have once said that compound interest is the eighth wonder of the world. He went on to say, “He who understands it, earns it… he who doesn’t… pays it.”
My interpretation of the quote is that compound interest is so powerful that if one knows how to use it to his advantage, he would do well financially. On the contrary, the person who ignores it faces the risk of missed opportunity.
The beauty of compound interest is that the longer and earlier you invest, the stronger your money will compound. Time is of utmost importance here, as demonstrated from the compound interest formula below:
FV = PV × (1+r)n
where FV = Future Value; PV = Present Value; r = annual interest rate; n = number of periods
The longer the period, n, the more compounding can occur, creating a larger ending amount, FV.
As such, a millennial at the age of 21 would have a longer time to compound his money before retirement as opposed to another millennial at 34. Those 13 years would make a massive difference of around S$231,000 if S$10,000 were invested at 9% per year from their respective ages till retirement at 62.
What’s investing and what’s not
Investing doesn’t mean leaving our money in the bank. Banks give us paltry returns of around 0.05%. Contrast that with Singapore’s long-term inflation at about 2.6%.
Without any proper investment, our purchasing power will get eroded by inflation. This also means that our hard-earned money left in the bank is being eaten away by the inflation monster every day.
What investing the correct way does is that it allows us to earn returns higher than inflation. For the past 10 years, investing in an index fund tracking the Straits Times Index (SGX: ^STI) would have produced an annualised return of 9.2%, including dividends. Investing in companies that have sustainable competitive advantages and great prospects could deliver higher returns.
The Foolish takeaway
It is never too early to invest. World-famous investor, Warren Buffett, bought his first stock when he was 11, but he regrets not starting earlier. Millennials who would like to retire well when they are 57 with more than a million dollars should prioritise investing for retirement earlier in their lives. Only then can they allow the power of compounding to take effect, just like how Buffett managed to amass his riches throughout the years.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Sudhan P doesn't own shares in any companies mentioned.