Investment Research Group
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Our conclusion: There is no better time to start saving for retirement if you haven't started. This might seem like a strange thing to say but it follows some logical thinking.
Investing for retirement is a long steady process. It first requires a decision to cut some consumption in favour of investment and consistently shifting money from your monthly earnings into a growth asset of some kind - shares and property mainly - and doing so through a system of drip feeding.
The best time to start is in a period of falling asset values. Every month your $2000 (or whatever it is you are putting away) is buying more shares or units in a falling market.
When the value of the shares eventually recovers you find that your entry price was quite low thanks to dollar cost averaging, which is a well worn phrase but irrefutably successful way of investing.
There are two schools of thought about retirement investment. There is the long held belief that you first have to pay down debt - the mortgage in particular - before you can start saving and investing for retirement.
This follows the logic that no investment is going to give you a higher return than the gross cost of paying a mortgage, which is the equivalent of mortgage interest running at around 9% plus your tax rate. So you should only invest if your can get a return equivalent of 9% plus tax which is around 12%, and you will not find a safe investment paying that so pay off your mortgage instead and only save for retirement when the mortgage cost has disappeared.
However there is another view that you should start investing for retirement even while you have a mortgage no matter how small the initial investment because only then will this become your lifetime habit.
There is some anecdotal evidence from those who spent half their lives paying a mortgage that they simply increased their consumption once the mortgage was gone instead of keeping consumption the same and investing the old mortgage payment. This is human nature after a lifetime of denying yourself the luxuries of life.
Starting to invest late in life is certainly better than not investing at all. But our experience with this type of investor indicates a tendency to panic that the experienced investor does not share.
The long term investor begins to understand cycles the way the long term farmer understands seasons. A very poor crop will invariably be followed by a much better one, and the money lost in one season is made up in the next. The main thing is to stay on the farm.
The late starter does have a problem in that the time horizon to retirement has been shortened and this reduces the options. However, the advent of portfolio management can greatly reduce the risk and volatility up to retirement.
The greatest challenge of all is to forego consumption for investment. Among leading sports figures, some are very well off in later life when they stop playing sport, and some are very poorly off. The main difference between these two groups is not how much they earned in their peak but what they did with the money.
Few can doubt that the over US$400m Mike Tyson earned should have been enough to retire, if only he had invested.
