THERE are some persons who believe they need to earn a substantial income to guarantee a comfortable lifestyle in retirement.

Because of this perspective, some people are not motivated to save for retirement and make the mistake of delaying retirement planning. Being a high-income earner does not guarantee a retirement of ease or wealth. It has to do with one’s mindset. For some individuals the more they earn the greater their expenses. There is the propensity to spend on wants rather than needs. Higher education is not the formula for a sizeable retirement nest egg. The implementation of financial principles is the key to financial success in retirement and it doesn’t matter your educational background or the size of your pay cheque. One fundamental principle towards successful retirement planning is to “pay yourself first” like a bill. Think about it. How much money do you spend on indirect taxes? How much income tax do you pay? The Government gets paid from your salary before you are paid.

There is a reason the income tax system is called PAYE — Pay As You Earn. But you can design your own system and save as you earn by paying yourself first, before paying your monthly bills. Once you decide how much you want to save or invest, automate your retirement savings and investment payments through salary deductions, standing orders, or online payments. Consider the money you put aside for retirement as your “self-imposed tax”. Pay yourself first in the same way that your PAYE is paid first. If you increase spending from your income, it means more of your disposable income is being spent on General Consumption Tax (GCT) or indirect taxes.

The power of locking away funds in a retirement account allows for the multiplication of your funds into huge amounts over the long term. This is due to the wonder of compound interest. Small amounts consistently saved over time will grow into enormous amounts, but it requires patience and consistency. The more frequent funds are added to your retirement account the greater the compounding. Many people fail to understand the impact of compounding and therefore disrupt their savings or their investments by making frequent withdrawals from investment accounts which retards the compounding and the ballooning of their investments.

Compounding interest works beautifully with retirement plans because the funds are locked away. Currently, in Jamaica, while saving for retirement, you cannot access the funds until retirement, or if death happens your beneficiaries will receive the payout. In some countries, contributors can access their retirement funds under special conditions, but it comes at a cost, as their pension funds can be depleted. Remember, your pension funds are needed for a time when you are no longer working full-time or have ceased working altogether.

The earlier you start saving for retirement, the greater the impact of compound interest working for you. You may not have your own business, with people working for you, but there is a formula that never ceases to work for you if you keep it employed in your retirement and investment accounts. Compound interest works if you work it. Please note that compound can work against you when paying interest on loans. Compound interest on retirement and investment funds helps to make you a masterful investor. The frequency at which you save or invest and the longer you keep adding funds to the accounts, compound interest allows your money to grow much faster with time.

The contributions may seem small or insignificant at first but the consistency of the contributions to your pension fund is the key to the growth of your retirement nest egg. You earn interest on accumulated interest plus principal. This is the reason employees or pension contributors should start saving for retirement early. It’s best to save the maximum contribution allowed by law to your retirement account or start small and increase gradually over time. Supplement your retirement savings by investing.

Let’s look at the story of an investor by the name of Theodore Johnson. He worked at United Parcel Service (UPS) for 28 years. Johnson started investing as soon as he started working. He decided to impose his own 20 per cent tax on his salary by investing 20 per cent of his salary in UPS stocks. When he retired in 1952 he had amassed US$700,000 in company stocks. He only invested in the company he worked for because he believed that it was an excellent stock to own. After spending 39 years in retirement, the value of Johnson’s stocks was US$70 million. That’s the wonder of compounding. The annual growth rate of his investment was 11.9 per cent per annum. Johnson proved that you can create a fortune if you are patient, disciplined, and consistent. He was a “buy and hold” investor. This means he kept buying stocks and reinvesting the dividends regardless of the price or the economic conditions. His fortune grew faster in retirement than in the earlier years. Time is a key factor in accumulating wealth. Hence, long-term investment is important for financial success. He later established an education fund for less fortunate children attending college. Johnson lived a long life in retirement and died at age 91.

Someone once said that the rich and the poor are both consistent. I paraphrase, “The poor, consistently spend and remain poor and the rich consistently invest and become richer.”

Grace G McLean is a financial advisor and retirement specialist at BPM Financial Limited. Contact her at gmclean@bpmfinancial or visit the website: www.bpmfinancial.com. She is also a podcaster for Living Above Self. E-mail her at livingaboveself@gmail.com