Delayed gratification

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Delayed gratification

By Lesley Hohne CFP®, Director - Sterling Private Wealth

Compounding is the 8th wonder of the world, but it requires time to have a meaningful impact.

Our attitude towards ageing is shifting culturally and that requires shifting in our financial plans. If we are going to be healthier and fitter for longer, our finances need to be fit too.

This becomes increasingly challenging because instant gratification has been entrenched in our culture.

I can order any meal I desire via an app on my smartphone and it arrives at my door in 20 minutes. No sitting in the savouring of anticipation or looking forward to something. I can satisfy my impulse immediately at the push of a button.

In a world where food of any flavour arrives at my doorstep in 20 to 30 minutes after I desire it and so many other wants can be fulfilled in the blink of an eye, it is a challenge to hold the course for retirement savings for a client whose expectations are increasingly short-term.

There is no shortcut to compounding and we have to hold our clients through the discomfort of delayed gratification.

To give a simple example, let’s say we saved R1 million from age 20 to age 40 and did not add another cent but invested in a preservation fund. Assuming an 8% return, after nine years it would be R2 million, after 14 another years it would be R3 million, after 18 years R4 million, 20 years R5 million, etc.

Compounding requires time to have a meaningful impact, which can be significant. The problem is that the benefits don’t show in the first 10 to 15 years when people often get frustrated and withdraw their retirement savings (if they can when they change roles) looking to invest them in hotter returns or to buy a new car for example. This is damaging to your ability to retire.

It is important to educate clients about how, if they could delay retirement for a few extra years, they could unlock the major benefit of compounding that happens at the latter part of the investment journey, which could fund their longer, more vital older age, and help them live their best retirement lives.

Compounding only unfolds with the fullness of time. To stay in the dance with the markets through the ups and downs over many years allows one to reap the rewards of delayed gratification.

Overall, delayed gratification positively influences an individual’s investment decisions by promoting long-term focus, risk management, goal setting, avoidance of impulsive choices, wealth accumulation, and better financial habits. These factors contribute to improved investment outcomes and the potential for long-term financial success.

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