With the increased cost of living, people are understandably worried about whether they have a large enough nest egg to sustain the comfortable retirement they have long envisaged. In this two part blog, we will dive into the importance of starting pension contributions early and some of the benefits of continuing pension contributions beyond your employment retirement.
The first part focuses on starting early:
The early starter versus the crammer
There are different types of savers. The early starters are those who begin contributing to their pension as soon as they enter the workforce. They develop a habit of putting money away each month and their fund picks up momentum, even if gradually to begin with whilst on relatively modest earnings. When they retire, the size of the fund compared to the sum of their contributions makes them feel glad to have started saving when they did, allowing them to sustain their desired lifestyle in retirement.
The crammers on the other hand, don’t start putting money away early, concluding they are too young to start worrying about things like this. This ultimately gives them less time to build up a large enough pension pot to afford their desired lifestyle. Later in their careers they either need to put more money away or are forced to target a high rate of growth, taking on a bumpier investment journey than they might be comfortable with. Increasing contributions sufficiently may not be possible depending on their personal cashflow at that stage of life and a higher risk investment strategy may keep them awake at night in the run up to retirement.
What is the point of mentioning all of this? Well, the success of your retirement savings journey is not just down to glamorous things like investment performance. Getting the simple things right, developing a habit of saving and starting the snowball effect of compound returns sooner rather than later will undoubtably improve the chances of you having the retirement you dream of.
Show me the numbers
If you save £5,000 per annum into to a pension and leave it for 20 years, earning a 5% per annum return, it will turn into £165,330. This will have only cost £80,000. This is because your £5,000 contribution only costs you £4,000, the government give a 20% bonus to your contribution, in this case, £1,000 per annum.
If we increase your annual contribution to £20,000 then the final figure after 20 years would be starting to get into big numbers, over £600,000.
The big takeaway from any analysis we do on contributing to a pension is starting early, joining your employer’s scheme to maximise your employer’s contributions and holding as much of your pension investment in equities will provide you with the best opportunity to build a significant pot for retirement.
If you want to be talk about how to maximise your chances of having a retirement pot large enough to help you do all the things you’ve dreamt of being able to do, please contact the author Iain Harper Associate Director at Carbon.
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