There’s a Chinese Proverb that says, ’The best time to plant a tree was ten years ago. The second best time is today.’ And, in its simplest terms, the same is true when it comes to starting a retirement fund.
It might feel like there is a whole load of variation here. Some people will be happy to retire at 65. Some folks are planning on working well past this age. Some are already tired of working and are coming up with schemes to make sure that they can retire by the age of forty. For some, retirement looks like luxury holidays, fancy meals out and no let up on the shopping spree. Others might have simpler pleasures in mind.
Figuring out what you might actually need in retirement can be hard enough - and putting off doing the maths can lead to a failure to do anything at all towards retirement planning. But when it comes to figuring out how to fund your retirement, there’s really not a complex message. If you want to retire - ever - then you need to get that pension pot moving in the right direction.
If you’re still sat on the pension fence, mulling over what to do - and when to get started - then here is some food for thought.
Start in Your Twenties - The Arguments
There are very few people in their twenties who are thinking of retirement already. Finishing education and setting out on the career ladder are not things that will get you thinking too hard about drawing your pension. But they really should.
It is precisely because retirement is so far away, that your twenties can be the best time to make a start on your retirement fund. The beauty of time and compound interest works seriously in your favour and makes every penny saved at this stage worth so much more by the time you jack it all in. Perhaps even more powerfully, starting early can help set healthy savings habits which can last a lifetime and make a massive difference to your financial stability in the long term.
Of course, there is a counter argument. Your twenties are likely to be a time when student and consumer debt is high, you might be saving for housing costs, transport and for everyday needs. Most likely your earnings at this stage are as low as they ever will be, making squirrelling away cash an unattractive proposition. What’s best depends on your individual circumstances but if your employer offers a healthy match to your contributions, for example, then scrimping elsewhere to pay some money into a pension account is a smart bet. Free money from the boss is usually worth tightening the belt for, even if you won’t be able to get your hands on it for a while.
In the UK, pension contributions are eligible for tax relief, meaning you get £100 for every £80 paid, and because most employers must now offer a pension scheme and contribute at least one percent salary contributions towards your retirement fund, it is well worth checking out what your boss can offer.
However, if you have high amounts of consumer debt, which is costing a fortune in interest, then paying this off might be your priority right now. Make sure you take specialist advice if you are unsure.
The Case for Starting in Your Thirties
If your twenties are a tough time to save because of student debt and finding your feet in the world, then your thirties are a perfect time. Right?
Unless of course, you’re starting a family, getting married, or going through any of the other life stages that tend to require a substantial savings pot of their own.
But if you have not got a retirement fund started already in your twenties, then by your thirties, even if you have competing demands, you might be feeling a little bit antsy by now. And rightly so.
The magic is in the compound interest, you see. Check out this calculation, which shows two people starting to save either at age 20 or age 40. If the twenty year old saver saves only £20 a month, while the 40 year old saver tucks away £40 every month, they will both have the same amount to their accounts by the time they hit 60. However, the person who started saving aged 20 will have benefited from an additional twenty years of interest, meaning her pot is now worth significantly more, with more than double the amount of interest accrued than that of the older saver.
In your thirties you probably still have the time to make a significant difference to your savings pot by leveraging the power of compound interest. It’s hard to find a good reason not to get moving at this stage in life.
And if You Hit Your Forties And Beyond With No Retirement Fund...
The longer you leave it, the more important it is that you seek decent financial advice from a qualified professional about the best ways to start your retirement fund. Online calculators can help you work out the balance between what you want and what is affordable, and you still have the time to think about a variety of different options. For example, the closer you are to the age you wish to retire, the more certainty you are likely to want in your investments. If you’re prepared to be flexible about when you retire, then you may have more flexibility in your risk tolerance, and this could pay dividends for you. But the best thing you can do is ask for professional help on the matter.
An increasingly popular option is to continue working in some capacity past traditional retirement age. If you’re considering this then your retirement fund may not need to be quite so hefty, after all. You could develop new and marketable skills and start to consider how to monetise the things you enjoy to supplement the income you have - but it’s smart to have a fall back plan in case ill health or personal circumstances stop you from doing this. Either way, the longer you leave your retirement fund to grow, the better your potential annuity will ultimately be.
See Also: Retirement Strategies For Freelancers
Retirement these days can last for a significant proportion of your lifetime, and should be something to look forward to. It should be about luxurious holidays and carefree time with friends and family. But without a decent retirement fund you might find that your thoughts are more occupied with making ends meet.
Given changes to state pension in most parts of world, which mean that more of us will have to wait longer to get any benefits from the state, it is not wise to rely on any governmental pension to keep you afloat in later life. The smart thing to do is plan early - as dull as it might seem, it will ultimately mean you get better bang for your buck, whether you stick with a company pension plan or diversify into other asset classes. But I promise you, budgets are sexy. After all, nobody wants to get with a financially feckless partner. So for the sake of your love life if nothing else, take some financial advice now, and make sure that you are making your money work as hard as possible for you in the long term.