Save clever: how money saved early in life works hardest for you

31st October 2014


Saving for retirement may not be top of most young people’s to-do list but the pounds squirreled away earliest will work hardest for you over your life.

As many of nine million more people will start saving for retirement by 2017 due to the government’s auto-enrolment scheme and while workers will have the opportunity to opt out, Andy James, head of retirement planning at advisory firm Towry, has urged them not to.

He said not only will starting saving early get individuals into good habits but money saved, even a small amount, can have a large impact over time.

This is due to ‘compound interest’ – which Albert Einstein described as the ‘eighth wonder of the world’ – your money can add up significantly. Compound interest is interest that is added to your savings that then earns interest of its own without costing you anymore and is very valuable when saving over the long term.

A 30 year old who saves 5% of their £40,000 income over the 35 years to retirement would have a pension fund of £153,196 when they retire at 65, with the fund growing at a modest 4% per year.

In contrast a 50 year old who puts 15% of their £40,000 salary into retirement for the next 15 years would only have £124,947 in their fund despite making larger deposits. This difference is due to compound interest, said James.

‘For many the notion of saving for a pension at a young age feels tough at a time when many are looking to get on the property ladder, paying high rental costs, or clearing their student loans,’ said James. ‘However, where there is some money to spare, even small pension contributions made over a long period of time can make a significant difference to your retirement fund – much more than trying to create a pension in its entirety later in life.

‘While hard pressed individuals will rightly have a priority of paying down expensive debt it will be important not to miss out on any contributions that their employer will make on their behalf if they agree to make payments themselves.’

‘If goes without saying that the more you save over your working lifetime, the better, and many would hope to have an eventual retirement fund far in excess of £150,000. But remember, the first pounds you save are the ones that will work hardest for you. Even if you cannot contribute as much as you might like, the power of compounding shows that it is vital to put something into your retirement fund as early in your career as possible.’


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