Nearly everyone has a dream for their retirement. It often includes leaving work while you’re still healthy enough to be active and independent, planning to buy a boat, or holiday home, or simply spending as much leisure time as possible. And after decades of dedicating most of your waking hours to your work, enjoying the fruits of your labour is a laudable goal.
The stark reality is that far too few of us fully reach our retirement dream, and for a variety of reasons. But when you get right down to it, the vast majority of Pensioners who don’t enjoy an ideal retirement failed to take steps that would have made a big difference. Frankly, they made mistakes that caused them to fall short.
But there’s one mistake above all others at the heart of people’s failure to achieve their retirement goals. And that mistake is not starting early enough to contribute to their retirement savings.
Time really can be worth more than money
When it comes to arriving at retirement with the most money, the best thing you can do is start putting away as much as you can as early as you can. It’s truly that simple. The difference between starting young and putting it off can be enormous.
For instance, if you started investing £100 per month in a fund that grew at just 3% per annum at age 20, you’d have about £93,000 at age 60, If you put it off until 40, that same £100 per month would be worth only around £32,000 at age 60. But here’s the rub. That extra £61,000 would have been generated from only £24,000 out of your pocket.
It’s the extra years in the market that allows your money to take advantage of compounded growth and deliver the big payoff. If you delay to age 40, you’d need to kick up your contribution to around £285 per month — an extra £44,000 — to arrive at retirement with a similar balance.
Time smooths out your returns
But it’s not just about the power of compounding growth. The longer you invest and regularly contribute, the better your odds of capturing the best returns. The market has its ups and downs, and it’s impossible to predict when they’ll happen.
If you start contributing early and regularly and invest through every part of every cycle during your working years, the law of averages will be in your favour. If you keep putting it off, waiting for the next crash, you’ll miss out on a lot of great returns.
Just imagine if you were one of the people who sold at the bottom in 2009 and sat on the sidelines for the past decade, watching the market more than double in value.
Even from the pre-Financial Crisis peak, the market has more than doubled in total returns:
By steadily contributing to your retirement investments for as many years as you can and through every kind of market, you’ll avoid the mistake many people made over the past decade: missing out on an historically profitable bull market while waiting for the next crash. At this point, even if the market falls by half, you’d still be far ahead of its 2007 peak.
Start as soon as you can (that means now)
Even if you’re not 30, start contributing as much as you can to your retirement savings now. Whether it’s maximizing the company contribution, or contributing to a Personal Pension, there’s no good reason to put it off.
The longer you wait, the more money it will take to reach your goals. It’s that simple.
So says FCA chief executive Andrew Bailey. He says the pension freedoms are the right approach to help individuals deal with the increasing complexities of retirement.