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April 10 ,2014 | by Hari Sri

Should you start saving for retirement now? Study says “Yes”

start saving for retirement now

A recent study has found that saving during your twenties alone can lead to a bigger pension pot than 40 years of contributions in later life. So when should you really start saving?

Saving for retirement during your twenties can earn you a better pension than 40 years of saving from ages of 30 to 70, according to a new study from research firm CLSA.

 

The report found that someone who contributes £2,500 per year to their pension from the ages of 21 to 30, and then stops entirely, will earn a pension fund worth £553,000 by the time they retired at the age of 70. In contrast, a worker who starts at the age of 31 and then contributes the same amount until they reach 70 will have a pot worth £534,000.

Surprisingly, there was also another outcome – if your parents were to pay £2,500 per year into a pot for the first two years of your life, and you never contributed at all, it would be worth £551,000 by the time you reached retirement age.

 

The results are all down to the workings of compound interest, which essentially keeps rewarding savers for the interest they have already accumulated. Providing that all savings get returns of seven per cent every year, it really can pay to save for ten years early in your working life rather than 40 later on.

That said, the obvious flaw in the study is that it’s very unlikely any pension savings will ever generate a consistent seven per cent return. In a blog post for the Wall Street Journal’s MarketWatch, Matthew Heimer describes these “smooth, never-a-down-year returns” as one example of the issues that can be “quibbled” with the data.

But more importantly, he says that the study doesn’t reflect a simple fact of pension savings: as people age and earn more, they also contribute more.

 

It goes without saying that starting early is wise – it gives you more time to put money aside and does reap the benefits of compound interest. In JP Morgan’s recently published guide to retirement, the company indicates that the benefits of saving from the age of 25 can include a pot twice as large as that of someone who starts saving at 35.

Yet that doesn’t mean that workers in their 30s, 40s or even 50s should despair – any retirement savings are better than none at all, and with the right investments it is possible to put aside a nest egg that will make life after work more comfortable.

Hari Sri

Hari is the LSBF Blog's News Editor. He manages the editorial content on the blog and writes about current affairs, SME, entrepreneurship, energy, education and emerging market news.

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