Wednesday 4th May 2022
What's it all about?
This article is designed to help you:
It’s tough to sock away any spare cash when the cost of living’s high and lot of people are losing hope that they’ll ever be able to own our own homes or save any serious cash. The thing is, saving’s a marathon not a sprint, and comfortable retirements aren’t built in that last burst of speed before the finish line. In fact, you’re better off thinking of it like a long jump - when you’re getting ready to make the leap, you’ll be glad you had a good, long run-up.
Here’s a quick list of the top reasons why it’s best to get your retirement saving started earlier:
Think about what you want
It’s simple mathematics. Whatever you’re saving toward, the sooner you start the easier it’ll be. Think about the kind of retirement you’re going to want. Will you need cash to travel, take cruises and spoil your grandkids rotten? The things you’ll be able to do with your life after retirement are going to depend very much on the decisions you make in your younger years. Retiring with only enough to cover your day-to-day living expenses is going to leave you with a gaping hole in your bucket list.
Time flies
10 years really isn’t a huge chunk of time when you compare it to your entire working life. However, the difference that decade of saving makes can be massive. Let’s assume you’re a youngster of 25, looking to build a retirement pot of £300,000 by the time you hit State Pension age. Just to throw some fairly realistic numbers in, we’ll say you earn £29,000. According to Royal London, you’d be looking at socking away savings at a monthly rate of £380 to hit your goal. Delaying the start of your saving plan by just 10 years, however, would bump those monthly contributions up to a whopping £540 per month.
Obviously, there are some estimates and averages in those predictions, but the point is that starting earlier makes the climb toward your ideal retirement a lot less steep. When you consider that 10 years is also the length of time the average UK saver is expected to outlive their pension pot (so says the World Economic Forum), you start to see the scale of the late-saver problem.
Okay, so from where you’re standing right now, your retirement date might look like it’s a long way off. Again, though, the earlier you start saving toward it the closer you can bring it. There are pros and cons to this, of course. Some studies suggest that working later into your life can give it a better sense of structure and meaning. You’ll also have to think about things like qualifying for the full State Pension, with some early retirees finding they haven’t paid enough National Insurance Contributions to get the maximum rate. Even so, it’s a safe bet that most people would stop work sooner rather than later if they had the choice.
by 42% apparently
A pretty eye-opening report from the University of Amsterdam has found that retiring sooner can actually add years to your life! While a lot of people still claim that working longer helps to keep your mind and body active, there’s another side to that coin. As the study shows, retiring earlier can cut your chances of death over the next 5 years by a staggering 42%. Admittedly, the research findings mainly apply to male Dutch civil servants – but the basic principle probably still applies to more or less anyone.
Why would this be the case? Well, for one thing, slaving all day at work isn’t always the healthiest way to spend your time. Once you’re out from under the daily grind, you’ve got more time to look after yourself, get exercise and eat well. You’re also more likely to be able to sort out quick medical attention for any sudden health concerns. For another thing, work is just sometimes flat-out stressful. That alone can ramp up your risk of life-threatening conditions like strokes and cardiovascular disease. You can’t hold back the hands of time forever but, statistically speaking, the younger you are when you retire, the healthier you’ll be.
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Really, it's true
This might be difficult to swallow, but younger people really do have the edge when it comes to saving. We know, it sounds strange, given their lower average incomes and their Student Loan repayments. The thing is, when you’re younger you’ll usually have fewer unavoidable drains on your finances. From the ages of 20 to about 40, a lot of people in the UK aren’t yet coping with mortgage payments or the costs of raising kids, for instance. Again, just crunching the raw numbers, a typical Brit under 40 will have more disposable income and fewer expensive bills to pay each month. If you only start your retirement saving once all those other costs kick in, you’ll have a much harder time hitting your goals.
Make your money work harder
You might have heard it said that Albert Einstein considered a thing called “compound interest” to be the most powerful force in the universe. It’s kind of an urban legend at this point, given that the story didn’t start going round until long after Einstein was dead. Either way, though, the basic idea’s pretty sound.
So what’s compound interest and why does it matter? Well, at its heart it’s just a way of letting your money work a little harder on its own. When your savings are earning interest, over time, the interest itself starts earning interest, too. It’s like a snowball rolling down a hill. Every time it turns, it picks up more snow. Better yet, as the ball gets bigger, each roll picks up a larger amount of snow than the roll before. Over years, the interest on your interest can pack a lot of extra cash into your savings.
The same principle applies to investments, including pensions, although there’s obviously some risk involved. The returns are invested alongside your original investment to speed up the rate your money grows. It takes years to see the best benefits, of course, but that just makes it more important to start as early as you can.
Get closer to your pension pot
This is just good sense, but getting yourself into the right kind of saving habits earlier in life is always the best plan. Those first few steps toward setting up your retirement pot need to be in the right direction, and getting used to the idea of keeping living costs under control and saving consistently will help keep you on track for life. You’re basically building a relationship with the actual idea of money, and getting that balance right from the start can dramatically improve your financial situation when you come to retire.
Strange benefits
We’ve talked about pensions quite a lot, both in this guide and some of our others. There are obviously pros and cons to them, when you compare them to other kinds of saving or investing. You can watch more about those in our video, “Long-Term Saving: SIPP or ISA – Which Should You Choose?” – but for now, the main thing to know is that pensions are a really good way of saving for the long haul, with some very nice tax features to them.
In practical terms, though, one of the main benefits is also one of the strangest. You really don’t have easy access to your pension savings most of the time. They’re generally locked away tight until you hit the age of 55. That sounds like a pretty severe limitation – and it’s absolutely supposed to be. However, that very restriction is also one of your pension’s greatest strengths. Locking your money away like this keeps your retirement pot leak-proof, so it’ll still be there when you need it. As always, though, the sooner you get started, the more you stand to benefit.
Lighten the load
Another point we always make is that the interest on your debts will virtually always mount up faster than the returns on your savings. Over time, any gains you’re making can easily be chewed up by the extra debts you’re racking up. So, before you start any major saving journey, you need to bring down the debt you’re carrying as much as possible. Cutting down what you owe is actually a bigger priority than setting cash aside, particularly when you’re just starting out. With those debts cleared away, you’ll be able to put the focus where it needs to be – on stacking up those lifetime savings.
Keep checking back here for more money tips and updates. We’re experts at saving you cash and we’re always here to help. That’s the reason why you’re better off with RIFT.
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