Too young to start saving for retirement?

A bit like death and taxes, one thing we can all be certain of is that we will get older.

When you’re young retirement seems so far off that it’s not high enough on your priorities to want to do anything about it.

Yes you know you need to get round to saving at some point but you’ve got what appears to be a whole lifetime ahead of you until you reach retirement age so may as well wait for a few years before you start to worry about that.

But maybe now’s the best time to start saving

Let’s consider 2 different women in their 20s.

Anne has seen her mother and grandmother struggle with finances and not have enough money, and she’s determined things will be different for her. As a result, she decides to start saving now. Not a lot, because she doesn’t have much disposable income, but she’s keen to get started.

She decides to save £25 a month into an investment plan since she wants to get into good habits at an early age regarding her finances.

If she continues to save this amount for 40 years and receives a return of 5% a year, at the end of that 40 year period, the amount saved would be worth around £38,000.

This is never going to be enough to give her a comfortable lifestyle. She realises this. But the other things that Anne knows are:

–          If she starts saving £25 a month now when she’s in her 20s, over time that monthly savings amount will increase as her salary increases. As a result, the final figure will be much higher than £38,000.

–          The amount she’s actually paid in by saving £25 a month for 40 years is £12,000. It’s cost her £12,000 but is actually worth £38,000. This increase has been gained through growth each year.

When she looks at it this way £38,000 seems a very nice return for an investment that has cost her £12,000 over time.

Compare this to Beth who didn’t start saving in her 20s and waited another 10 years to start. She now has 30 years to save rather than the 40 Anne had, if she plans to retire at age 60. If Beth also saves £25 a month, over the 30 years she will save £9,000- which is ¾ of the amount saved by Anne.

On this basis, presumably at the end of 30 years Beth’s pot will be ¾ of the size of Anne’s pot?

Infact, after 30 years, using a return of 5% a year Beth’s fund would then be worth just short of £21,000. Compared to Anne’s pot of £38,000 Beth’s pot is worth just over ½ of Anne’s pot.

How can it be that Beth saved ¾ of the amount saved by Anne, but her pot was worth nowhere near ¾ of the value of Anne’s pot? Infact it was worth just over ½.

The reason is that not only was there less money going into Beth’s pot, but her money had 10 years less growth than Anne’s.

The message to take from the example of Anne and Beth is that it’s never too early to start saving for your future.

Even if it’s only a very small amount, it will set up a savings habit. The important thing is to start doing it. As Nike says “Just do it”. Get a standing order in place so that money automatically goes out of your bank account on a set day each month, into some form of savings plan.

Once you’ve started saving it will become an easier decision to increase it. The longer you leave it to start saving the more you need to put in each month to get to the same figure at the end.

And then the harder it becomes to start because you need to find a larger sum each month; it’s a vicious circle.

If you’re a women looking to take control of your finances please do sign up for my eBook download. This will help you get to grips with your finances, whatever your age and feel more in control.

I look forward to speaking with you in the future.

 photo credit: Flickr/achimh