The start of something is often the most important: in the early years babies learn not only motor skills, language and emotions but also how to navigate the world and where they fit. When starting a career, the engagement, training and personal development in those first formative years provide a foundation and direct the opportunities and trajectory for the future.
Interestingly, if something is missed in these early years, it puts those affected at a disadvantage and it is often difficult to catch up and takes comparatively much more time/effort.
Applying this to pension savings, this article looks at the impact of the first 10 years of saving into a defined contribution (DC) pension and the consequences of missing or delaying saving in these years. The results are stark, showing that via the magic of compound interest, saving into pension between the ages of 21 and 30 have more of an impact on your final pension pot than someone who only starts saving at 40.
Something that is often underestimated when trying to engage people with saving for their retirement is the factor of time. Those in their 20's today potentially have 70+ years of investment and 50+ years of savings to take advantage of. These sorts of timelines allow people to consider a different approach to risk as well as being able to benefit from compounding.
Pension modellers are such a useful tool to show the possible future but playing with them to see the impact of a bit more saving or saving into a investment with a different risk profile can open saver's eyes.
Risk is of course something that should not be trifled with and savers will need to understand that investments can go down as well as up.
Even with a savings horizon of 70 years, savers will do well to remember that establishing a savings plan from as early as possible - and those years between age 21 and 30 - will be hugely beneficial when it comes to building a pot for retirement.
When saving for 10 years pays more than saving for 40 Save from 21 to 30, then stop. You will have a bigger pension than a saver who starts at 30 and stop at 70. Richard Evans 7:34AM BST 07 Apr 2014 Someone who starts saving at the age of 21 and then stops at 30 will end up with a bigger pension pot than a saver who starts at 30 and puts money aside for the next 40 years until retiring at 70. This astonishing outcome is entirely due to the power of compound interest – the way that investment returns themselves generate future gains. Having 10 extra years for compound interest to work its magic has the same result as all those years of extra contributions.