This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice please consult us here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
It may feel too soon to start thinking about retirement in your 30s. After all, you are barely half way through your career and other financial goals can seem much more pressing – e.g. saving for a property deposit. Yet your 20s and 30s are a great time to consider retirement plans due to one crucial advantage you hold over older people – time.
Suppose you have two people – a 30-year-old and a 55-year-old – who both have the same goal of retiring at 68 with £200,000 in their pension pot. They both start at the same initial amount of savings. Whilst the latter only has 13 years to achieve his goal, the former has 38 years (nearly three times as much time). Even setting aside any interest gained or investment growth made in this horizon, the 30-year-old will likely experience a much lower strain on her monthly retirement savings/contributions compared to the 55-year-old.
Yet when you factor compound interest into the picture, the 30-year-old has an even greater advantage due to the amount of time they have. Below, we explain this in more detail. We hope you find this content useful. If you’d like to speak to an independent financial adviser then you can reach us via:
T: 01282 772938
Young people & compound interest
Compound interest refers to the concept that when you save/invest money, you earn interest on the savings – and then, afterwards, you earn interest on the interest. For instance, imagine you invest £10,000 and you earn a 10% return over 12 months, leading to a total of £11,000. If you later earned another 10% on this amount one year later, then you’d have £12,100.
Over longer periods, compound interest has the power to snowball significantly. Let’s take the example of £10,000 again, but assume this time that you average 5% real returns each year (i.e. after costs and inflation). Without any further contributions, the pot could be worth £16,288.95 by year 10. By year 20, the total might stand at £26,532.98. By year 30 it may stand at £43,219.42 and, by year 40, maybe £70,399.89. Looked at as a percentage increase on the initial amount, the 10-year total shows a 62.89% increase; 20 years a 165.33% increase; 30 years a 332.19% increase; and 40 years a 604% increase.
This example demonstrates the exponential growth compound interest can generate in the later years – i.e. between years 30 and 40 of your savings/investing. Whilst an older person likely will not have the time between now and retirement to benefit from this, a younger saver can.
How to save for retirement
Of course, many young people are unlikely to have a large lump sum (e.g. £10,000+) that can be set aside for retirement, unless they have come across a windfall like a sudden inheritance. If you do, you may be more inclined to commit this towards a more immediate financial goal, like a deposit on a house. So, how can someone in their 30s plan for retirement early on, benefitting from the power of compound interest, without compromising other goals he/she may have?
Fortunately, there is another common strategy – making regular contributions into your pension pot(s) which have an appropriate investment strategy and asset allocation. If you are employed, you should already be subscribed to a workplace pension under the UK’s auto-enrolment rules (via PAYE). In 2021-22, the law requires you to contribute at least 5% of your salary into such a scheme – and your employer at least 3%. This is a good start, but it may not automatically lead you to achieve your retirement goals.
First of all, have you checked where your money is being invested? Many young people are put automatically into a “moderate” investment strategy with their workplace pension, which may not reflect your risk appetite or investment horizon. Secondly, what are the fees on the workplace pension platform and containing funds? It could be that many of them involve high costs which are hard to justify in light of past performance. Thirdly, are the contributions – yours and those of your employer – setting you on course to achieve the eventual pension pot size you will need to help realise your retirement goals? It may be that you need to consider upping how much you are saving into this – or another – scheme each month.
Of course, these are complex questions that require knowledge, skills and experience to answer confidently. Unless a young person is already a financial expert (e.g. by training to be a financial adviser/planner), then he/she may benefit from receiving professional advice to ensure you are setting yourself up for an ideal course to achieve your future retirement goals.
Invitation
If you are interested in starting a conversation about your own financial plan or investments, then we’d love to hear from you. Please contact us to arrange a free, no-commitment consultation with a member of our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
Reach us via:
T: 01282 772938
