A late start to investing for retirement will seriously reduce wealth and final pension or much more will have to be saved each month for the same income.
Delaying saving for a pension will reduce the size of the final pension fund substantially. The result will be that retirement will have to be taken later or retirement plans scaled back to match the smaller pension.
The figure in the following examples which illustrate the importance of starting investing for the future as soon as possible are based on the same assumptions as in Best Time to Start Retirement Investing. It assumes 12% growth plus a little dividend income over the long term for the major stock indices such as the FTSE 100 or the Dow Jones Industrial Average. Index tracking using a low cost tracker fund is a straightforward and sensible approach for those investors who wish to keep things simple.
Buying an Annuity to Provide Retirement Income is Expensive
Someone retiring around 60 to 65 will need a pension fund more than £750,000 to have a pension comparable to the average wage. For many to maintain their lifestyle a million pounds (dollars, Euros or whatever) will not be sufficient. Buying an annuity to provide a pension at that age will cost around £20-25,000 for each £1,000 of annual pension income. For illustrative purposes an annuity provides a reasonable benchmark.
The examples below are based on investing the same total amount over different periods and will demonstrate why an early start is so important. It shows the benefit of compounding gains and the importance of long-term investing, even at modest levels.
Starting Young, Birth is Much the Best Time
As described in the previous article maximum wealth at retirement is achieved by investing regularly for as long as possible. If parents put a sum aside at birth and on each birthday then a child will have a good start towards a comfortable retirement; and be encouraged into good investing habits.
At age 60 the lifetime investor will have invested £22,100 and will have a retirement fund of just over £1.9million pounds to give an income of around £80,000 per year which could actually be more than their salary.
Newly Independent Adult Starting Work
Understandably most people do not start thinking about pensions until they start their careers and even then they often delay whilst they establish a home and start families. Even starting at 23 after graduating the pension will be much reduced.
Investing £582 per year will result in a pension portfolio at age 60 worth a little over £397,000. That would give a retirement income of around £16,000 a year from the same investment total of £22,100.
Mid Life Crisis – Realisation that Retirement is Getting Close
It is common for people to not worry about retirement income until children start leaving home and older friends start to retire. Even at age 45 with another 15-20 years of work it will be difficult, and expensive, to build a reasonable pension.
Starting investing for retirement at age 45 and putting in £1,381 per year to build the same total investment creates an investment fund worth just £66,000 at age 60. That converts to an income of barely £3,000 a year.
Serious Consequences from Leaving Investing for Retirement Late
Clearly the sooner one starts investing for retirement the better. An early start will have a profound effect on how comfortable retirement will be. It is simply not possible to catch up lost years and it is the later years when the real investment gains are made.
So How Much Extra Money is Needed for a Pension to give a Comfortable Retirement?
To achieve the same as a lifetime investors pension fund young adults will need to save £2,900 each year. Instead of 22,100 they will need to invest £110,000 an extra £90,000, into their pension fund to achieve the same level of financial security at retirement as those who started with a modest child’s trust fund.
For new middle aged investors the figures become £40,000 per year, instead of £22,100. The total invested needed becomes £640,000, £0.5million more than the investors starting in their twenties and a huge £620,000 more than the lifetime investor.
Secret is to Start Regular Investment as Early and as Long as Possible for Financial Security
These examples show that starting investing early makes a comfortable retirement much more affordable and achievable. Delaying will make achieving that comfortabale retirement much more painful when many people are trying to scale back their workload.
As a final thought, retirees can increase their pension fund by delaying taking their pension and continuing to save. It is certainly worth considering if healthy and still enjoying work. Continuing to invest and retiring at 65 instead of 60 and the retirement fund would be well on the way to doubling.
If an investors starts saving early they might be able to scale back their workload and make a smooth, planned transition into a comfortable retirement.