When do you want to retire?
July 2010
We all know the answer to this one. Tomorrow.
But we also know that creating a sum of money that will provide us with a continuous income stream through retirement, ideally without eating into our savings, is going to take some considerable time to accrue.
If you are saving for your retirement, you are almost certainly investing for the long-term. It’s an odds-on bet that you will be putting money away for at least 10 years, but it could be 20 years, 30 years or even longer.
That might seem like a long time to wait for payback, but investments can be slow growing fruit and an extra 10 years can make a big difference.
Let’s compare two examples. Say you are aged 30 and plan to retire at 65, that gives you 35 years to build up your savings. Now let’s say you saved £100 a month over all that time. If you had stuffed the money into your pillow you would have £42,000 to show for your effort, a good sum but nothing to write home about.
The effect of compound interest
A reasonable return, plus the effect of compound interest and the right investment vehicle, paints a very different picture. Over 35 years with an annual return of 5% your savings could have grown to a substantial £111,320, although this figure does not allow for the effects of charges, taxation or inflation.
So investing your money sensibly is important and it’s equally important to give yourself enough time for your money to grow. If you start saving £100 a month just 10 years later (age 40) with the intention of retiring at 60, assuming the same annual return as above you would have saved just £40,754 after 20 years.
In other words, you may have to invest considerably more if you want to retire at 60. Either that, or put off your retirement for another 10 years until the age of 70.
When it comes to retirement you have but one choice: save harder or work longer.
Check out the compound interest calculator in our Tools and tips.
Why bother with a pension?
Simply put, because of the tax advantages of saving this way. For a basic taxpayer, for every £80 you put into your pension, the government adds £20 (2010/11). Higher rate taxpayers may be able to claim even more through their tax returns.
New restrictions on tax-relief are being introduced for anyone earning over £130,000. For more information, read our feature What’s new – Tax relief on pension contributions for higher earners.
