Money can buy a lot of things, but one thing it can’t purchase is time. This is why starting to invest early in preparation for retirement is essential.
Yes, we know – Thoughts of retirement plans when life’s road seems to stretch endlessly in front of you might seem like something to put aside for another day.
But they shouldn’t be!
Time may be your friend at this stage, but seemingly in the blink of an eye, it can transform into a millstone around your neck.
There are many advantages to investing early, but perhaps the most topical one is that long-term investments can ride out market turbulence. But this is only one advantage. This article discusses this in more detail and also looks at the other main advantages of investing early as you prepare for retirement.
There is much to think about as you start out in a career. You might be getting married, buying a house, planning a family, or just having fun. Getting established is also expensive – buying cars, furnishings, insurance, it all adds up. Setting up pensions at this stage might seem like an unnecessary expense.
This is a common mistake. Investing for your retirement is not an expense, it is down payments toward a healthy and wealthy retirement.
Of course, it is an understandable position. With a fledgling and perhaps not yet lucrative career, expenses, and so much else going on, it is easy to slip thoughts of retirement to the back of one’s mind. But just to give the matter some context, then consider the case of a forty-year-old wanting to retire at the age of sixty. This scenario would mean achieving the necessary retirement goals in 240 paydays. This does not leave a lot of leeway.
To help understand the full benefits of investing early in a pension plan, it is useful to examine a hypothetical case example. This is very much a simplified scenario, but the key point is made.
Eric and Erica are twins in similar jobs. Both make monthly pension contributions of €200 per month. To keep it simple, this figure includes all employer payments and tax relief.
The two twins paid this sum into their pension pots for a total of ten years (again, this is for the sake of simplicity). The difference is that Erica contributed between the age of twenty and thirty, and Eric chose to wait and paid his between the ages of thirty and forty.
The twins hope to retire at the age of 60, so let’s examine both pots and see how the investments have fared. Both paid in the same sum – €24,000, the only difference is that Erica’s investment has had longer to mature.
Keeping it simple, we will assume a 5% annual growth on their pension investments. Using this figure, Eric’s investment would be worth €77,000 at age 60. Erica, by virtue of having her money invested for an extra ten years, would see her investment worth €125,000.
This case example shows a financial mechanism called compound interest at work. In essence, compound interest means your money makes money, and the more money you have, the more money you make, it is a snowball effect. Time is the best friend of compound interests and is the number one reason why starting to invest as early as possible is a no-brainer.
There is always an element of risk to any investment. Markets can be turbulent places, and even the best advice can occasionally fall short. Investing early allows your investment policy to be versatile enough to cover shortfalls or market blips that can set pension plans back a stage.
It is never too early to begin preparing for your retirement. The earlier you begin, the easier it is to set an early retirement age and plan for those glorious days when you can finally say goodbye to the daily slog.
At Financial Architects, we specialise in Lifestyle Financial Planning. This is the perfect way to integrate your future plans into your intended daily lifestyle. Essentially it makes it easy for people to work towards a long and happy retirement without compromising on their current needs and mid-term goals.
Why not contact us today and see how we can help make “time” the best investment ally you have.