Fresh-faced, optimistic, and full of idealism out of university at 22 years of age, the last thing I thought I’d be doing a few years later is planning my pension and my retirement.
But here’s why you should be doing the same.
Remember that feeling of going to an exam completely unprepared? Well imagine that dread and multiply it by about 100 times when you come to retirement and realise that your savings are barely going to see you through a couple of years, your workplace pension which you faithfully paid into has attracted a 55% tax, and your kids have got their own families to worry about.
You might not think it now, but this is a potentially disastrous situation at a very fragile time of life.
Recent data suggests that you need at least £121,000 in savings plus a full state pension to be able to last 20 years of retirement. Unless you’re confident of achieving this, you must read on!
‘I can’t plan so far ahead though!’ I hear you cry; well I would argue that you literally cannot afford not to plan ahead.
This is the main reason that focussing and planning in your 20s will reap great rewards. Simply put, compound returns have a snowball effect. It’s putting the money earned back into the pot to earn even more money, ad infinitum.
Let’s take a worked example:
If you saved £100 a month for 10 years, you would have £12,000.
If you put £100 a month into, say, stocks and made 8% a year, at the end of your 10 years, you would have £18,128.32.
That’s an extra £6,128.32 over 10 years due to the simple fact that you a) put the money into something that made 8% a year and, b) you put the profits back into the pot each year.
Imagine doing that over a 40-50 year working life, and potentially earning more than 8% a year (very possible). This is why planning in your 20s is important – you get time to maximise the compound return benefit.
It’s no wonder Einstein said:
“Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”
Which one would you rather be?
So what’s wrong with my workplace pension?
Aside from shariah-compliance issues (one for our resident Islamic Finance expert, Ibrahim Khan), conventional pensions do not really offer much control or a very good rate of return.
I am a big advocate of people self-investing. This might appear scary, but learning about the topic is actually massively rewarding and the fact that you can control and keep a close eye on your investments is invaluable.
I always tell anybody who is interested enough to listen that you do not need to be a Wall Street banker to understand investments. Stocks and shares, probably the best long-term game when it comes to investments, is a case of picking companies whose future you are confident in who operate in industries you think have a profitable future. Yes, there’s much more to it in terms of fundamental technical analysis, but if you are bothered enough, and I think you should be, you can learn these things too.
There’s the opportunity to also diversify into other areas of investment besides stocks and shares – commodities (e.g. gold and silver) and property are always safe, popular bets, but you can also dedicate a small percentage of your portfolio to higher-risk, higher-reward strategies such as investing in startup companies or small-cap shares.
Why leave your future in the hands of somebody else when there is so much opportunity and learning material?
Time for action
Everybody is different, and everybody has different degrees of risk appetite. Some people might read this and want to opt out of their work pension altogether, others might wish to stick with it but think about alternative investments on the side, such as property. Yet others might think I’m talking a load of cobblers and will not have even got this far.
But if you have stuck with me, I am confident that deep down you are a savvy investor in the making.
In future blogs, we will look at investment options, but in the meantime, be sure to expand your reading and let’s explore thoughts in the comments section below!
As a related point, you should check out our detailed guide on self-invested pension plans here. This is particularly important if you have lots of past workplace pensions that you want to aggregate in one place. Pensionbee are one provider we particularly like who can help with consolidating pensions in one place all online.