Everyone knows that the earlier you start your pension, the better off you will be in the end. Afterall, some of your money will be invested for 40 years. I have come across a number of cases recently where people are nearing retirement and are drastically trying to play catch up. These are people who are contributing to their pension, but just not very much.
Pensions are expensive to fund properly. It is a big boost if you are part of an occupational pension scheme and your employer makes a significant contribution too. But lets have a look at what you get if you contribute €250 a month to a pension and it grows by 6% per annum.
What kind of income would those pension pots provide you? Assuming you maintained the same investment strategy and got 6% per annum and you lived 30 years in retirement, you can expect the following levels of income (I am ignoring tax free lump sums in this example).
If you want an income of €40,000 from your ARF, you will need a pension pot of €583,629 to provide you with that level of income from an ARF assuming 6% return (which means you are invested in equities for your entire retirement). If you had started your pension with €250 a month for the first ten years of your pension saving, how much would you need to pay into your pension to reach that target?
Indexing your pension is one way to increase your pension pot at retirement. If you indexed your pension at 5% per annum, how much impact will it have?
As you can see, indexation has limited use for those who are drastically behind where their pension needs to be. The longer you wait, the more capital you need to increase your pension pot and the less you can rely on compounding.
A good way to increase your pension pot over time is to redirect pay rises into your pension. Once you are over a certain level of income (it is different for everyone), you have enough money to live your life comfortably. Lifestyle creep is on stuff you may not need and will only give you limited amount of pleasure. Save the money instead, you will get more enjoyment from a great enjoyment than from buying stuff now.
09 October 2023