Here we look at the challenge of saving enough into your pension for it to be worthwhile. For anyone that missed part one– what is a pension & why do I need one, click here.
The thought of building a pension fund big enough to make a meaningful difference to your income when you retire is enough to put many people off. ‘I cant afford it’ or ‘I cant afford it right now’ are the most often quoted responses when people are asked about their pension. Now it’s perfectly understandable, so many of us feel financial pressure constantly, so taking on another commitment seems too much. But one of the key things to understand about building your pension is the effect of accumulation, both in terms of the amount of money you physically save month on month, but more significantly in the interest that money earns.
First up the accumulation of your contributions, i.e. the money you save in every month. The simple fact is, the sooner you start, the more you will have, so even starting with €50 per month will start to build up. And don’t forget it is tax free, contributing €50 per month only actually costs you €30, the
tax man is putting in €20. If most people start working by their mid-twenties, and retirement age is currently 67, you have 40 years to chip away. And as you go along, you will have a chance to increase your contributions, when you get a pay rise in work, when you have less mouths to feed, when you inherit some money from a relative or even when you get a win on those prize bonds or your lotto numbers! So don’t count yourself out, start with however much you can, and as time goes on you’ll get opportunities to increase it bit by bit, but the longer you do it for the more you will have.
The most important factor in starting sooner than later though is the effect of earning interest over time, compound interest. When you save money into your pension, it is invested on your behalf by the company you save with, so it will earn interest each year. The cumulative effect of earning interest year on year on year is a game changer. A simple example:
You put €100 p/m into your pension from age 28, and never increase or decrease that contribution amount. If it earns 5% per year in interest, your pension pot at retirement age (68) will be €152,207. That is made up of:
You: €28,800 + Tax back: €19,200 + Interest: €104,207
So when you feel like you can’t afford it, or it’s not worth starting, remember your pension grows in 3 ways:
1- You keep adding to it every month, for 10, 20, 30, 40 years, however long you have
2- Every time you add to it, the tax man adds to it, the more you put in, the more you get back
3- Compound interest means that over time the amount you and the tax man puts in multiplies, potentially many times over. The longer you do it, the more it multiplies.
And the longer you do it, the bigger the snowball!
How much interest & tax back have you missed out on so far?