The benefits of saving early for your pension
No matter how much you earn as a worker, one thing is almost certain; you’ll never work forever and so, you’ll retire one day. Your retirement may seem a long way off, especially in your 20’s. But when it eventually comes, you may need to depend on a pension to fund your lifestyle.
Even though you earn a pension when you retire, the amount may not be enough to foot your bills and do the things you love. That’s why saving early and extra into it is one of the most crucial steps towards planning for retirement.
Truth is, the older you get, the more responsibilities you have and hence, the more difficult it becomes to save. So, it’s not just important to save, you have to start saving early enough too. Let us consider the different benefits of saving early for your pension.
#1. Reduce the Burden of Savings On Your Income
When you start your retirement savings early enough, you can spread out your target amount over a long time. By so doing, you get to lessen the burden of your savings budget on your income. This in turn increases your disposable income so you have more money to spend on other important things.
If you do not start saving early, chances are high that you will end up putting yourself under pressure to meet your savings goals. You’ll have to either work harder or increase your savings percentage and either way, you’ll accumulate more financial stress.
Assume you set a retirement savings target of £15,000 and you start saving 50 years from time. You will only have to set aside $300 every year to meet your target, and that’s only about £25 per month. On the contrary, it will cost you a £1,500 annual savings to achieve the same amount in 15 years; and that’s a much higher £125 monthly.
#2. Take Advantage of Tax Benefits
Money paid into your pension is not taxable until they are withdrawn. This helps you leverage compounding interest on your savings as you earn interest on the money you would have paid out as tax. You also have the opportunity of paying lower taxes when you withdraw from the account.
Each year in the UK you are entitled to save £40,000 which is tax-free, this is an excellent way to bring down your income tax level.
Let us assume you earn £40,000 per year, you will pay tax on £27,430 of that if for this purpose you invested the maximum tax-free allowance of £40,000 that year you would pay £0 in tax.
So for every amount extra that you pay into your pension each year you will effectively be gaining an extra 20% in savings if you’re a standard rate taxpayer and 40% back for everything you earn over £50,000.
#3. Enjoy the Power of Compound Interest
One of the major advantages of compound interest is that it gives the ability to make money from the interest you earn on your savings. This is a cool way to earn passive increment in income while you work.
In compound interest, your interest per year is added to your principal and the new sum becomes your new principal. As such, the same rate of interest yields more amount each year as a result of the regular increase in gross principal.
When you invest early in a retirement plan, the little regular amounts you contribute can accumulate to a huge amount over time.
#4. Leverage Employer Contributions
Different employers may offer different benefits to encourage the culture of savings, especially for retirement. Retirement funds such as 401(k) enable your employer to separate a certain percentage from your pay on a regular basis as your savings contribution.
Most employers match your contributions based on certain criteria. For instance, your employer can decide to match a contribution of $1 into your retirement savings plan for every hour you work.
A very common method among employers is to match the percentage you contribute per time provided it meets their minimum standard. So, if you can contribute up to 5% of your gross earnings, for instance, your employer puts an equal amount into your retirement.
This is absolutely free money and you can take advantage of it as long as you work. The earlier you get a retirement savings plan, the more leverage you get from this type of benefit and the more money you accumulate.
#5. Create Room For Growth in Savings
You’re most likely to earn more later in your working days than in your early days. Factors such as promotion, diversification of investment, etc., can all contribute to your increase in income as you progress in your work.
So, if you develop a retirement savings plan early enough, you have the opportunity to increase your regular contribution to it as your income expands. You can decide to allocate a certain percentage of every increment to your savings, and you can add bonuses too.
What to Consider When Saving For Retirement
There are some factors that make your early retirement savings worthwhile. A proper understanding of these factors will help you draw a better and more profitable investment plan, and some of these factors are:
#1. Retirement Age
Before you start making investments for your retirement, you need to first decide at what age you want to retire. This will go a long way in helping you decide other saving factors such as how long to save, the target amount, etc.
#2. Savings Target
As soon as you decide on your retirement age, you can make analyses and assessments of what you want from your retirement age savings. Consider factors such as fixed bills – for example rent, utility bills, etc., and other possible expenses.
When you put these things together, you can estimate the amount you need and how long you need to save for it. Then, you can draw a savings plan to distribute the contributions in the most feasible way.
#3. Type of Assets / Account
Where and how you save or invest your retirement funds matter a lot. It is best practice to use retirement savings plans that offer you good tax benefits and compound interest.
Since retirement savings is mostly a long-term project, you can also leverage investment assets such as stocks, bonds, etc. Such assets have the ability to grow in value over time, so you have good chances of getting multiples of what you invested when you retire.
#4. Other Helpful Financial Instruments
To lessen the burden on your retirement savings and investments, you can secure other useful financial instruments such as insurance. If you insure against necessities and emergencies such as fire outbreaks, health bills, and even life assurance, you can rest assured that you can hardly have reasons to interrupt your retirement savings plan.
Saving for your retirement is quite important, but it pays more to start the savings early enough. You can contact a trusted financial adviser to guide you on the best ways to leverage the benefits you’ve learned from this article.
A good article to read that fits in nicely with consistent pension savings is our Dollar-Cost Averaging article, covering the benefits of long-term investing.