For no good reason, schooling systems in many parts of the globe completely fail to educate us about the fundamentals of money. Whether it is to do with taxes, savings, investments, debt or budgeting, schools seem to give the whole thing a skip and instead teach you that the mitochondria are the powerhouse of the cell. While we have our fingers crossed that this changes in the future, it is never too late to start learning about money by yourself, there are tons of free resources available for free.
Today, we’re going to consider the question of – what, if any, is the right age to start a private pension plan? As soon as possible is the general consensus when it comes to saving for retirement. It’s always encouraged to save for that proverbial ‘rainy day’, because you really never know what the future may hold. But in recent years the necessity to save for retirement seems to be something that’s been given a fair share of importance.
Sure, you may have the luxury of some extra pocket money. Who knows, you might have been frugal in your spending habits. Or, perhaps you got lucky gambling at a no deposit online casino and got your hands on a fair share of cash to put aside for better use. In any case, starting a pension plan early will result in a significantly bigger pension pot when you reach retirement age and throw in the towel. It could even let you afford to retire earlier and enjoy some peace and quiet.
However, if you’re reading this, there is a good chance you haven’t started your pension plan yet. Like with so many other things – it’s never too late to start. The earlier you start it, the better. Let’s take a look at some of benefits of starting your pension plan as early as possible.
Compound Interest gets Better with Time
Compound interest, to put it simply, is interest earned on interest. You receive interest on both the original principal amount and the interest that accumulates over time. The word “time” is pretty key in this equation. It basically means the amount of interest you earn will be much greater the longer you save for.
To better understand how compound interest works and how it can significantly increase your savings when you start early, let’s consider a hypothetical example:
Let’s consider two people that start their private pension plans at different ages. Let’s assume Sam starts his pension at the age of 20 while Peter starts his pension at the age of 40. Sam is only able to save $50 a month, but Peter is able to save $100 every month.
Now, let’s assume a pretty standard savings interest rate of 4%. At this interest rate, when Peter reaches the age of 60, he would have a pension pot worth $36,500. Sam, on the other hand, despite having saved exactly the same amount as Peter overtime, will have a pension pot worth $60,000 when he reaches the age of 60. The difference is quite mammoth because compound interest becomes more significant as time goes on.
This is one of the biggest advantages of starting your pension plan early. You earn a lot more interest.
You Get Tax Relief on Pension Savings
The best part about a pension isn’t even compound appreciation. The tax relief that the state provides is actually even more beneficial. When you contribute to a pension, the government refunds you tax at the highest tax rate you typically pay, thereby increasing how much you save every month for free.
This implies that when Sam pays $50 into his pension, the real amount put in is $62.50 in the case above. This is because Sam, who pays income tax on the basic income slab, pays tax at a rate of 20%, therefore $62.50 taxed at 20% would be $50. The funds are deposited into the pension account as if they had never been taxed. When you factor in tax relief, Sam, when he is 60 years of age, would have a pension pot worth $72,800.
Let’s pretend that Peter earns a higher income and is there is a high-rate taxpayer than Sam. Because he pays 40% tax, each of his $100 payments becomes around $166. Despite this massive lead, he will fall short of Sam, finishing with roughly $60,600 when he reaches the age of 60.
As it is clear from this example, a lower-income person can nevertheless end up with a larger pension account than a higher-income earner just by starting their pension earlier.
A Few Other Reasons to Start Your Pension ASAP
While compound interest and tax relief are huge incentives to start your pension at the earliest, if you haven’t started your pension yet, then you should know that there are a few other good reasons to start it right now!
Your company may also contribute to your pension, allowing your retirement savings to increase.
Pensions are viewed positively for inheritance tax reasons, so if you pass before a certain age, your pension will be handed on tax-free (depending on which country you live in).
To help reduce risk, good pension plans are spread out instead of being invested into a single thing, your money is invested in a meticulously chosen mix of assets. So, even if one fails, you won’t lose all your savings.
