Pensions tips: What to do in your 20s
This blog starts our new series, tackling ways to plan for your retirement at different stages of your life. Each Wednesday we'll look at a different decade, from your 20s to 60s.
For the average person in their 20s, a pension is the last thing to think about. This is the age when social lives are important, there may be student loans and other debts to tackle, as well as running a car, hoping to travel, and saving money to move out of home. For those that have moved out, there will be rent and utilities to pay for. At the same time, it's typically the age at which people earn a lower wage, as they're at the start of their career. Together, this is a difficult mix - a lot to spend, with little to spare.
Nonetheless, being able to save at this age will be a massive boost to your eventual pension fund size, but popular opinion is that it doesn't need to be thought about for many years. As we wrote about last week though, one of the crowning glories of auto-enrolment is that it has forced young people to think about their pensions. What is arguably the most difficult to reach age group has now been made to think about retirement and consider the importance of starting to save early. It's been so effective that the Department for Work and Pensions has halved its forecast of people opting out, from 30% to 15%.
The downside is that not everyone is covered by auto-enrolment, so the lowest earners won't have any pension provision. According to The Pensions Advisory Service, 63% of people earning under £7 per hour and 74% of part-time workers are women and won't be covered by auto-enrolment. They have the option to request being enrolled, but there's a risk they won't have any savings for the future.
If you are able to put aside any money at all then your 20s is a great age to begin saving. When you begin a pension fund you will be able to choose the risk level of investments, and given the length of time before you will be due to retire you could give consideration to those with higher risk. If you need any encouragement to start saving at this point, some time learning about the magic of compound interest will demonstrate how much more you can retire with than if you start even ten years later. An article in the Telegraph explains that if a person saved £2,500 a year between the ages of 21 and 30, then stopped, and another person saved from the age of 31 until 70, both earning 7% interest each year, the first saver would have a fund of £553,000 while the second would have £534,000. Put into perspective, the first saver will have contributed a total of £25,000, and the second will have saved £100,000. Starting early means you can save less and retire on more - and who doesn't want that?
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