BLOG: How to plan for a richer retirement

Written by: Angela Seymour Jackson, managing director workplace pensions at Aegon
We now live in a world where instant gratification is the norm, we crave instant results and planning takes a back seat.

On demand entertainment can be delivered direct to your phone or tablet when you want. It’s not necessary to plan a holiday or trip in advance when you can turn to last-minute holiday booking to fulfil your needs.

The problem is, the expectation of instant gratification is storing up problems for the future.

We’ve become so hard wired to crave things immediately our default position is to experience fulfilment now, without delay. Generation now is being pandered to by obliging companies, only too happy to meet our demands.

Pensions simply don’t fit the model. After all, waiting is hard. Saving is harder. So, without some adjusted thinking, carrying on as we are is going to have a detrimental impact on our future financial security.

When we think about retirement, the majority of us in Britain are frightened we’ll end up with too little money in old age to enjoy a comfortable standard of living. But when it comes to modern living there’s a whole list of things that sneak ahead of saving for the future – debts to be paid off, a house to save for and countless other priorities ahead of boosting your pension pot.

If people are spending their salary and more to fund their lifestyle now, then the lifestyle they’ll expect in retirement will naturally mirror their current one. The problem is a comfortable lifestyle in retirement won’t be achievable without sufficient income. That income won’t be possible without proper planning and saving now. Unless there’s a shift away from borrowing over saving, the reality of a debt-filled retirement could be an increasing cause for concern. A very good reason for people to get comfortable with the concept of making choices which may limit their ability of getting something now, for the pleasure of being able to have something bigger or better later.

The most famous study of delayed gratification is the Stanford Marshmallow Experiment, a study conducted by Professor Walter Mischel nearly 50 years ago at Stanford University. His experiment involved giving a group of young children a marshmallow and then leaving them in a room for fifteen minutes. They were given the choice of being able to eat the marshmallow straight away, or if they waited for fifteen minutes, they were given two marshmallows. Some children were able to wait, others were not.

The grown up version is a dilemma we face each and every day – to spend or save. If you were to offer someone £100 today or £101 if they waited six months, most people would take the cash and run. If it was more of a marked difference, say £100 now versus £1000 if you were willing to wait, most would wait.

How does that experiment relate to saving for retirement? Well, starting to save for retirement when you’re young gives you a huge edge if you want to be wealthy in later life. When you’re in your 20s, you can invest relatively little for a longer period and wind up with far more money than someone older who saves the same amount over a shorter period. This is the power of compounding.

The analysis below shows it pays more to start saving early, by comparing how much savings of £300 a month could be worth based on the age you start putting money into your pension.

This chart shows your savings pot on retirement could be worth an extra £146k compared to someone who starts saving a decade later at 35 years old. In fact, to achieve the same savings pot as someone who started saving at age 25, a 35-year-old would need to pay in an extra £37,800 overall, equivalent to an extra £205 every month. And the story gets worse the older you are when you start saving.


Source: Aegon

Looking at what income these different savings pots could provide, we can also see some stark differences. If you saved £300 a month from age 25 you could expect an income of around £20,000 on top of the state pension. This compares to an income of less than £12,000 a year if you start saving at age 35.


Source: Aegon

The older you get the less time you have to recover from your mistakes. So, while it’s not easy to save, taking time to think about how you spend your monthly budget when you’re younger can give you more spending power later in life. Shaping your retirement early in your career gives you the best chance to retire when you want and in the way you want.

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