When you’re in your twenties with the world at your feet, saving a component of your hard earned weekly wage for an all-too-distant retirement certainly seems like it can wait.
As life moves on and we accrue more commitments in the form of family, mortgages and other loans, pension savings can be even less of a priority.
There are a myriad of excuses, from having time on your side to relying on the good old state pension, which was recently ranked in a study by the Australian Centre for Financial Studies and Mercer as among the best in the world in terms based on adequacy.
The grim news is however that the future of the Irish State pension looks uncertain at best. The same study ranked Ireland 20 out of 25 countries for the likelihood that its State pension could provide promised benefits in the future.
With the aged population on the increase, current estimates show that by 2050, there will only be two workers for every pensioner, down from five in 2016.
With such a steep decline in workers the current State pension will be a thing of the past because there will simply not be enough PRSI contributions being made to pay the State pension benefits.
As it stands, only 29% of Irish households have adequate structures in place to provide for their retirement. That leaves an overwhelming 71% of the rest of us who are staring down the barrel of poverty in retirement unless we take steps to rectify the situation.
The good news is that retirement savings don’t have to break the bank. Even better, the earlier you start the less money you’ll have to contribute to your plan thanks to compound interest.
Compound interest occurs when interest is paid on the interest attached to your principal sum.
Rather than paying out your interest, it is reinvested so that earnings are made on both your savings and also your previously-accumulated interest.
Over a longer period of time, pension schemes that work on compound interest can make a significant difference to financial outcomes and may require less investment than a pension started later in life. The graphic below shows the comparison between Dave and Ken. Dave started his pension savings just ten years before Ken, yet at retirement age his fund will be almost double that of Ken.
Source: SMP Financial (http://www.smpfinancial.com/pensions_compounding.html)
The graph below shows the difference between someone who started their pension savings at 25, versus someone who started at 45, who effectively has less than half their younger peer at retirement age.
While the key message is resoundingly to start your retirement savings as early as you can, don’t throw caution to the wind if you are further down the track in life.
With the government looking to plug a €440 billion hole in hidden State pension liabilities it’s likely the State pension won’t fund you in old age, so carefully considering your retirement savings options with your independent financial planner can help you optimise your savings and ensure you continue to live as you’d like to in your retirement.