Why Start Your Pension Early?
Starting a pension plan early has a significant impact on your final retirement outcome and this is down to one main fact, the effect of compound interest.
The Rule of 72
This is a simplified way to determine how long an investment will take to double, given a fixed annual rate of interest. All that you have to do is divide 72 by the expected rate of return.
The answer is the number of years it will take for the amount of money to double.
Consider two examples of how you can use this below:
• If you are aiming for a return of 6% p.a., it will take 12 years for your investment to double (72/6% = 12 years)
• If you want to double your money in 10 years, you will need to achieve a return of 7.2% p.a. (72/10 years = 7.2%)
The Impact On Your Pension Plan
This rule demonstrates that a contribution made to a pension plan in your 20’s or 30’s has the benefit of time on it’s side to grow very significantly from the time it is made, to your retirement age.
When you add higher growth rates and a longer-term together, the impact can be significant. If you wait until later in life to start your pension, you will probably want to be more cautious in your investment choices (human nature), reducing your potential growth rate.
Start a pension now and you'll thank yourself later on.