Compounding will play the biggest role in helping an 18-year-old save £1m for their retirement, analysis has stated.
Research from the Bowmore Group has revealed that if an 18-year-old today puts £1.71 a day into their pension until they hit 68 years old - the current state retirement age - they could have saved £1m.
This is based on a high growth rate assumption of 10 per cent (the long-term average equity market return over the past 100 years).
But even if - as experts have claimed - the world is in a lower for longer growth phase, the virtue of compounding over time still means that individuals do not need to save hundreds of pounds a week in order to be a millionaire at 68.
Instead of relying on inheritances or property wealth to boost their later-life income, Bowmore Group has claimed that even using a more conservative growth rate of 5 per cent, an 18-year-old would still only need to put aside £10 a day (£3,650 a year) in order to retire with a comfortable pension pot.
Aside of inflation, and whatever the real spending power of the pound will be when today's teenagers reach state retirement age, John Clamp, chartered financial planner for Bowmore said saving for retirement did not have to be complicated.
Instead, he said it can be relatively simple if individuals make regular contributions from an early age - although one needs discipline and maybe drinking fewer artisan coffees each week.
According to Clamp, it is important to get the message across that people should start saving as early as possible, as the impact of compound growth magnifies the longer you have money invested.
Early saving gets the compound worm:
- If an individual starts saving at 28 rather than 18, they would need to save over £1,000 more per year in order to reach £1m in retirement.
- If an individual waits until they are 38, this figure rises to nearly £3,800 more per year.
- Both of these estimates are also calculated using the 10 per cent annual growth. If the more conservative 5 per cent growth is used, the additional amount having to be saved each year would be even higher.
Clamp explained: “The challenge is actually getting young people excited and engaged about saving for retirement. It doesn’t form part of the school curriculum and is often overlooked by young people for a very long time.
"We would argue this is largely due to the lack of knowledge and understanding of how to save and in turn the impact it can have.”
Clamp gives three main pointers to help young investors get started:
1. Setting the right disciplines - regular saving and making use of tax breaks/subsidies
2. Understanding the impact of compound growth (exponential growth rates in the later years)
3. How to make your money consistently work hard for you.
He added: “Compound growth is difficult to get your head around until someone actually shows you what is possible.
"Young people tend not to worry about their retirement savings as it seems (and is) such a long way off, however, when you demonstrate, how small sacrifices can make massive differences this really helps to get them excited.”
simoney.kyriakou@ft.com
