The Cost of Delaying Your Pension: Start Early and Reap the Benefits.Road To Building One Million

Introduction:

When it comes to planning for retirement, many people focus on the cost of contributing to a pension scheme. However, have you ever considered the cost of delaying your pension? By postponing your retirement savings, you may be missing out on significant long-term gains. Let's delve into the numbers and explore the advantages of starting your pension as early as possible.

Cost of Delay

The cost of delay principle refers to the concept that delaying action or decision-making can result in negative consequences or missed opportunities. In the context of retirement planning, the principle emphasizes that postponing the start of your pension contributions can have significant financial implications.

When it comes to retirement savings, time is a crucial factor. The longer you delay starting a pension, the less time your money has to grow and benefit from the power of compound interest. By postponing contributions, you not only miss out on potential investment gains but also have to make larger contributions later on to achieve the same retirement fund target.

The Power of Compound Interest:

The key factor that makes early pension contributions so impactful is the power of compound interest. By investing your money early, you allow it more time to grow and benefit from compounding returns. The longer your money is invested, the more it can accumulate over time. Also interest/growth in pensions are not taxed therefore your pension can grow quicker.

The Power of Tax relief:

Another significant advantages of starting a pension early is the power of tax relief, especially for higher rate taxpayers. In Ireland, pension contributions come with generous tax benefits. For higher rate taxpayers, the government provides a tax relief of 40% on pension contributions. This means that for every euro contributed, the government effectively reduces your taxable income by 40 cents.

Example Scenario:

Let's consider a hypothetical scenario where you aim to accumulate €1 million for retirement. Assuming a growth rate of 6% per year and a 40% tax relief on your contributions (applicable for higher rate taxpayers), let's examine the costs associated with different time frames.

Over 40 years:

If you start investing early and contribute consistently over 40 years, the gross cost would be €655 per month, with a net cost to you of €393 per month. Your pension fund, with compound interest, would grow to approximately €1,000,000.

Over 30 years:

Delaying your pension by 10 years would significantly impact your final fund value. With the same monthly contribution of €393, over 30 years, your pension fund would grow to €545,129. Although this is a substantial amount, it falls short of the €1 million goal. By delaying by ten years you would now have to save €1202 gross per month with a net cost of €721 to build a pot of 1,000,000. A difference of €328 per month just ten years earlier.

Over 20 years:

Delaying your pension by 20 years would significantly impact your final fund value. With the same monthly contribution of €393, over 20 years, your pension fund would grow to €269,227. Roughly about 25% of the €1 million goal. By delaying by twenty years you would now have to save €2,435 gross per month with a net cost of €1461 to build a pot of 1,000,000. A difference of €1,133 per month 20 years earlier

Over 10 years:

Finally, if you delay your pension until the last 10 years before retirement, the cost would increase dramatically. With the same monthly contribution of €393, over 10 years, your pension fund would grow to €101,709. You would need to contribute €77,400 gross (€46,440 net) per year to accumulate €1 million. With revenue allowances in place this would not be possible for PAYE earners.

As the numbers illustrate, the cost of delaying your pension can be substantial. Starting early allows you to spread your contributions over a longer period, making it more manageable and lessening the impact on your current lifestyle. It also provides the opportunity for your investments to grow through the power of compounding, resulting in a more comfortable retirement.

While the immediate cost of contributing to a pension may seem burdensome, the cost of delaying can be even greater. By starting your pension as early as possible, you give yourself the best chance to build a substantial retirement fund while minimizing the financial strain. Don't underestimate the power of time and compound interest. Take action today and secure a more comfortable future for yourself.