Am I too young to start a pension?

A question I am often asked is “what age should I start my pension at?” or “am I too young to start my pension” or “how old should you be to start your pension?”

Einstein has the answer when he said “the most powerful force in the universe is the power of compound interest”.

You are never too young (or too old!) to start a pension, but let’s have a simple example of why waiting can damage your retirement pot.

Let’s take Michael and John, two friends, both the same age.

When Michael turns 24 he starts paying €1000 per year into a pension. He pays into his pension for 12 years at which point he hits hard times and he stops paying into the pension. He leaves it to one side and never pays in again.

At age 24 John however feels he is too young for a pension so leaves it. At age 36 the year Michael stops he decides he needs to do something about his retirement and starts paying €1000 per year into his pension. He pays every year up to his 68th birthday.

John pays 32 years of contributions and Michael only pays 12. Both pay €1000 per year,  who do you think has a bigger pension fund at age 68?

Michael does!

Even though Michael only pays for 12 years and stops and John pays for 32 years.

The reason is because by the time John starts his pension the interest Michael is getting is greater than John’s payment and John will never be able to catch up unless he increases his contribution.

It works like this:

Book1 07022014 144845.bmp

So as you can see not only does Michael pay in €12,000 in total compared to Johns’ €32,000, Michael ends up with a significantly higher pension fund. In fact at age 36 if John were to try and catch up he would have to pay an additional 42% per year in contributions over and above what Michael had been paying.

If you are currently 36 or older don’t lose faith! There is still time, have a chat with us about your pension or lack thereof. I have clients in their 60’s starting pensions for the first time, it still makes sense.

If you are 24 you should definitely  talk to us too!

I can be contacted on eoin@prosperous.ie or 045854716

 

 

Notes

  • Both funds grow at the same rate of 6% per annum
  • You pension fund won’t be worth much if you only pay €1000 per year.
  • Both sets of figures ignore inflation and calculations are done on a straight line basis

Comments 2

  1. Mary

    I am 47. Work part time for the past 6 years. Worried about pension. What would be your advice? I am considering National Solidarity bonds.
    Thank you

    Mary

    1. Post
      Author
      eoin

      Hi Mary

      Thanks for posting. Solidarity bonds don’t really work within pensions as the pension is not recognized as an entity.

      But more importantly the big advantage to pensions is you get to use before tax income to invest your money and then it grows tax free.

      Solidarity bonds are not subject to tax on the growth but you will have to use after tax income to buy them.

      My advice would be that you find a good independent advisor and review all your options. I am happy to take a call on 0876445533 or you can email me directly on eoin@prosperous.ie

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