What if I were to give you a box. A box that magically doubles your money the instant you put money in it. And it doubles again thereafter at each 10 year interval that your money is in the box. How much money would you put in the box? I’m guessing a whole lot. After all, we all love free money.
Let me let you in on a bit of a secret. We all have that magic money box. It’s called a pension. Whenever most people pay money into a pension pot, your employer matches that contribution (up to a certain amount). For instance, whenever I put £1,000 into my pension, my employer puts £1,000 for me as well. That £1000 employer contribution is essentially free money as I wold have never got it if it weren’t for my pension contribution. And it gets better. Because of tax relief, any pension contribution is grossed up. So when I pay £1,000 into my pension, the government tops it up Thus the amount going into my pension is pot is actually £1,250. Again, that £250 is free money as I would never have gotten it without saving money into my pension.
So that’s £2,250 for just making a £1,000 contribution. Sweet right. And if I were to invest that money into a plain vanilla low cost index fund like the FTSE100 or S&P500, history suggests that I would expect to double my money every 10 years. At the first 10 year interval, I can expect my money to have grown to £4,500. At the next 10 year interval, the money would be expected to grow to £9,000. And the next 10 year interval, £18,000. See how quickly your wealth builds up.
So every £1,000 I put into a pension today is estimated to be about £36,000 when I take my retirement. Isn’t that a sweet deal? The magic money box is truly exceptional. It is no wonder I am trying to squirrel as much money in it as possible.