Many people in their 40s and 50s realise they haven’t saved enough for retirement and will have to work longer. Even when they pay hundreds or thousands of pounds a month into their pensions, it often isn’t enough. The main reason? They started too late and didn’t give their money time to grow.
Did you know that someone who saves for just 10 years, from 25 to 34, can end up with more than someone who saves for 30 years, from 35 to 64? The reason is compounding.
When investing, your capital is at risk.
What is compounding?
Compounding means earning returns on your past returns. Each year, your investment earns a return. That return is added to your pot, so the next year you earn a return on a bigger amount. Over time, growth snowballs, and the longer you leave it, the faster it grows.
Saving early vs saving late: an example
Take two investors. Each pays £2,500 a year into a fund that returns 7% a year, at the start of each year.
- Investor A saves for 10 years, from 25 to 34, then stops and leaves the money invested until 65. Total paid in: £25,000. Value at 65: about £281,000.
- Investor B starts at 35 and saves every year until 64, for 30 years. Total paid in: £75,000. Value at 65: about £253,000.
Investor B paid in £50,000 more but ended up with less. The 10 extra years of growth on Investor A’s early savings made all the difference.
These figures ignore fees, tax and inflation, and 7% a year isn’t guaranteed. Investments can fall as well as rise. But the lesson holds: when saving for retirement, start as early as you can.
Start in your 20s if you can
Your 20s are the best time to start. You may have your first job but not yet a mortgage or a family to pay for. I was lucky to understand compounding early, so I lived frugally and put my spare cash into assets that produce income while still in my 20s.
Starting a workplace pension early helps even more. Your employer pays in, and the government adds tax relief, so more money starts compounding sooner.
Missed your 20s? It’s not too late
Even if you didn’t start in your 20s, starting now still beats waiting. For example, at 7% a year:
- Saving £2,500 a year from 31 to 40 (£25,000 in total) grows to about £187,000 by 65.
- Saving £2,500 a year from 41 to 64 (£60,000 in total) grows to about £156,000 by 65.
The best time to start was 10 years ago. The second-best time is today.
There’s a clear link between saving early and building wealth. So start saving and investing now, and don’t leave your retirement income to chance.
Disclaimer: This is not financial advice. The value of investments can go down as well as up.
Pedro is passionate about finance, marketing, and technology. He is a growth manager at several online projects and a former digital marketer for a fintech company.
