This is a tricky dilemma and with house prices rising faster than the average wage, it’s no surprise that so many people decide to prioritise deposit saving over retirement saving.
Here are a few things to think about before making a decision:
Save for retirement early and compound interest will have more time to work its magic
If you’re not already familiar with the concept of compound interest, let me explain its wizardry…
Let’s imagine you put £1,000 into a savings account that earns 3% interest each year. Thanks to this interest, after 12 months you’ll have £1,030 in your pension pot.
In the second year, you’ll be earning 3% interest on a larger sum of money (£1,030), even though you haven’t placed any more money in the account yourself.
After 40 years, this £1,000 will have grown to £3,262. That may not sound like a huge increase (and inflation will probably have had its wicked way with its value) but, for the sake of explaining how compound interest works, you’ve had to do absolutely nothing to this money in this time.
Your original £1,000 has been snowballing around in your account picking up more and more money.
So when you start saving for retirement at an early age, your money has more time to accrue more interest. I’m not saying you should put £1,000 into your pension pot in year one and then call it a day – the above was just a simplified example. By making modest monthly savings from a young age, you could retire as a millionaire. Whereas if you don’t start saving for retirement until you’re 40, you’ll have to save a higher amount each month in order to retire on a decent sum.
If you’re employed, it’s worth getting what you can out of your employer
If you have access to a workplace pension, I’d strongly recommend contributing whatever you have to contribute in order to make the most of your employer’s contributions.
I say this because opting out of the auto-enrolment scheme will see you missing out on what is essentially free money from your employer.
If your employer will only put in the bare minimum required by law, you can do the same. By all means, ideally you wanna pay more, but at the least, MILK YOUR BOSS DRY, HUNNIES.
If your employer will match your contributions up to a certain figure, I’d advise making the most of such a generous scheme by putting in as much as you possibly can. Again, to make the most of free money.
Find out how your workplace pension works and act on this accordingly.
You will probably never feel well-off enough to save for retirement
If you’re an ambitious sod like me, you’ve probably spent most of your years on this earth assuming that one day you’ll be rich. It’s a sad fact though that for most of us, these dreams will never materialise. In reality, unexpected expenses will always crop up and life will probably continue to find various ways to fuck with your finances when you least expect it.
When I was saving for a deposit, I didn’t have access to a workplace pension because the auto-enrolment scheme didn’t kick in at my workplace until late 2017. I didn’t bother setting up a private pension because I figured my finances would be much better once I’d moved into my own place. But, dear reader, that’s not been the case. Not only did I have to buy furniture when I moved into my apartment, I also had to regrow my emergency fund from the ground up, meaning I still wasn’t in a position to pour mega bucks into my pension.
When the auto-enrolment scheme did force my boss at the time to start contributing to our pensions, I didn’t opt out but I also didn’t save as much as I probably should have done.
In August 2019, I lost my job and became self-employed. Now not only do I not have access to a workplace pension, I also have so little money coming in that it’s even harder than before to prioritise retirement.
Of course, not everyone will find themselves in this situation, but you can guarantee that life will find some way to surprise you. Maybe you’ll have an unplanned pregnancy and decide to become a parent. Maybe you’ll want to get married. Maybe you’ll move into your own home and the roof will collapse and your insurance company will refuse to cover it – I don’t know if this is a thing that genuinely happens but it’s the most dramatic scenario that came to mind.
I appreciate this post is very one-sided and I do understand why people delay pension savings until they’ve bought a home – especially if finances are so tight that it’s difficult to achieve both goals at once.
At the end of the day, you’ll decide what’s best for you and I won’t judge anyone who procrastinates on their pension pot. Hey! I did the same. Nevertheless, I hope this post has given you a few things to think about and perhaps you learn from my mistakes.