Compound Interest

Compound Interest

The most common recommendation for retirement saving is that you should save half your starting age as a percentage of your income – if you start saving for retirement aged 20 you’d save 10% of your income for the rest of your working life, if you start age 30 you need to save 15%. If you leave it until you’re 40 you need to save 20% of your salary.

Twins Andy and Bart Cooper are both employed in the same job, earning the same amount. At age 35 they are earning £30,000 a year – this year Andy saves £3,000 towards retirement, because he started saving at age 20, but to achieve approximately the same retirement pot Bart must save £4,500, because he started saving for retirement aged 30.

Bart has lots of catching up to do, not only to match Andy’s 10 additional years of contributions, but also because he must make up for the investment returns that have been earned by Andy’s funds over those 10 years.

This is called compounding – when Bart started saving, Andy’s investment had already achieved 10 years of compound returns.

If you start saving early in your career you’ll probably be able to retire early – this is far more likely than if you leave it late.

See compounding in action with this online calculator []

Some more articles show the importance of starting to save early:

The returns cited by BusinessInsider are based on US markets, and may be generous, but their graphs and examples are compelling.

Read Tim Hale’s Smarter Investing for the practicalities of UK investing.