Compounding Interest and When to Start a Pension
Starting your pension early allows the power of compounding interest to significantly improve your return.
Return projected as of December 31st 2022.
We often receive the question, "When should someone start contributing to a pension?" While most 25-year-olds may not be thinking about retirement, they may later regret not starting sooner. This post aims to illustrate the significant impact of starting early on one's retirement income.
The power of compounding interest is a fundamental concept in finance that greatly influences wealth accumulation over time. It involves earning interest not only on the initial investment but also on the accumulated interest over a specific period. When applied to long-term investments like a pension fund, the effects of compounding interest can be remarkably powerful.
By initiating pension contributions early, you provide your investments with more time to grow. Even small and consistent contributions over a long period can lead to substantial growth due to compounding. The longer your money remains invested, the greater the potential for compounding to work in your favor.
In the above illustration, it is evident that Investor A, who started at age 25, has a significantly larger pension fund at age 65, despite investing the exact same amount as Investor B. This demonstration assumes Investor A starts contributions at 25 and stops at 45, to highlight the impact of compounding interest alone. However, if Investor A continued their consistent contribution of €150 per month until age 65, they would generate an even larger pension fund at retirement.
So, when considering the question, "Should I be contributing to a pension yet?" the answer is likely YES.
Starting early can make a substantial difference in the long run, potentially allowing you to retire earlier than you could without a well funded pension.
Questions? Contact me anytime,
Rachel O’ Shea, QFA, Senior Consultant
T: 0214521328