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Retirement is traditionally seen as an opportunity to relax, sit back, and enjoy the rewards of a lifetime of hard work. You may have an idea about how you’d want to spend yours, whether that’s taking long foreign holidays, mastering your hobbies, or simply spending more time with your loved ones. Of course, when you’re young, retirement can seem a thousand miles away. There are plenty of life milestones before that, from buying your first home to starting a family. As such, you may not have given the topic much thought. As with most tasks, however, the sooner you start it the easier it can be, and this also applies to building a long-term plan. Read on to find out why putting one in place sooner rather than later can really benefit you.
Retirement can seem a long way away when you’re young
When you’re young, you pass several major life milestones in quick succession. From living by yourself for the first time, to buying a home and starting a family, there are many important goals that you may reach within just a few years. Because of this, it can be easy to only think about the short term when considering your finances. With milestones coming up left and right, you may feel you’ve got enough on your plate without having to think about the long term. That being said, retirement may come around sooner than you might think, and this is especially true if you aim to retire as soon as you can. Due to Pension Freedoms, you can access your pension funds from the age of just 55, although this is set to rise to 57 from 2028. Even if it may seem far away, planning for the long term while you’re still young can help you to enjoy a more comfortable lifestyle when the time comes. For a start, you’ll have a greater amount of time to build your wealth, which can make it easier to accrue enough to support your desired lifestyle. But this longer timeframe can also help you to benefit from the incredible power of compounding.
Building your wealth while you’re young can help you take advantage of compound growth
Albert Einstein once called compound growth the “eighth wonder of the world” and when you see the effect it can have over time, it’s not hard to see why. Essentially, this is growth on previous growth and over time it can help your wealth to increase substantially. For example, let’s say you invested £1,000 in a fund that offered you an annual return of 5%. To keep things simple, we’ll assume there are no investment fees and won’t take inflation into account. After the first year, you would have £1,050 and so would start earning returns on that £50 growth if you kept your money invested. This means that after two years you would see a 5% return on your £1,050. This would be £52.50 in growth, giving you a total of £1,102.50 invested. After three years, you would get a 5% return on your £1,102.50. This would be £55.13, bringing the total value of your investment up to £1,157.63, and so on. Essentially, the longer you invest your wealth for, the larger the returns you could enjoy, as they compound over time. The sooner you start building your wealth for retirement, the larger your pension funds could be by the time you’re ready to give up work. After several decades of compound growth, even small contributions can quickly add up. This can help to give you greater confidence that you’ll have enough wealth to enjoy the retirement you want when the time comes.
Working with a planner can help you to retire early
Another reason to start building a long-term plan sooner rather than later is that not only could you have more wealth in retirement, but you may be able to retire at a younger age too. For most people, this probably sounds ideal as it would mean that you can spend more time doing the things you love. Of course, this could be much more expensive, since your wealth would need to last for much longer than if you retire when you reach the State Pension Age. However, building a long-term plan while you’re young can help you to grow your wealth more effectively over the course of your working life. Having one in place can increase the likelihood that you’ll be able to afford to retire at an earlier age. When you work with a planner, they can help you to build your wealth in the most effective way, not only with compound growth but also by making informed decisions when investing. Furthermore, having a comprehensive financial plan in place can help you to avoid any financial disruptions that might slow your progress towards your financial goals. This can enable you to rest easy, knowing that you’re on track for the retirement you want when the time comes.
Get in touch
If you want to know more about how we can help you prepare for a comfortable retirement, get in touch. Email us at office@verve-financial.com or call 0330 320 5048.
Please note:
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.
