When you’re young and in your 20s, the current pension age of 66 seems light years away, like you’ll almost never reach it, it’s SO far away. For the average 20-year-old, 66 seems SO old (!).
I had this conversation with a friend’s 20-year-old son, let’s call him Tim, a few years ago when he started a new job.
The Pensions Conversation
The conversation went something like this.
Me: ‘Congrats on your new job. So, are you saving into a pension?’
Tim: ‘ A pension?!’ he spluttered. ‘But, pensions are for old people!’
Me: ‘That’s the point!’
Tim: ‘But I might not even live to my 50s or 60s. Even if I save into a pension I can’t access it for about a million years. So, what’s the point?’.
Me: ‘Ok, so you are expected to live to be about 100 years old. What are you going to live on later in life, air?!’
Tim: ‘But, I can get the state pension when I’m older’.
Me: ‘Have you any idea how much that is?’
Tim: ‘No.’
Me: ‘The maximum you can get right now is £203.85. But if you were 66 now, it doesn’t mean you’ll get the full amount. It depends on your circumstances.’
Tim: ‘200 quid a week? Is that all?’ Blank look.
Me: ‘Yes, that’s all. Have you any idea of the pension pot you would need right now if you were retiring as a single person in London?’
Tim: ‘No idea’.
Me: ‘£357,500’.
Tim: ‘That much?’
Me: ‘Yes, that much and that’s only for the absolute basic standard of living. That would only give you just under £1200 a month to live off. That would have to cover rent, utilities, food, everything.’
Tim: ‘Okay then, can you explain pensions to me?’.
I asked Tim, how much he could spare a month. ‘I can do about a £1 a day’ he smirked thinking that this would never work.
‘Perfect’ I said, ‘that’s a good start’.
Time and Compound Interest and Your Pension
I told Tim that he had something very valuable, time and how time and compound interest could make him wealthy.
I showed him how this worked using the £30/month example.
Me: ‘So imagine you invested a pound a day every day until you are 57’. (This is currently 55 for your private pension but is due to change to 57 on 6th April 2028.)
‘Starting with £0
Invest £30/month for 37 years
The government gives you an extra £7.50 which is free money, so the total is £37.50.
Invest £37.50/month, 7% return over 37 years gives you a pot of £74,859.’
Tim: ‘Almost 75 grand from just a pound a day?!’. He couldn’t believe it.
Then I showed him the chart below.
Tim’s eyes widened. ‘You mean I only had to contribute £16.5k to get almost 75 grand?’
Me: ‘Yes. And if you add in employer contributions it’s even more. Plus the contributions help cut your tax, so you are paying yourself multiple times. Also, as you start earning more you can contribute more which means you could have a massive pension pot by the time you retire.’
I Want To Be a Pension Millionaire
Tim then tells me: ’75 grand is okay but I want to be a millionaire. How do I get to a million pounds by 57?’
Me: ‘To get to £1M in 37 years, you would need to invest on average £500 a month at a return of 7%.
Tim: ‘But I don’t have anywhere near £500 a month to invest.’
Me: ‘You invest what you can at the beginning then as you get better jobs and better pay you increase your contributions so you can reach the £1m mark’.
Tim: ‘How do I get from £37.50 a month investment to having a pot of £1m? That seems impossible’.
Me: ‘This is how’. I showed him the calculations below. Each increase in contributions represents a new role with a pay rise. The average rate of return is 7%.
| Starting Amount | Contribution/Month (Gross) | No. Years Invested | Total Contribution | Interest | Pension Pot |
| £0 | £37.50 | 2 | £900 | £66.45 | £966.45 |
| £966.45 | £250 | 3 | £9,000 | £1,224.11 | £11,190.56 |
| £11,190.56 | £500 | 10 | £60,000 | £36,832.41 | £108,022.97 |
| £108,022.97 | £750 | 10 | £90,000 | £143,488.72 | £341,511.69 |
| £341,511.69 | £1,037 | 12 | £149,328 | £509,267.11 | £1,000,106.80 |
| TOTAL | 37 | £309,228 | £690,878.80 | £1,000,106 |
Tim: ‘Well, I’ll definitely look into this! I only need to contribute £309k to get to £1 million. That’s unbelievable.’
Me: ‘Time and compound interest….’
If You are In Your 20’s
Are you in your 20’s or do you know someone in their 20’s who hasn’t started a pension? You could show them this post so they can see the advantages of starting to save early and using the valuable currency of time.
Thanks for reading!
Share your comments, and experience or ask questions in the Comments section below.
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