The Optimal Age To Save for Retirement

the number one Financial regret of the baby boomer generation is that they wish they'd started saving for retirement sooner and I don't think that's a boomer exclusive concern one of the most common things that people say to me is I wish I'd started all of this sooner growing concerns of a retirement crisis certainly don't help it's easy to see why when most people start taking retirement seriously in their 30s 40s or even 50s they can quickly come to the conclusion that they've started too late but is that actually the case the retirement crisis give us your diagn is of that problem right now you got you got you got that milk money I got I got I got that milk money time is up I got mil money on August 8th 1949 Life Magazine published this article about widely renowned American Artist Jackson Pollock in it they raised a question is pollock the greatest living artist in America they wanted to Proclaim him as such but there was another Contender for the crown who just couldn't be ignored Anna Mary Robertson Moses was a commercial Force the likes of the art World rarely sees in a single year hmark alone shifted 16 million Christmas cards with her designs on not to mention the cops stamps and just about any other surface her work could be plastered onto Anna is one of the most successful artists of all time but most won't know her by that name instead they call her Grandma Moses because she didn't start painting seriously until about the age of 76 such is the surprise that a person can have any use in their later years that every time she's discussed every search you make about her the first thing you see is not a discussion of her art but her age as a culture we're obsessed with age and youth it's this idea that you're too old to make a difference and then the surprise when you actually do that is relevant to today's discussion because this paper from The Institute of fiscal studies discusses making a difference in later life and I think the results will surprise you the premise is simple the ifs think enough has been said about how much you should save for retirement but no one is talking about when you should save for retirement the most common way of saving for your retirement is the auto enrollment scheme at work and in this example let's say you pay the minimum payments on a monthly basis you're paying around 8% in total of your gross salary into a pension and that amount say static over the course of your life as a percentage of your overall income is this linear savings approach and with that sort of approach the sooner you start the process the better this is why when you Google how much you should have tucked away for retirement by 30 you met with numbers like 100% of your annual salary or these sorts of discussions that point out if you started at 25 rather than 35 you would have double the amount in retirement notice again the linear assumptions around the amount that you save each month these articles are just absolute mood Hoovers sucking the life out of Anyone who reads them that isn't under the age of 25 making them feel crap about themselves but the ifs goes life is not linear it's not this straight line we don't hop onto adult and at 21 and just ride the escalator to the end life is chaos a Meandering mess that resembles a pollet painting and at different points in our life we Face Financial challenges and Milestones that rock our worlds this paper looks to acknowledge that and it's findings make an absolute mockery of the notion that you're starting too late if you're 35 45 or even 55 they actually argue that it's not optimal to have a consistent savings approach throughout your life and they actually say that in some years we should save nothing at all saving anything every year of your life may not be the best thing to do the dotted line on this table reflects this consistent savings approach we've discussed and these are the lines that this paper argues are the optimal approach if we're accommodating for the curveballs and Milestones and average person faces in their life now when I say optimal what the paper is looking to do is smooth out living standards over the course of a lifetime basically to make sure that you have money to spend on life when you need it and then that you save more when you have the ability to save more they modeled this in a few ways which we'll look at in a second but in almost every case the optimal period to do the majority of your retirement savings comes after the age of 45 you see the saving rate just shoots up here on the graph this chart as I said is a combination of three different charts or models that they ran that each look at predictable life events that the average person will face in modern times the first Trend that they looked at was the tendency for us all to earn more money as we get older before we take a look at what they found let me just tell you about today's video sponsor the daily upside the daily upside is a completely free daily newsletter that is sent straight to your email inbox I read it every day and I absolutely love it and that's why in 2022 I reached out to them and asked if they wanted to sponsor this channel they said yes and they've been supporting what we do here ever since they give you an overview of everything that's happening in the finance world and they don't just focus on American stories as you can see here with this article that discusses octopus to UK energy business the stories are written by Finance professionals so the journalism and insight is always topnotch like I said it's completely free there are no pay walls or upsales or anything like that you just sign up using the link in my description or the one in the pin comment for you you whack in your email and that's it you signed up and you know if you don't like it you can always unsubscribe right back to the video on this point of higher earnings they basically said instead of consistent saving rates across your life can we accommodate for that trend of higher earnings in later life so when we're older we relieve some of the pressure to save on our younger poorer selves and pick up the slack when we have more disposable income and less commitments remember they're optimizing for quality of life here and what they want to do is still end up in the same position in retirement so even though there's not been this consistent saving rate we still end up in the same place with the same amount of money at retirement they concluded that this could be done following a pattern where Beyond 35 the saving rate shoots up here is your consistent rate of saving that reflects the current Auto enrollment pension scheme and here is an approach that accommodates for the trend of higher earnings in later life optimized for smoothing out lifetime living standards the three different lines here represent the levels of Education that you might have as that is an indicator of your total earnings and also your cost of living so just to pick one out the average person here with a lower education in this model could start saving at 36 and be okay if they followed this savings pattern this is coincidentally the same age most people get serious about saving for their retirement and it's the age when we see most people start to pay more than the minimum contribution into their pensions I guess they finally realize that their dreams of being a rockstar won't pan out and they're going to get old one day but look if Grandma Moses could become Queen of the canvas at 80 you can do anything let's just point out that this point on the chart here resumes zero savings prior to these ages so if you've been paying into an auto enrollment pension or any savings for that matter in your 20s and 30s but then you go oh crap I need to get serious about this well you will be ahead of the model already the next life event they wanted to look at was kids they ask is it sensible to have a fixed savings rate when the average person between 30 and 32 has a kid or to so before we look at the graph they plot this chart plots the amount of people in each cohort that are struggling financially this black section here being people who are not coping financially notice how as we get older the trend is downwards as people are mass wealth but at this 35 age range here it kicks upwards which is a reflection of the increased responsibility and pressure this age group face as kids on average get older and more expensive so bloody expensive so the ifs wers again can we accommodate for this can we improve the living standards of those people in question relieve some of the savings pressure but still hit our financial goals for retirement later on this is what they came up with here here is the straight line the consistent approach again and here is the approach the ifs argues would still work the saving rate steeply declines at the point child one comes along then it kicks down again here when Child 2 arrives the savings rate sits very low whilst the children are still at home and then races back up again when they flown The Nest also you'll notice that the savings rate in this example is higher prior to the children arriving so maybe the best way to prepare for kids is to fill up your pension before there's a mini youth filling up some Pampers the final event they modeled was for student loans they acknowledge that many people will one day clear or get their loan wiped and when they do they can use the amount they were paying and put that into pensions again in the earlier years of this example the saving rate on this model is very low combine these three models together to get what the ifs thinks is a better way to save for retirement over a lifetime this wonderful lumpy bumpy mess of a graph we started with where in the earlier years the pressure to save is minimal versus the end and really the bulk of the work is done beyond the age of 46 now we need to stop for a second here this paper really attempts to put forward the question should Auto enrollment schemes be static percentages or should we Flex up and down the amount that people paying to Auto enrollment based on age and life circumstances it looks to optimize full quality of life throughout your life and the key argument is that most work for the retirement savings can be done at a later dat I don't want you to take that as an excuse to stop saving you know it's still very much the case that any money that you save early on is going to help relieve the pressure later on down the line they model this themselves and show how by being in the Auto Work enrollment schemes early on in life you relieve a lot of the savings pressure later on down the line below I've linked a document that I've put together that looks at some of the fun choices available inside of most of the work-based pension schemes that people are part of check that out if you're looking to get more actively involved in your workbase scheme this discussion around when is best to save is a pretty nuanced debate and and they've had to make loads of assumptions about rates of return your earning potential and the fact that your children will have left home and won't still be sat on the sofa at 25 the point of this video is not to convince you to delay savings you should 100% save as much as you can as early as you can because it's just going to lighten the load we can't make assumptions about your future life we can't sit here and say you will definitely earn more and this is how your life's going to pan out but in the same way we can't go back in time we can't change the past and the mod that this paper performed and the conclusions that it's not only realistic but potentially optimal to save the majority of your retirement Savings in later life I hope provides reassurance for anyone sat there thinking they've missed a boat or that they're late to the party it's very much possible to produce the results of someone who's saved consistently throughout their life by just increasing your saving rates in your Peak earning years when you've shared the expensive responsibilities of children in a home grandar Moses lived a life of relative poverty but died a multi-millionaire money for most of our adult life she lived and worked on a farm milk money I'm sorry anyway she ran a farm had 10 kids over a lifetime five of which didn't survive infancy so yeah she had a lot going on and really it was only when that responsibility stopped that she was able to make strides towards building her wealth I'm not saying you should paint Whimsical Landscapes to fund your retirement but I just want you to give yourself a bit of a break and realize that saving up massive amounts in your early career is not easy to do and if you think everyone else is doing that and you know you're left behind well the data would SU suggest otherwise nearly onethird of Brits are not currently saving for retirements at all 21% of people admit to having no pension savings including 177% of those aged over 55 who are nearing retirement according to the on the median average UK pension part is £ 32,700 now this applies to all age groups so as you get older the number changes for 25 to 34 year olds the average is 9,300 for 55 to 64 year olds the median is 17,300 by sitting here and watching content on pensions and actively asking yourself the question am I doing enough you're ahead of most people in the UK so let's say you're 55 today and you have nothing in savings at all and you go into work and you start contributing into your workbase scheme and through those contributions tax rebates and the employer match you get to a point where you're putting 10K a year Away by the time you hit 65 assuming a 6% growth rate you would have 1 32,8 15 so without factoring in any other savings the state pension home equity or even the ability that you may have to save higher than that from a standing start at 55 you would Place yourself now well into the top 50% of people in your age group based on today's medium figures and then at 65 you don't just stop Grandma Moses's career ran from the age of 78 to 101 she painted 25 paintings in the year that she died but anyway her 23 year long career as a painter is 3 years longer than my whole professional life which includes let's see a stint at a shoe shop a pub top man three years at Uni five big adult jobs as you call them two part-time jobs washing pots at a pizzza Express and delivering Chinese takeaways in ffield not to mention this YouTube channel two decades of painting led her to the point where she was one of the most popular artists on the planet more popular than Pollock at her height and she achieved that at a point in her life where most people would say you're done life and your ability to earn cash does not stop at 60 this chart plots the average length of a retirement over the past few decades in 1970 as a male you might expect 10 to 12 years today that's closer or even above 20 years for women it's 25 years most people watching this will have a retirement that exceeds the length of their entire childhood or matches the years between 30 and 50 think of everything you did between 0 and 20 or everything you have and hoped to do between 30 and 50 and the fact that you'll have all that time again it's not pointless time it's not unproductive are you really just going to sit there in one of those weird armchairs waiting to die if you have dreams of a retirement that involves no paid for work then that's okay if you're late to the retirement planning game I hope I've shown you today that it's possible to achieve the same levels of retirement a consistent savings approach will have got you by just focusing on higher savings rates in your Peak earning years and actually this ifs paper put it out there that this is optimal if we're trying to live our best lives but let's also acknowledge that retirement is different nowadays to the recent past we live on average longer and for that reason many of us will work for longer in some form not always because we have have to as well or we're forced to many of us will do it because we want to painting is not important the important thing is keeping busy so next time you're Bea yourself up about starting too late on your investing Journey or thinking about what would have happened if you started 10 years earlier just remember Grandma Moses this ifs study and tell yourself this narrative about it being too late for me is just a load of pollock you in the little welcome to the dairy Dutchess love Factory

Channel: Damien Talks Money

Views: 71,514

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Id: xDYUAQTqxK4

Length: 13min 57sec (837 seconds)

Published: Sun Apr 28 2024