This is a question we often see from people in their 20s, whether they should worry about starting a pension or can afford to leave it a while longer.
The answer to this question will always come down to individual circumstances, goals and objectives.
We all know that the longer we leave it to save for retirement, the harder it becomes.
This is because we miss out on those years of pension contributions and compounded investment returns, which give us a valuable head start when we start making larger pension contributions in our 30s, 40’s and 50’s.
That said, in most cases there are more pressing financial objectives to consider at this stage of your life.
Paying money into a pension scheme when you have expensive unsecured debt to repay would be a false economy. It usually makes sense to prioritise debt repayment over savings or investment.
Once debt is repaid, at least to an acceptable level, then the creation of an emergency fund of cash savings will usually take priority over saving for retirement.
Paying money into a pension – which you cannot access in any form until you reach your 55th birthday – would be unwise in the event of an earlier financial emergency which plunges you into debt because you have no accessible savings.
Most financial planners recommend a cash emergency fund equivalent to between three and six months of committed expenditure. Get this in place before thinking longer term.
Once unsecured debt is repaid and an emergency fund has been created, there could still be other financial priorities ahead of saving for retirement.
As a result of a decade or longer of rapidly escalating house prices, getting onto the property ladder has become a herculean task, particularly in London and the South East where property prices have fast outpaced average wages.
This means needing to save for a much bigger deposit than previous generations required, something that can take several years and much fiscal dedication.
So rather than worrying about starting a pension in your mid-20s, what you really need to do is to establish a sensible financial plan that considers all of your financial priorities.
Your various financial objectives are all linked and, with limited financial resources, tough decisions need to be made about which take priority.
What I would argue is very important in your mid-20s is to live a lifestyle with a reasonable ‘gap’ between your income and expenditure.
Rather than living life to your financial limit each month, it is important to make spending and lifestyle decisions which result in a gap of at least 10%, but preferably 20% or 30%, between what you earn and what you spend.
Putting this uncommitted income to good use – such as repaying unsecured debt, starting an emergency fund or saving for a deposit on your first home – is an important discipline which puts you in the best position to start saving for retirement once other objectives have been satisfied.
Where you absolutely should start the retirement savings journey in your 20s is where your employer offers a generous matched contribution to a pension scheme.
Assuming you can afford the employee contribution needed to be rewarded with this contribution matching, it would be unwise to give up this ‘free money’ which will quickly boost your pension fund.
Planning for retirement is very important; particularly with all of us living for longer and needing a bigger retirement fund to cover the cost of more time spent in retirement.
Your 20’s are the decade where you can lay a valuable financial foundation for the rest of your life, although in terms more general than solely retirement planning.
Entering your 30’s and beyond with less debt, more savings and as the owner of an affordable property should mean you can afford to save more for retirement as your career develops.
Photo credit: Flickr/S Falkow
