Key Post Should a person in their 20s or 30s contribute to a pension?

Fella

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I think you have also have to factor in that in your 20's and 30's your generally at your peak fitness and health . I would advocate people enjoy life at this stage and not sacrifice living and travelling to pay into a pension. If you have excess cash fine put it into a mortgage/pension , but most people at this age are child free and these are years to be enjoyed , how many years are you actually going to get fit and healthy at 65 that you and your partner can spend that 2 million ? 2 million at 65 seems ridiculous , come 75 your probably on a couch waiting for the 6 o clock news as the highlight of your day , saving for 45 years for about 10 years of been rich meh i'd rather spend now as the opportunity cost of not having this health is real.
 

NoRegretsCoyote

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792
Take this to its logical conclusion. The difference between a 5% nominal return and a 7% nominal return doesn't sound huge. 7% is only 40% bigger than 5%. But over a 40-year horizon a 5% return increases your money seven times, while a 7% return increases your money 14 times, basically double!
@Brendan Burgess

As you can see from the worked example above, I do indeed understand compounding.

Please replicate yourself if in any doubt.
 

Brendan Burgess

Founder
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Hi Fella

Very interesting take on it. I suppose that this thread is whether one should contribute to a pension or pay down the mortgage, given that the person is going to save.

That is a bigger issue: "Should you save in your 20s?"

Not sure if I want to address this in this thread.

Would you like to kick off a Key Post on the topic? Then I could link to it.

Brendan
 

Fella

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Hi Fella

Very interesting take on it. I suppose that this thread is whether one should contribute to a pension or pay down the mortgage, given that the person is going to save.

That is a bigger issue: "Should you save in your 20s?"

Not sure if I want to address this in this thread.

Would you like to kick off a Key Post on the topic? Then I could link to it.

Brendan
For sure I will , probably won't be today though but when I do I'll link you to it, thanks
 

Sarenco

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5,590
Someone on a salary of €115k, starting from 0 at age 40, would probably hit the €2m ceiling if they keep contributing up to age 65.
I don't think that's very likely Brendan - even with a very aggressive asset allocation.

Bear in mind that a significant proportion of those contributions will have a relatively limited time to grow in that scenario.
 

Gordon Gekko

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€37k a year from age 40 to 65 growing at 6.0% a year gets you to €2m.

Eminently achievable with the right asset allocation and an eye on costs.
 

Fergal19

Registered User
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71
You also can't underestimate the behavioural factors. By saving from early on even for small amounts it creates a habit. This habit will stick with you for life, also make you aware of financial matters and improve your financial literacy from an early age. It also gets you a comfortable with investment markets and the ups and downs that go with it. Short Term volatility is a lot easier to accept and thus understand when the amounts are smaller!

The longer you leave it off the easier it gets to put it off for another year. "Ah sure ill catch up next year" etc.... Then when you do want to catch up with a lump sum the investment appears riskier to you as you aren't used to investing. This can result in you under investing the funds and create further issues.
 

Sarenco

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€37k a year from age 40 to 65 growing at 6.0% a year gets you to €2m.
Except that the contributions aren't €37k per year for 25 years.

€37k may be the average annual contribution but the later annual contributions are considerably larger than the contributions earlier in that 25 year period. That makes a material difference to the final figure, even if you assume a 6% annualised investment return after all costs (which I think is rather optimistic).
 

Gordon Gekko

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Except that the contributions aren't €37k per year for 25 years.

€37k may be the average annual contribution but the later annual contributions are considerably larger than the contributions earlier in that 25 year period. That makes a material difference to the final figure, even if you assume a 6% annualised investment return after all costs (which I think is rather optimistic).
Yes...I deliberately went with €37k because it’s prudent.

Years 1 to 5, it’s €29k, Years 5 to 10, it’s €35k, Years 10 to 15, it’s €40k, Years 15 to 20, it’s €45k, and Years 20 to 25, it’s €50k.

By applying those figures, the fund should be even larger!

And in any event, the person could simply choose to stick a linear €37k in.

But either way, €37k at 6% gets you there.

What’s the long term nominal return from global equities, 8%? 25 year time horizon? I’d back that horse from this starting point.
 

Sarenco

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@Gordon Gekko

I think you're missing my point.

During the first 10 years of the simulated 25 year period, the maximum tax-relieved annual contribution is €28,750 - not €37,000. €28,750 compounded @6% over 25, 24, 23, etc years is materially lower than €37,000 compounded at the same rate over the same time periods. The larger contributions come later in the period but they have less time to compound. You can't simply take the total amount contributed over the period and divide by 25.

From 29 December 2000 to 28 June 2019 the MSCI world index returned an annualised 4.09%, in Euro terms. I've no idea what returns will be like over the next 25 years but I think 6% is optimistic, particulatly net of all investment costs.
 

elacsaplau

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622
Much as I enjoy Sarenco missing Gordon's point (and versa vice)........if only there was a way to establish what the figures actually look like at different growth rates.
 

NoRegretsCoyote

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@Gordon Gekko

I think you're missing my point.

During the first 10 years of the simulated 25 year period, the maximum tax-relieved annual contribution is €28,750 - not €37,000. €28,750 compounded @6% over 25, 24, 23, etc years is materially lower than €37,000 compounded at the same rate over the same time periods. The larger contributions come later in the period but they have less time to compound. You can't simply take the total amount contributed over the period and divide by 25.

From 29 December 2000 to 28 June 2019 the MSCI world index returned an annualised 4.09%, in Euro terms. I've no idea what returns will be like over the next 25 years but I think 6% is optimistic, particulatly net of all investment costs.
@Gordon Gekko You would want to have an extremely odd lifetime trajectory of income and expenditure here.

Basically someone with a sustained 97th percentile income from age 40 to retirement, and a lifestyle frugal enough to allow more than half of their net income going into a pension.

Also a person too poor until age 40 to put away even 1% of income to take advantage of the ten-fold growth in assets that a 6% nominal return will generate over 40 years.
 

Gordon Gekko

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I just ran the numbers.

Someone contributing the maximum each year from age 40 to 65 needs a 6.1% average annual return in order to get to €2m.

I estimated 6%.

@NoRegretsCoyote, that’s a strawman argument. I was merely responding re the numbers and the various assertions made regarding what’s possible or feasible.
 

NoRegretsCoyote

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792
@NoRegretsCoyote, that’s a strawman argument. I was merely responding re the numbers and the various assertions made regarding what’s possible or feasible.
I didn't doubt anyone's good faith or arithmetic.

My point is that it is an unusual kind of income/expenditure pattern to have. Rarely applicable to someone casually looking on AAM.
 

Sarenco

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Messages
5,590
Someone contributing the maximum each year from age 40 to 65 needs a 6.1% average annual return in order to get to €2m.
I arrived at a slightly lower number using an annualised rate of 6.1% but it's pretty close.

Workings below -
  1. 28750 126335
  2. 28750 119071
  3. 28750 112226
  4. 28750 105773
  5. 28750 99692
  6. 28750 93961
  7. 28750 88558
  8. 28750 83467
  9. 28750 78668
  10. 28750 74145
  11. 34500 83859
  12. 34500 79038
  13. 34500 74494
  14. 34500 70211
  15. 34500 66174
  16. 40250 72765
  17. 40250 68581
  18. 40250 64638
  19. 40250 60922
  20. 40250 57419
  21. 46000 61849
  22. 46000 58293
  23. 46000 54942
  24. 46000 51783
  25. 46000 48806
  26. - 1955670
 

Sarenco

Frequent Poster
Messages
5,590
I think this means that you didn't miss any point!! ;)
My point was simply that it was inappropriate to use an average contribution figure (€37,490 in this case).

I would have thought the above demonstrates why that is the case but you obviously disagree.

I would be very interested to understand your reasoning.
 
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