28 Dec 2011, 11:51am
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  • How I Got Away With Not Saving For a Pension in my 20s

    The standard advice for anyone in connection with pensions is start early, young man, start early. Do it, and do it now – your early savings are what makes all the difference.

    I didn’t. I effectively started at 28, and even worse because I want to retire early I effectively started later in my working life. For a normal worker in my industry retiring at 60 I would have been saving for 32 years whereas I’ll be lucky to reach 25 years. I’m therefore like a normal worker starting at 35. Because my company pension is a final-salary one, the difference is less than it would be with a DC scheme. However, I’ve had to make changes in the last three years to try and make up for the difference.

    Because I own my house outright this has been easier for me, and it make me wonder if the standard advice is simplistic, and people should take a systems approach to their lifetime finances. In a later post, I will try and work out what proportion of income I did spend on the various key aspects of life (housing, hedonism, tax and pensions). The information isn’t precise for some of the early years, and yet I believe it shows that as long as you do save for some key asset classes in your 20s, it doesn’t have to be a pension in those earlier years.

    I’ve analysed  my working life, and mortgage, rescaling values to eliminate the scourge of inflation which makes it so hard to compare values over a thirty-year working life. Here, I have looked at various pension saving scenarios and how they would work out, as if I were saving into a defined contribution pension at 15%, about twice the rate of NEST’s 8%. Defined Benefit (final salary) pensions are better than NEST largely because more money goes into them, usually from the employer so it is not always visible to employees. However, a pension is deferred pay, so two employers both offering  the same salary but one offering more contribution to a pension are actually offering different salaries.

    First off, an extreme wealth warning. If you are in your 20s and looking for an excuse to live it up at the expense of saving this is not your ticket to ride. You have far more unknowns ahead of you that I have in describing this story, because I am in my early 50s and my career trajectory is known. If you’re young and you use this to justify not saving your 8% of income into a pension then you need to save 8% of your income into some other asset, and assets do not include most of the things you might want to buy ;)

    I got into deserved hot water over here for the assertion that you can make up for a lack of saving in your 20s, and that compound interest will not necessarily ride to the rescue. Not because I didn’t get away with it, but because

    @ermine — Thanks for the follow-up. I’m going to argue strongly against what you’re saying, for the sake especially of young readers reading, as I think it’s dangerously misleading.

    [...] I don’t want Monevator to help put people on the exactly the opposite path that I set out to postulate, and that we post on every day – i.e. at a minimum, realistically aiming to achieve financial security within their lifetime, or better yet some financial freedom.

    Consider yourself warned young person, Monevator is right in that you can’t know until you are 50 that you won’t take some important hits I didn’t. I am looking back over my working life and I know what happened. Young reader, you are looking forward over an unknown career arc. You may have less luck that me. In particular, if you are a woman in your 20s do not follow my path. I will explain why later, but you are exposed to more serious risks statistically that men at the same age. It’s not feminist, it’s not fair, but it seems to be what happens, and you should protect yourself against the world as it is, not as it should be.

    Having said all that, I consider this pretty clear proof that the magic of compound interest is not all that it is cracked up to be, and that is is perfectly possible for someone who has a career path similar to mine to catch up for the lack of early pension savings in ther 20s. Observe that I did not accumulate any debts in my 20s, and my savings went towards putting down part of a 20% deposit on a house I stupidly bought at the height of the Lawson boom. For all the good those savings did me I could have drunk it all in the Television Centre bar and had twice yearly holidays in the sun, but I stuck with just reasonably excessive drinking and one holiday most years.

    The community that can take inspiration from this analysis is the one of the greybeards who didn’t follow the recommended route, and delayed saving till their thirties or even forties. As long as they didn’t screw up with debt, and as long as they paid their mortgage down at the recommended rate, they can recover without working till they drop, through the application of ERE’s methods, but perhaps calling it Earlyish Retirement Extreme

    Setting the scene – how I simulated different saving approaches

    To try and make sense of the last three decades, I have taken my salary and normalised it to 1 for my first proper job with the BBC in 1984. I am British, and unlike our American friends I just don’t like talking about how much I earn. Regular readers have probably roughed it out by now, but you ought to have to work for it.

    I’ve then rebased everything by scaling for inflation using the RPI index, setting that first BBC job to a nominal value of 10000 pounds. In the RPI adjusted world I have created, that 10000 pounds holds its value across the three succeeding decades, because I deflate prices and my salary by RPI inflation.

    an ermine's inflation-adjusted income and mortgage stupidity

    You can see that over the years I improved my income in real terms by over two times. The dip in 1987 was when I took an MSc with a Manpower Services Commission grant. You can also see that the ermine is taking a hit from the stinginess of my employer and the rampant inflation of late towards the end. The actual high-water-mark of my real income was in 2008.

    I’ve also represented my mortgage on that. Look at that awesome income multiple of what, 5 times? Millennials and the Priced Out generation take note, I had to stump up a deposit of about 10% to bring that multiple down to within spec so my debt was lower. I then had to borrow another 10% interest-free on a credit card advance to avoid taking the shaft from high loan to value insurance, which I paid down in the first year. Whenever it looks like a good idea to pay more than 4*salary for a starter house, STOP. You are either earning too little or paying too much, just like me :) What isn’t shown here was I had an endowment mortgage which I only managed to conclude a mis-selling case on in 2004. Friends Provident sold a single ermine with no dependents a life insurance product, FFS. Fundamentally I shouldn’t have been so stupid, but at least I did get the situation restored to what a repayment mortage would have been (the endowment had fallen behind by 1/3). That payment from the endowment is why it looks like I robbed a bank in 2003/4…

    Although I was a feckless young ermine, taking my BBC final salary pension as a cash lump sum on moving to my current company, I am lucky enough to have been in a final salary pension scheme since then for the rest of my working life. Taking a leaf from SG, I have simulated that pension with a steady pension saving rate of 15% from my rebased and inflation-free income, compounding at 5% which seems a reasonable estimate for the long run stock market total investment return after inflation. Mind you, someone who has been saving using an index tracker over the last decade may take a dim view of that 5% assertion! I’ve then modelled how various different variants of me would have done with different pension savings strategies.

    Meet the Cast of Characters

    Steady Eddie

    First we have Steady Eddie. He starts work, saves his 15% gross into a pension scheme from 1983 until he retires at the end of 2010, 27 years later. He is the benchmark for how you should save into a pension. In all these graphs, the magenta bars are the parts contributed by the magic of compound interest. Note that most of this is Eddie’s own saving, though I do agree it would be churlish to deny the value of compound interest, as it makes up 48% of his pension capital.

    Steady Eddie. Take it slow, Eddie, this is how pension saving should be done

    He has experienced the same career progression in real terms as I did, so he earns just over twice as much as a greybeard as when he got his first real job. I normalised his wages to £10000 in 1984. I don’t count my very first job as that was a poorly paid technician post; I started looking for work in 1982, into the teeth of Margaret Thatcher’s first serious recession, so I took the first vaguely relevant job I could get. Eddie is sitting pretty with a pension of 6554 pounds in my normalised universe with a pension capital of £131000. That’s slightly under 40% of his average salary and 28% of his final salary. I am lucky; if I left and drew my pension now I would get a higher percentage of my final salary, and I am duly grateful for my good fortune in that I have had a stable job that has been interesting and rewarding for the vast majority of my time there, regardless of things that may have gone wrong in the recent past.

     Sensible Susan

    The only lady in the bunch, Sensible Susan follows the same path as Steady Eddie for 11 years. Ball-breaking feminists are going to hate this, but she then quits work to have children.

    What can I say? I’ve observed it happen that way often enough, and even if Susan returns to the workplace the missing years are critical to one’s career deveopment. Though my pay didn’t go anywhere in real terms in my 30s the projects I worked on built the platform on which I got the next decade’s rises. However, since she was sensible, Susan has built the classic early starter ‘magic of compound interest’ example of saving for ten years and stopping. Except I’ve had her save for eleven years, because I took time out to to an MSc in 1987 and it seems a bit tough on the Sensible Susan version of me to KO 10% of her earnings as well as well as have her stop work early. Articles like thisthis and this lead us to believe that the magic of compound interest will save her pension, but a casual inspection of her savings graphs relative to some of the later more feckless versions of me will show that just isn’t true. I have kept the vertical axes the same scale.

    Sensible Susan - the magic of compound interest (magenta bars) works for her but it doesn't make up for the serious lack of contributions

    Sensible Susan is on less than half of Steady Eddie. Compound interest makes up more than half her pension capital (66% of a total of £53000). She’s going to feel the pinch with less than half the pension of Eddie. On the other hand, she’s contributed less than a third of Eddie’s contributions. That she is closer to half than a third of his pension speaks something for the magic of compound interest but no way as much as you’re led to believe.

    Feckless Freddie

    He’s a lazy B’stard, our Freddie. He spends far too much time in the BBC Television Centre bar eyeing up the beautiful people of the luvvie set, who are far prettier, and, er, of the right sex, than the hairy-arsed engineers in the bowels of TVC where he works. As a result, he doesn’t realise till too late that London prices appear to be getting away from him. One day he ends up in the Broadcasting House bar (a classier lot in those days, the Radio types than Freddie’s Television Centre chums) and listens to yet another gorgeous sylph-like Rebecca and her pretty-boy BF talking about how much the price of their house has gone up and “oh gawd, Tarquin, ahhhrn’t we rich, dahlink”. On the radio Freddie hears Elvis Presley singing “We can’t go on like this”.

    and thinks to himself that yes, London, we can’t go on living like this, I am caught in a trap. As Freddie pulls his head from yet another pint of E.S.B. he looks up and gets his coat. Freddie figures he needs to go up the value chain a bit from being a studio engineer, and get away from the city that won’t let him live in it without paying exorbitant rent. After a Tube journey he gets on his bike to cycle up the Western Avenue from TVC to Hanger Lane, and thinks about a research job with more pay and a chance to buy a house. But first he needs to fix his ropey Batchelor’s degree. When he gets home he notes the beginnings of a gleaming white pelt starting to show.

    Yup, Feckless Freddie was me. I did the MSc, returned to London for a year then moved up to Suffolk. House prices were still sky rocketing, and I had to get on the ladder before it became out of reach. Oh dear…

    I did investigate whether my BBC pension could be transferred to my current employer, but it didn’t work out. If I had those three/four years they’d be useful but I’ve been here long enough it isn’t a huge amount. As a deferred pension it would be diddly squat, as it is referred to my final salary on leaving the BBC, so even if it didn’t lose over the years to inflation it would be referred to as final salary less than half of the one I retire on. So I used the £700 surrender value to a good purpose towards the deposit on the house. Oops…

    So how does my alter ego Feckless Freddie get on?

    Feckless Freddie and his Frantic Antics at the end

    The three yellow bars are the savings I have managed over the last two and a bit years, effectively twice my gross annual salary. If we ignore these, we still see that Feckless Freddie has an accumulated pension capital of £78000, less than Steady Eddie but still a lot more than Sensible Susan. Why is this? It is because twenty years of compound interest doesn’t make up for Susan’s shortage of contributions, and this is made a lot worse by her lack of the boost provided by career progression.

    It is the weakness of compound interest at realistic rates of real return, combined with the fact early pension contributors are contributing from a low earnings base that means all those stories about early starters staying ahead are just wrong. Feckless is obviously feckless, because he is about half short of Steady Eddie. However, he’s paid off his mortgage by the end, so he can now hit the tax-advantaged pension savings hard. His risk of the government shafting his plans is reduced as he is within a few years of drawing his funds, and the tax-free-pension-commencement lump sum could be just the ticket to make up for his fecklessness earlier. Feckless Freddie ends up with £129k, compared with Steady Eddie’s £131k. After three years of austerity, Freddie can sign up for his pipe, slippers and cruise brochures too.

    The fact that Freddie ends up with the same as Eddie isn’t totally coincidental. I targeted making up for the lack of pension contributiuons due to my missing years as well as compensating for retiring early. I can’t compensate for both unless I work another two or three years, but I can eliminate one. The bar was set by what my own pension would be if I stayed to 60. My assumed real rate of return was 5%, and though I can realise that as dividends I don’t believe I will get a total return of that much even though I have bought mostly since the crash, and a lot at the early 2008 low. I think my share capital value will fall behind inflation in the years to come, but this will hopefully happen slowly so if won’t kill me off in the period between leaving work and actually drawing my pension. If my share capital and dividend income starts to get nuked, well, that’s why I have about the same amount as my shares ISA in cash savings, because there is the mother of all economic shitstorms coming our way. I won’t be a forced seller in that intervening period unless the value of that cash is destroyed because this sort of thing happens.

    Looking at Sensible Susan’s holdings, note that what early saving and compound interest have bought her is insurance. She is unlikely to be totally unable to work again, and if she returns to the workforce then some of the same techniques used by Freddie are open to her. She is likely to reach a lower maximum salary in real terms than if she hadn’t taken time out of the workplace because other workers will have been honing their skills and schmoozing their way up the greasy pole in the gap, but there’s nothing stopping her making up some of the difference. Had he not done something drastic, Feckless Freddie would be closer to her pension than to Steady Eddie’s.

    Finally, let’s meet

    Stupid Steve

    Steve couldn’t see the point of all this saving for retirement malarkey, life was for the living here and now. He’s been a bit stupid, really, our Steve, and only started saving for retirement for the last ten years of his working life. He’s almost like Sensible Susan in the number of contributions, but what makes him stupid and her sensible is he did it the wrong way round. Everybody tells you you have to save early on, right? So what happens to Steve, he’s going to get slaughtered, right?

    Stupid Steve loses out, but not as much as people would think, since his contributions are twice as high as Susan's

    He’s had the same career progression as I did, so his pension contributions are made at the peak of his earning power. He’s on a pension capital of 43,000 compared to Susan’s 53,000. But he’s still got one ace to play that she doesn’t necessarily have. He’s still working, so if he manages to sock away twice his gross salary towards the end, getting himself up to 94,000.

    Now there are some things about Stupid Steve that make you think perhaps he may not be the most financially savvy cookie. But there may be mitigating factors. Say Steve is self employed, and he’s been building up his business all his life. When you or I leave work, we have nothing to show for it expect a few beers down the pub, a gold watch and of course the pension. When Steve leaves work and retires, maybe he has a viable business he can either get someone to run and it pays a dividend, or he can sell the company as a going concern and recover the capital he built up over his working life. Suddenly Stupid Steve isn’t so Stupid at all, perhaps he is Smart Steve. He’s only doing the pension saving at the end because it’s rude to say no to a 40% tax break with five years or less to run.

    Conclusion

    The advantages of compound interest are vastly overrated as they apply to real-world pension saving. Real people

    1. don’t have enough time
    2. can’t get enough real investment return
    3. haven’t advanced enough in their careers

    for the much vaunted example of Sensible Susan ending up with more pension capital than Feckless Freddie, even if he starts 10 years later. They’d have to achieve an investment return of > 8.5% in real terms for that to be true, and it just ain’t going to happen.

    The main thing you buy by saving into a pension early is insurance – against long spells of job loss, unpaid sabbaticals or incapacity.

    Earlyish Retirement Extreme

    The message to greybeards who have spent too little time saving in their youth – there is hope! You can do it. Austerity is a lot less painful for a 50-year old with their house owned mortgage-free than it would be for a 25-year old. Most of the things that are wrong in my life are to do with the fact I am working, the environment is enervating and it consumes a lot of my time. Very few of the things wrong in my life can I solve by spending more money!

    The Archdruid identified the key issue in this post.

    What most Americans do not know, and have no interest in learning, is that it’s possible to be poor in relative comfort.

    I found the transition, from a normal average consuming lifestyle to one of consuming less, very hard. I was far more motivated to go through it because I was under the impression I would become unable to work or ejected from work in months. I wouldn’t have been able to complete the transition otherwise, but after six months of consumerism detox I was off it.

    Above all else, if you’re doing Late Retirement Extreme saving as opposed to Early Retirement Extreme saving, you are probably saving at the peak of your earning power.  To save in real terms what I saved in the last nearly three years would have taken me nearly seven years of saving at the BBC – I didn’t work there that long! Plus my outgoings were a higher proportion of my pay than they are now; what would I have done about paying the rent? Not only that, the money I saved would be locked away for three decades for governments to try and get their sweaty mitts on it, and I would have saved less tax.

    As for seven years staying in my sleazy bedsit as opposed to three years reduced outgoings at home with the lovely company of DW, well, I dunno. Getting on isn’t all bad :)

    the young person’s dilemma

    Even for young people, and subject to this dire warning I’m just not so sure that locking your savings in a pension for 40 years (by the time you are 30 the retirement age is probably going to be 70+) is the best thing to do with any cash you may be able to save between 20 and 30. There’s lots of contrary opinion, like this and this to the effect that I am wrong here, so you have to make this call yourself. The primary risks that mitigate against later saving are if you expect to take significant time out of the workplace to pursue lifestyle choices or you expect career progression to be lower than mine. Taking time out tends to lower career progression, switching jobs between and within organisations more than me tends to increase it.

    Look at those charts, and they are for a relatively short working life of thirty years, compared to 40 or 50 years that are implied by State retirement ages of nearly 70. As long as you start by the time you are 30, giving you 40 years to save before retirement, I’d say there may be other more pressing calls on your saveable cash. After all, though I was a dipstick for using my BBC pension funds towards a house, the financial strategy was right – put this into a capital asset. You recognise an asset because it either saves you more money in its lifetime than it costs you, or it pays you an income.

    A house is a capital asset if it saves you rent, and the many reasons for not buying a house don’t outweigh the many reasons for buying a house. Machinery, services and supplies for a business are an asset if the business can turn a better profit than the cost of those assets properly depreciated would return on the stock market on in a bank. Your van is an asset if it lets you get more work than it costs, your Ferrari, designer suits and your Sky subs are not assets.

    So as long as you understand assets, and as long as you save into assets or RPI index-linked cash the amount you would save into a pension (at least the equivalent of 8% pre-tax), I would say a young person might do well to take a strategic view that saving to a house or saving to buy assets for a business or saving cash is more relevant to their financial lifestream. Pensions advice is so one-dimensional. Do it. Do it now. How about no, let’s work out that this makes sense?

    Assets can help you save in a pension later on. My house contributes £9800 p.a. to my pension saving – it would cost me £7k to rent it but I don’t pay myself rent or a mortgage and I’d have to pay 41% tax and NI on that, which I save going into a pension. That’s not a bad ROI, it’s actually over 10% p.a. on the RPI adjusted price I paid for it.

    There’s a time and a place for pension savings. As long as you heed the dire warning and understand it, I’m not so sure between your 20s and 30s are that time. Just save that 8% of income somewhere accessible and tax-sheltered if in financial assets. Yes, you’ll lose the tax break now, but heck, you’ll probably pay basic rate tax on it on the way out so don’t sweat it. Who knows what tax will be in 40 years’ time! It is possible to make up for lost time. The amount I have in pension AVCs alone is enough, at a real return of 5%, to compensate for the six years of contributions I am short.

    Very Late Retirement Extreme is what I’m looking at i.e. around or beyond “normal” retirement age. I’m on the ERE path but not sure what that will look like 5yrs from now. It could be I’ll be at or near the beginning of some kind of potential semi retirement. If so, I’ll have achieved a lot, if not, I’ll have to just plug away some more. I’m probably somewhere between a Feckless Freddie and Stupid Steve.

    However, I agree with your advice to own your house outright. It’s also a good idea to invest in other assets that will generate income. For example, by paying off my rental property, I would get roughly the same amount of income as investing twice the amount in an annuity. So between rental income, a partial pension from a previous job, dividend stocks and or an annuity, and whatever I can squeeze from the government system pension, I could probably punch out at around the regular retirement age with just about 50 – 60% of my average salary that is if I don’t croak first.

    There is a lot to be said about starting earlier but, as you point out, when you’re older it is a lot easier to be frugal then when your young, or not so young, and foolish. And while you may be able to live like there’s no tomorrow when young, you can certainly not live like that when you’re getting up there where you can clearly see ( and feel ) the inevitable. Happy New Year !

    I think I agree with a lot of your points, in particular that just leaving CI to work on small initial sums is not going to work any magic without bigger inputs later on, especially since most people don’t have the savvy to be good long term investors in their 20s (I didn’t).

    However, those with kids will find it much more difficult to be frugal in middle age: you need a bigger home and you spend more on food. And that’s before pester power kicks in.

    There is a longer term issue about whether a real terms uplift in income will be as large in the future. Curiously, I find too that my real income increased by a little over 2x over the main part of my working life (27 years).

    I do think that diversifying your asset base is a good idea and I suppose that, historically, the UK has ignored the pensions industry and voted with its feet for that too, in terms of property. Again, what will the future hold here?

    @g – you have a nice diversification there. I have a little, inasmuch as I have business assets, a share protfolio as well as my pension, there are an awful lot of people with just one retirement asset which would make me uneasy. You have a better asset spread than I have there.

    Owning your house and therefore naising the cost of accommodation conundrum is key to retirement IMO – I’d have to have a much larger share portfolio to be able to cover rent, indeed more that the inflation-adjusted amount I paid for my house!

    @SG, that’s a fair point, and probably a fail in my analysis. I’d run on an earlier generation’s assumption that children are no longer a finacial liability once they get to 18, but this just isn’t the case in the modern world. So it’s a fair cop ;)

    I’m also wondering whether the assumption about career progression is going to break down in future. It may become an extension fo the winner takes all model – it seems easier for a few to become millionaires in their 20s, and harder for the majority of particularly younger people to get out of entry-level jobs as they get into their thirties.

    Property is a funny old came. I’m not sure I’ve made that much on it given the soaking I took on my first house, but the value of massively reducing accommodation and living costs later on is hard to deny. I may have cocked up by taking the hit when I was young to reap the rewards later, perhaps this is where I was sensible Susan and not Feckless Freddie. Taken as part of the overall mix, perhaps in buying early I sowed the seeds of the massvie catch-up I am doing now.

    Happy New Year to you!

    Nice post, and great to see the graphs and the personal experience.

    I still don’t think you’re comparing apples with apples though.

    Steady Eddie starts saving 15% at, say, 22, and we’re comparing where he gets to 27 years later? Then he’s only 49!

    In the ‘standard model” he’d be saving for another *two decades*! See how far his compound interest stretches then with a new graph, if you can stand to read it and weep. ;)

    Ditto, to a lesser extent, Susan.

    I don’t see comparisons with where you as particularly valuable because both Eddie and Susan could also choose to save enormous amounts of their later earnings if they chose to. You’ve simply assumed that they haven’t, so they don’t benefit from the yellow bar effect.

    This hardly matters compared to the impact of not allowing them to compound for another 18 years or so to 65-67, but it’s still a factor.

    Young people don’t have to save into a pension and lock their money up. They can save into an ISA, for instance, and retain full freedom of control, at the loss of some tax benefits (the lump sum, and potential tax abitrage if they’re higher rate tax payers now, and lower payers in retirement).

    That said, pensions are much more flexible than in the old days.

    Finally, please stop reminding me about the glorious delights of the Sylph-like Rebeccas in the BBC drinking dens. I’ve been there, and unfortunately not always got the t-shirt. ;)

    On a more PC note (or perhaps a less one) you’re right to assume many women will leave work/pensions to have kids. To be totally fair though, you should model them returning to work later, which many do.

    [...] How I got away with not saving in my 20s – Simple Living in Suffolk [...]

    7 Jan 2012, 7:10pm
    by ermine


    @Monevator The comparison in terms of working life is pretty straight up, I am 51, and my career is set back by a year and a half because I did an MSc as well as an undergraduate degree, and was unemployed for six months in 1982 ;) I am not sure the model of working to 70 will work out for everyone. It certainly won’t work for me. Among work colleagues of the same age I observe heart disease, strokes and other illness cut people down in their last decade, plus a roughly equal number of casualties due to what would be classed as ‘mental health issues’. I’ve seen the funerals of two colleagues in their fifties.

    I recently met X from this post in town, and he looks a lot better since leaving work. His doctor probably did him a favour in telling him this TIA stroke is your last early warning signal, mate.

    These colleagues weren’t all fat bastards, BTW, and none were smokers. Indeed of the two that have gone to the great office in the sky one was a keen hill walker and the other was into sailing.

    Now it is possible there is something anomalous about my workplace, but I don’t think so, I was talking to one of the guys I worked with at the Beeb and the problems of digital Taylorism seems to apply there too. Perhaps engineers don’t handle themselves well, after all you don’t become an engineer because you’re great with people, so maybe they are more susceptible to burnout. Countering that, earlier in my career I learned lots from people who got well into their sixties, often smoking and drinking to an extent that would look untoward these days.

    Whatever the problem is, if you are relying on working in a professional white collar job in a globalised workplace till 70 then maybe you don’t need a pension at all ;)

    That’s why the yellow bars are there. If I believed I could carry on and suck all the crap up for another nine years (and the pension scheme doesn’t get ceased in the meantime; it probably will be closed to future accruals at some point) I’d have the fully accrued amount, and I could return to regular middle class consumerism, well, if I could stomach the waste involved!

    That’s the trouble with compound interest. If it takes 50 years to do something seriously useful, that’s 20 years too long in the modern workplace IMO. After 30 years of working, the fire inside begins to flicker under the slings and arrows of being a wage slave, and you start to dream of other things than just sucking up to the Man. I’ve only got so much time on this Earth, and waiting for compound interest to give me a leg up is just too much of that precious time used, IMO. I can do the calculation of where compound interest would get me after another 20 years of work, but these are twenty years I’ll never live again, and that’s something that never seems to get set in the counterbalance. That’s where I’m with ERE – use extreme force, with extreme focus to achieve ends that are out of the ordinary. Little steps achieve little things.

    Ah, the Rebeccas… I still have fond memories of the scenery in the Television Centre bar, despite the tremendious din due to the glass walls reflecting the boisterous noise ;) BH was more convivial then, you could actually hear your fellow drinkers.

    > should model them returning to work later, which many do.

    Yup, but that hit in the most critical period of building your career does seem to be pretty devastating. I know it isn’t talked about in polite conversation, but basically if you’re going to take time out in your 20s/30s then other people are going to be getting better at their jobs and have demonstrable successful projects while you’re out of the workforce. It would be most surprising if this were cost-free…

    Happy New Year and may your (active) investing do well {tease} ;)

    Indeed, happy new year! :)

    Well, I said that they’d be sensible to work out their sums to their late 60s because that’s where the current state pension age is headed. The consensus, and it’s a reasonable base case scenario.

    The standard retirement age is pretty likely to be 70 before too long for today’s youngsters, and they’ll probably expect to live until 90. So they have 50 years to compound.

    Saving an extremely affordable £100 a month for 45 years should give you a £200K pot in today’s money, using our 5% real return. In reality, many would save far more in later life, of course.

    Also, as I keep saying, they don’t lose anything by saving a bit early on and then deciding to go radical later on. With my method they get two cracks of the whip, with yours only one. There’s really no advantage to planning to try to save radically for the past few years of your life, except a bit more money spent trying to schmooze the sylphs. ;)

    If they are too poor to save throughout most of the career, then I don’t have a remedy for them, or a comment except to say that I doubt they’re likely to be in a position to fix things with a miraculous pay surge late in life.

    I’ve got absolutely nothing against earning as much as you can and being paranoid (in fact, I’d be more paranoid about career paths — as others have said, I’d be wary of presuming escalating incomes and cash-rich later years will a reasonable expectation for most in the future).

    I think several strands of argument are being conflated here — early retirement, earning paths, the future of the West… ;)

    (That’s probably why we’re seeing so many interesting directions we can take it – lots of post inspiration, eh? ;) )

    But even by that light, I think there’s inconsistencies — if as you say people can only expect to be happy and productive in work for 30 years, then that’s only another reason to save as much as they can early on. Granted it doesn’t allow compound interest to really work its much-disputed ‘magic’, but it also avoids having to commit consumerism hari-kari in later life! :)

    [...] me, I see quite a few semi-old gits pumping money into their pensions, and lots of it. I’m one of them. We’ve all got it horribly wrong, you should start saving when you’re [...]

    [...] note; if you want an ISA to form part of your income stream, and possibly allow you to go for a late pension savings burn then you have to start early, like at least ten years before you want to retire! In the interim I [...]

     

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