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To bring this reality home, consider the following:
1. After ten years of saving, you’re almost half way there!
In a diligent forty-year savings plan, the first two years’ contributions already pay for 10% of your retirement. By the time you hit 36, you have already funded half your pension – provided you leave this money alone. By contrast, the last ten years’ contributions make up only 13% of your pension.
Bottom line: Save like crazy in your twenties! Then leave your money alone. Cashing out in your thirties will cost you half of your pension. If you want to skip ten years of saving, rather skip the last ten years, and not the first.
2. Catching up is hard to do
You may believe that you can catch up by saving more in the future. But in reality, this is harder than you might think. Most people already struggle to save at the recommended rate of 15% per annum. If you cash in your retirement savings after ten years, you would have to save 25% of your income for the subsequent 30 years to make up the shortfall. Not only is that a big bite out of your lifestyle, but only just below the 27,5% new tax-deduction limit. Delay for another two years, and you won’t even be able to claim your required contributions for tax. And if you delay until your forties, you will have to save half your income to make up the shortfall. Pretty impossible, really.
3. Starting late cheats you out of your money working hard for you
Cashing in early and starting over not only affects the percentage of income you need to save in order to reach your goal; it also cheats you out of your money working for you. The shorter your savings period, the less your pot grows by way of investment returns, and the more of your pension must be funded by only what you put away. So if you decide to cash in your pension after ten years, you don’t just lose what you have saved, but also the return you would have earned on those savings, compounding for thirty years and beyond. That is a lot of money to lose out on - money that you didn’t even have to work for.
The bottom line: Be smart. Don’t waste your precious savings on impulsive or short sighted thinking. Preserve them at every chance, every step of the way.