Choosing to retire five years earlier could see pension savers miss out on £60,000, new analysis from Standard Life shows.
According to the group’s calculations, an individual who began working on a salary of £23,000 per year and paid the standard monthly auto-enrolment contributions from the age of 22 would build up a total retirement fund of £263,000 by the age of 65. However, retiring just five years earlier at the age of 60 would result in a total pot of £203,000, a loss of £60,000.
By contrast, those choosing to work up until the age of 68 would see their pot increase to £304,000.
Standard Life said the key difference is those retiring early will miss out on the benefits of continued compound interest towards the end of their career. Additionally, those who have been working for several decades may be earning more in terms of salary towards the end of their career, meaning pension contributions and compound interest will be greater.
Jenny Holt, managing director for customer savings and investments at Standard Life, said those in a position to pay more into a pension from an early age should do so.
Holt said: “It’s interesting to see how just a five-year delay in retirement towards the end of your career can significantly increase the pension you retire on by tens of thousands of pounds. This is largely due to the power of compound interest which gradually builds over time.
“Clearly nobody can put a price on quality time in retirement so it’s worth having a think about the type of lifestyle you’d like when you do retire and use that as a basis when deciding if the delay is worth it.”
Holt said individuals should utilise the Retirement Living Standards tool from the Pensions and Lifetime Savings Association, which breaks down what life in retirement looks like at three different income levels.
Holt added: “Far from delaying retirement, there’s a movement of people who follow a disciplined programme of savings and investment aimed at allowing them to retire far earlier than most. They follow a couple of different routes to get there but some live an extremely frugal lifestyle over just a few years working, dedicating up to 70% of their income to savings and then retiring in their 30’s and 40’s. In reality, this is incredibly hard to do, particularly in the current inflationary environment- – but this shows the trade-offs involved when in it comes to retirement savings and the importance of having a goal.”
