Young savers, are you on track for ‘30 by 30’?

Mathilda Volant

by , Content Manager

at PensionBee

13 Oct 2021 /  

13
Oct 2021

Train tracks at sunset, with trees on each side.

Saving goals for 30 year olds are typically property themed. But while nesting for a new home is a milestone in your twenties, building a nest egg for retirement is a smart goal too. Your pension may appear a far away financial worry, however setting a retirement goal right now could help in the long run.

Treating your savings like a marathon - not a ‘nearing forty’ sprint - may make even ambitious goals achievable. How does accumulating a pension pot of £30,000 by 30 years old sound? Appealing?! Well here’s how!

1. Don’t get pension FOMO

Thanks to auto-enrolment rules you’ll likely be added to your company’s workplace pension. If you’re over 22 years old and earning over £6,240 a year then you’ve probably been automatically enrolled in a workplace pension scheme.

Income (over your ‘qualifying earnings’) is eligible for pension contributions. Minimum defined contribution contributions are set at 5% for employees and 3% for employers. Though some employers will offer to match your contributions!

Most people are beginning their careers in their twenties.The average salary for 22 to 29 year olds is £29,209. Which equates to monthly employer contributions of £57.42 and (personal) workplace contributions of £76.56 - with an additional £19.14 in government top-ups.

Counting the average employee and employer contributions (and the tax top up!) is only half the picture to your pension pot goal. As your pension is an investment, we’ve taken into account these three factors in our illustrations too:

In being auto-enrolled for eight years you could already reach a pension pot of £15,231.35. That’s over halfway to your ‘30 by 30’ goal! But if your employer doesn’t enrol you, or you opt out of workplace contributions, then that potential progress will be lost.

You’ll miss out if you opt out.

2. Save sooner, save less

As we’ve seen, workplace contributions will only get you so far towards your ‘30 by 30’ goal. That’s where personal contributions come in. When you pay into your pension, you’ll usually receive a tax top up of 25% - providing a competitive edge to saving into your pension.

Beginning to save is an easy decision, how much to save is harder. Here’s a simple savings equation to help: each month save four times what your age is into your pension. For example, if you’re 25 years old then you would save £100 a month into your pension.

Creating healthy habits with your money can be tricky in your twenties. Newfound wealth from working might lead to more splurging and less saving. But even small contributions could have a big impact. Simply using our equation you could exceed your ‘30 by 30’ goal!

Don’t worry if you’re starting to save later into your twenties. To catch up you could increase your regular contributions to close the gap. Or make a single lump sum contribution - if you ever receive a large payout in your life, like a Christmas bonus or an inheritance.

To recap:

  • Save monthly, using the ‘four times age’ method
  • Receive your 25% tax top up, making it ‘five times age’ after
  • Add extra contributions if you’re starting later

Want to spend your twenties saving for your first home? Beginning to save for both may prove better than prioritising one and getting behind on the other. As your pension is a long term investment, you don’t have to break the bank to make meaningful contributions.

Be invested in your success by investing in your future.

3. Growth for your #goals

Pensions by design are long term investments, so that gives your pot a lot of time to grow. The key to growth is compounding. Your contributions can give you investment growth - and that investment growth can give you investment growth - through the power of compounding.

In short, the money from your first contribution will go further than the money from your last contribution. By consolidating your pensions you increase the impact of compounding. You can contribute less, but receive more, by contributing over a longer period.

This scenario follows a decade of contributions, growth, and top ups, to reach a total of £30,633.23 by 30 years old. Here’s how much each factor had an effect on the pension. Breaking it down into five categories of contributions:

Looking at the breakdown of reaching your ‘30 by 30’ goal you can see the split. Less than half (38%) has come out of your pocket and less than a quarter (24%) from your payslip. You’d have contributed £19,109.76 (62%) of your £30,633.23 pension pot yourself.

The remaining £11,523.47 (37%) of your pension comes from three places. First, your employer contributions (18%). Second, the tax top up (15%) on your personal and workplace contributions. Third, your investment growth (4%) after inflation and annual plan fees.

With your pension often the pay off can pay well. These illustrations show the impact of contributions and power of compounding - from a pot of nothing to a pension worth over £30,000 in only ten years.

Consolidate and let compounding help you hit your goals.

What would ‘30 by 30’ do for my retirement?

So opting into your workplace pension, making personal contributions, and consolidating pots to compound growth can help you reach and even exceed a pot of £30,000 by the time you reach 30 - but what does ‘30 by 30’ mean for the rest of your retirement? Although many millennials like Christie believe that a comfortable retirement is out of reach, our research shows that young savers are able to hit ambitious targets by starting sooner.

For those in their twenties the State Pension age is set for 68 years old - with the potential to rise further. Even if you’re eligible and complete the full 35 qualifying years you’ll only have £179.60 per week to live off. It’s a top-up more than a retirement income in itself.

And we’re all living longer. So creating a pension that can keep up with your lifestyle may cost a little. Say you’re 30 years old with £30,000 for your retirement, what is the reward for all of this? Here are some projections on how achieving ‘30 by 30’ could set you up for life.

After 30 years, how big might my pension be?

Person to person this will vary wildly. But continuing using average salaries, our personal contribution equation, and a 5% annual growth rate you might expect a pension pot of almost a quarter of a million pounds by 60 years old! Already a retirement-worthy amount.

You can use our Pension Calculator to see how your pot might support your retirement.

So using our assumptions you could save £332,823.94 by 68 years old. This equals approximately £24,100 a year in income. Add in the State Pension (£9,339 per year) and you’re looking at almost £33,439 a year (remember, pre-tax) for your retirement.

Comparing the personal contributions over 47 years (£2,066 yearly average) to the retirement income for over 30 years (£33,439 expected income) is staggering. And the largest accelerant for this potential investment growth is compounding over a longer stretch of time.

Your ‘30 by 30’ goal recap

  • Stay opted into all your workplace pension schemes
  • Keep consolidating your defined contribution pots when you switch jobs
  • Pre-retirement make monthly contributions of four times your age into your pension
  • Choose a globally diversified pension plan that aims to help you grow your money over time
  • When financially ready, enjoy a happy retirement

The scenarios in this article are for illustrative purposes and assume:

  • Your pension experiences investment growth, inflation, and an annual plan fee
  • You make increasing monthly personal contributions into your pension
  • You’re employed full-time from 22 years old, at an average salary for your age
  • You’re continuously enroled in a defined contribution, workplace pension

Some employers may enrol you in a defined benefit pension scheme, or not enrol you at all. If you’re unsure, you can always ask your employer for more information or a financial advisor to discuss your specific options.

Risk warning

As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.

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