When it comes to saving for retirement, the earlier you can start the better.
If you start saving at the beginning of your career, you’re only going to have to put aside a little every month to be able to retire with an enormous sum as the power of compounding does all the heavy lifting for you. Indeed, if you start saving at age 25 and retire at 65, you only need to put away £100 a month and achieve an annual return of around 10% to retire with £600,000 (excluding inflation).
However, starting saving later in life makes building wealth harder because you’re unlikely to benefit from compounding as much as a younger investor. Nonetheless, it is still possible to retire with £1m if you start saving at 45 and if you make the right decisions. After all 99% of Warren Buffett’s wealth today was earned after his 50th birthday.
Time to start saving
Unfortunately, if you start saving at 45, you’re going to have to work a bit longer than usual and you’re going to have to save more than a 25 year-old would be able to get away with. Still, it’s likely that at age 45 you’ll have more capacity to save more as you may have already paid off a portion of your mortgage and be earning a higher wage than entry level 20-somethings.
For the purpose of this example, I will be using an annual return rate of 10%, which is slightly on the high side but it is still achievable if you invest your money in high-quality growth and income stocks.
If you save £100 a month at age 45, and retire at 70 with an annual return of 10%, you’ll retire with a pension pot of only £130,000, a respectable figure but not the £1m benchmark desired. To reach this goal, you will need to contribute more every month. Doubling the monthly contribution to £200 will leave you with £259,000 at 75, and a monthly contribution of £300 will give you £388,000 within 25 years.
Starting from zero
All of these examples assume that you start off at zero. Once again, this is where the 45 year-old might be better off than the younger saver because it’s more likely you will have already saved a small nest egg at this stage in life. Assuming a small savings pot of £10,000 to start, a £300 monthly contribution will give a total of £502,000 within 25 years – half-way there.
To reach the £1m mark with the lowest possible monthly contribution, an initial fund of £25,000 is needed. If you have this pot at age 45, you can get away with saving £550 a month to reach £1m by 70. If you don’t have this nest egg to begin with, the lowest monthly contribution you can get away with is £775.
For some comparison, if you saved £775 every month from age 25, you would have £7.6m by age 70. Put simply, yes you can save £1m by retirement at age 45, but it pays to start saving sooner rather than later.