Why It’s Important To Save For Retirement

Retirement may seem like a distant goal, but it's never too early to start saving for it. In fact, the earlier you start saving, the better off you'll be in the long run.

Saving for retirement is crucial because it allows you to maintain your standard of living once you stop working. By putting away a small amount of money each month, you can build a significant nest egg that will provide for you in your later years.

Of course, many countries in Europe have social security programs that provide some form of state pension when you retire, and that’s a good thing. However, these benefits are typically not enough to cover all your expenses in retirement.

Part of the reason for this is that, according to the World Health Organization, average life expectancy in Europe is now around 81 years old; 15 years longer than it was in the 1960s. As a result, the strain on state finances when it comes to pensions has increased massively, and state pensions have often not kept up with the rising cost of living. As a result, the onus is on us all to help support ourselves in retirement much more than previous generations may have had to, which means a greater need to plan and save for our retirement. 

One of the biggest advantages of saving for retirement early is the power of compounding. This is the effect achieved when money we save earns interest on both the amount we save, but also the interest we have already earned. Over time, this compounding effect can turn small savings into sizable sum which is particularly useful when saving for something long into the future.

For example, if you were to start saving €100 per month from the age of 25 and managed to average an annual return of 6%, your savings would grow to over €200,000 by the time you reached age 65. Of this €200,000 only 25% would be from the money you actually saved each month. The rest would be from interest you will earned and the effect of compounding. 

Conversely, if you were to wait until later in life to start saving for retirement, you would likely need to save far more money each month to reach the same savings goal. In fact, if you were to start saving at age 45 and wanted to have the same €200,000 by the time you were 65, assuming the same average 6% annual return, you would need save around €450 per month.

This may not seem too dramatic a change for some people. After all, you’d expect to be earning more money at 45, than you were would at 25, so €450 would be much more affordable, surely? Well, it might be but by the time you reach 65, around 50% of the €200,000 in your savings pot would have come from the money you saved each month, with far less coming from interest and compounding, meaning your savings pot will have cost you substantially more!  

As you can see, when it comes to saving for retirement compounding and time are your friend, so it pays to start early.   

Another reason why it's important to save for retirement is that it gives you the freedom to enjoy your later years without worrying too much about money. Retirement should be a time to pursue your passions, fulfil your ambitions and do all the things you didn’t have time to do whilst working.

However, without a salary arriving in your bank account each month, you’ll still have bills to pay and all those plans you have needing will need to be paid for too. But if you save for retirement, you can build up the means to live the kind of retirement you would actually like. 

It is also worth remembering that many European countries offer tax incentives for retirement savings. For example, in the UK, contributions to a pension scheme are tax-deductible, meaning that you pay less tax on your income. This can result in significant tax savings over the long term and, effectively, the tax authorities subsidising your retirement when it comes.

Saving for retirement is essential if you want to live your golden years free form too many money worries. By saving small amounts over a long period and taking advantage of the power of compounding and potential tax benefits, you can build a substantial nest egg that will provide you with financial security in retirement. So, why not start saving for retirement today, and then look forward to the comfortable and financially secure retirement that you deserve? 

Remember, your investments can go up and down and you could end up with less than you started with. Past performance does not guarantee future results. The information provided is financial guidance and should not be considered financial advice.