Start saving for retirement as early as possible
Not only because you put money aside for several years, but also because of the power of the interest-on-interest system.
Snowball effect
Because not only the amount you deposit generates interest all those years. The interest that is invested over and over again generates interest again and again. This snowball effect means that small efforts at the end of the ride can yield great results.
Pension Guide 2018
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40 tips for a higher pension
To save an amount of 150,000 euros against your 67ste, and starting on your 25ste, you must set aside the following amounts (at 4.75%):
- MONTHLY: 96.14 euros per month
- ANNUAL: 1129.48 euros per year
To save up that same amount if you only want to keep your 45ste start, you must set aside the following amounts (at 4.75%):
- MONTHLY: 326.03 euros per month
- ANNUAL: 3,830.33 euros per year
If you start 20 years later, you must in other words, your savings effort is more than 3 times as great to save the same final capital together.
Interest
Of course, those results also depend on the return on your investment. The more your pennies return, the greater the snowball effect will be.
Example: You have a starting capital of 100,000 euros.
- If you have that money on one savings account let alone, and we’ll assume you have the minimum interest of 0.11 percent you have after 20 years 102,223 euros.
- But like the same 100,000 euros annually 3 percent you have after 20 years 180,611 euros.
- Are you able to earn a return of 5 percent to realize, that will be 265,330 euros. Or more than doubling your initial amount.
Small side note: the examples do not take inflation and any costs into account. But they do show how great the power of interest on interest can be.
Even with little money
This does not only apply to large sums. Even if you don’t have a decent amount to start with and need to build your nest egg from scratch, the difference is significant.
Example: You set aside 100 euros every month.
- Deposit that money into a savings account every year 0.11 percent after 20 years, that amount will have grown to 24,267 euros.
- Spends your monthly deposit on an annual basis 5 percent you will deliver it after 20 years 40,754 euros on.