The cost of delay

It is common folklore that the ostrich has a tendency to bury its head in the sand when it is being pursued by predators believing that if he can't see them, then they can't see him and he will be safe.

Applying the concept to human life means that if someone "takes the ostrich approach", then they are ignoring a problem in the hope that it will simply disappear.

Unfortunately this is the approach some people seem to take when it comes to planning their future happiness. Some people choose to ignore the reality of what their retirement will be like if they fail to make the appropriate provisions.

In 2005 the average state pension payable was just Lm45 a week, which was less than the National Minimum Wage. With people living longer would you be happy to survive on this for maybe as long as 40 years?

Clearly we have to take responsibility for our own standard of living in retirement. The two key factors in ensuring you have sufficient income when you retire are (a) having a sound investment strategy, and (b) starting your savings as early as possible

We will cover long-term investment strategies in our next article, but first we should look at the impact of delaying your decision to start saving for your retirement.

Many people take the ostrich approach to savings by telling themselves they will do something 'next year'. Unfortunately 'next year' never arrives and, before they know it, the day they are due to retire is just around the corner. They are then faced with trying to make up for lost time by having to put away a large proportion of their salary.

Lm20 (€46.59) a month could be worth at age 65 assuming you received an annual investment return of five per cent (net of charges). We have assumed that you increase the amount you save by five per cent a year.

By splitting the columns into two we can see the amount you have contributed compared to the growth (or interest) added. It clearly demonstrates the 'compound effect', which means growth gets added onto previous growth.

The earlier you start saving, the easier it is to accrue a large fund. Not only are you saving more over the long term but the effect of 'compounding' means that any growth your money achieves is added onto previous growth, thus multiplying the returns you get.

One can also interpret this in another way. The earlier you start saving for retirement the less it will cost you and the earlier you can afford to retire. So don't be an ostrich. Face the reality of what retirement is going to be like and start saving before it is too late.

If you have a pensions related question please e-mail us at pensions@middlesea.com

Mr Fairbairn is a pensions consultant with Middlesea Valletta Life Assurance Company Ltd, which is authorised to carry on long-term business under the Insurance Business Act, 1998 and is licensed to provide investment services in terms of the Investment Services Act, 1994 in relation to linked long-term contracts of insurance.