‘Wait till you are 35 to save’

JoeCrystal

I just came across this article on FT.com Source

Rational investors should not start saving into a defined contribution pension scheme before the age of 35, but should set aside a third of their salary from the age of 55, according to academics at London’s Cass Business School.

The findings run counter to conventional wisdom, which argues people should start saving into a pension scheme as early as possible so as to benefit from the greatest possible compounding of investment returns.

I was wondering what people's view on this articles. Especially this forum keep screaming at the people with extreme politeness to start saving into pension scheme. Personally, I think it is silly idea, you are after all missing ten years of investments (if starting from 25) or seventeen years (if starting from 18).

Lokolo

How are people suddenly going to find that they are able to afford to put 33% of their salary into a pension when they've been living off 100%??

regprentice

Well i'm relieved to hear that as that's pretty much when i've started.....

Think a lot of people will be in the same boat. This is my first employer to offer any kind of pension contribution. Not sure how many 55 year olds will be putting away 33% though, but i do know people who have saved up and put a full year away into their pension at that age, usually if they are expecting a big bonus or redundancy type payment.

Interested to hear what kind of contribution i should be making at this age, i'm putting away 15% of salary.

atush

IF (and it is ahuge if and very unlikely) you have been amassing savings and assets during those years of not opayint into pensions (ie from 16/18 t0 35) then by all means do it.

But the vast majority of the pension poor are low paid and will NEVER be able to contribute 30% or more to a pension. So should be encouraged to save fromt he day they start working and should be encouraged to join any pension scheme offered by their employer.

but given the newly educated will soon be graduating with 50K debt or more I hardly think this will be good advice in the above article. People have extra income in their 20's and 50/60's, not in thei 30-40's when they are having babies and paying mortgages?

Too stupid for words- and how much are these people paid and by whom?

dunstonh

Rational investors should not start saving into a defined contribution pension scheme before the age of 35, but should set aside a third of their salary from the age of 55, according to academics at London’s Cass Business School.

I would love to hear their reasons. I disagree with them.

(in todays terms) at 65
age 35 sees £100pm give a pension of £249pm
age 40 sees £100pm give a pension of £171pm
age 45 sees £100pm give a pension of £132pm
age 50 sees £100pm give a pension of £96pm
age 55 sees £100pm give a pension of £63pm

So, someone aged 55 wanting a real terms income of £1500pm would have to pay £2380pm. That's £28,560 a year. And if that is a third of their salary, that would mean they would have to be earning £85,680 a year.

A 25 year old aiming for the same £1500pm would have to pay £285pm with an annual increase of 3% to get the same figure.

snowqueen555

the article is saying to save in other ways before 35, it works for some, its as not saying to start at 55, which is what your figures above are assuming?

noh

Rational investors would not assume that they will still be working at age 55 and would save as much as they can from the day they start earning.

hugheskevi

The full paper can be found here.

From a quick flick through, it would seem to hinge around individuals exhibiting an Epstein-Zin utility function. This is a helpful assumption, because:

The first key feature of the model is the assumption of Epstein'Zin recursive preferences by the plan member. This allows us to separate relative risk aversion (RRA) from the elasticity of intertemporal substitution (EIS). Risk aversion is related to the desire to stabilise consumption across different states of nature in a given time period and EIS measures the desire to smooth consumption over time. Thus, risk aversion and EIS are conceptually distinct and, ideally, should be parameterised separately.

So that clears that up nicely. And whilst it would seem posters on this page do not generally have Epstein-Zin utility functions, I suspect most of the population are following an Epstein-Zin based-strategy.

More generally, and without having read the paper in detail, I find you get results like this when you assume that an individual wants to smooth their income by consuming the same basket of goods all their life, ie that they would like, say, £15,000 in today's money all their life, even though 40 years from now that will be a very small amount compared to average earnings (which will increase faster than prices).

That is a possible assumption, but in general people are more concerned with their standard of living relative to other people, rather than relative to their own past (and future).

The more you assume that what you are trying to do is have an income throughout your life that is constant relative to average earnings and hence more in line with the general living standard - eg, if you are well off, you might aim to have an income of 150% of average earnings both during work and retirement (adjusted for expenses such as mortgage, so you have the same discretionary spending power) - the smoother and more 'normal' your saving profile becomes. The more you try to smooth income across your own life relative to a basket of goods (ie fixed in real terms) the more you end up consuming earlier in life, with massive saving toward the end of your life.

Personally I am pursuing an inverse Epstein-Zin strategy, preferring to a lot of my saving early in life, with more of an eye on higher rate tax relief than on Mr Epstein or Mr Zin

snowqueen555

noh wrote: »

Rational investors would not assume that they will still be working at age 55 and would save as much as they can from the day they start earning.

If you don't assume you are wokring, then whats the point? Similarly, lets not assume we will be alive at 55? We make predictions for the future, its how we plan for things. We assume in the future we will live to an old age, and that we will have a working career, like the majority of the population.

I'm in my 20's and if I were to act like every working day were my last. I'd be loving in a hivel eating bread for the next thirty years.

Realistically you need to budget for savings, mortgages and pensions. The article is solely talking about pension investment. They are not saying to not save in other ways.

bendix

I lost interest when I heard the phrase rational investor.

They don't exist.

noh

snowqueen555 wrote: »

If you don't assume you are wokring, then whats the point? Similarly, lets not assume we will be alive at 55? We make predictions for the future, its how we plan for things. We assume in the future we will live to an old age, and that we will have a working career, like the majority of the population.

I'm in my 20's and if I were to act like every working day were my last. I'd be loving in a hivel eating bread for the next thirty years.

Realistically you need to budget for savings, mortgages and pensions. The article is solely talking about pension investment. They are not saying to not save in other ways.

I'm saying that I would not be planning to be working at 55. I would preferably be already retired.