I am confident that ‘how is your pension doing?’ isn’t the most frequently asked question amongst a group of 30-year-olds. But it should be. Those aged 30 today have a 50 percent chance of living till they are over 100 years old.1 Even if they retire at 70, will today’s 30-year-olds be able to afford to live that long? Potentially outliving all previous generations means that the retirement pots for those in their 30s will need to last for longer than ever before. Fortunately, the investment time horizon is greatest for them. Financial planning should be a core topic of conversation amongst those in their 30s; here are some tips on how to pass the decade with a clean bill of financial health.
When it comes to saving for your future, time really is of the essence. It is important however to consider how you save as cash isn’t going to do you any favours in the long term. Interest rates are at rock bottom and inflation at around 2.6 percent which means that real interest rates are negative. Those trying to save in cash will be losing money every month.
Savers would be wise to start investing in the capital markets instead. The earlier you start to do so, the more you will benefit from the effects of compounding; otherwise known as the most valuable tool in investing. An investor benefits from compounding by keeping any interest, yield or capital gains invested, instead of spending it. These additions create much greater growth than would have been possible from the original investment alone. Start investing today, as this valuable tool is best harnessed by a long time horizon.
Those in their 30s should start investing by opening a Stocks & Shares ISA and trying to fill their annual allowance (which is currently £20,000, 2017/18). Any money that you put into an ISA is not liable for income tax or capital gains tax, hugely benefitting your long-term returns. Another good thing about ISAs is their liquidity; they don’t have a lock-in period so investors can access their money whenever they need to. This liquidity will come in handy for those trying to save for a house or other significant expense.
The other way in which those in their 30s should start to invest is through their company workplace pension schemes. Say yes to signing up, and yes to as many additional contributions as you can afford.
If your monthly budget can stretch to it, those in their 30s should consider opening a SIPP too. Opening a Self-Invested Personal Pension (SIPP) allows control and flexibility which gives it an edge over other types of personal pensions, it also comes with the benefit of tax relief. Money paid into your SIPP will automatically receive basic rate tax relief (20 percent), so if you contribute £8,000, the government will top this up to reach a total contribution of £10,000. Higher rate and additional rate taxpayers can claim back an extra 20 and 25 percent tax relief respectively. Furthermore, any holdings inside the SIPP can grow free of income, dividend, or capital gains tax. The downside is that money in a SIPP will be locked up until retirement. A pound invested in your 30s is far more valuable than one invested in your 40s or 50s.
Based on historical returns (after fees) of a portfolio of Indices/ETFs from 2001 to 2016. Weights depend on the risk level.
Source of information: Bloomberg, own calculations. Past performance and future projections are not indicative of future performance. For more detail see our Investment Planner Methodology.
Those in their 30s may not have a particularly high level of financial knowledge and tend to be slightly cautious when first dipping their toe into the world of investing; a recent report found that Millennials hold twice as much cash in their portfolios as their parents (47% vs 20%).2 However, the good thing about their long wait for retirement is their long investment time horizon. It’s likely that those in their 30s now will be working until they are in their late 60s, giving their investments at least 30 years to weather some ups and downs.
It is important that all investors feel comfortable with their position, but we would simply urge you to consider your appetite for risk in relation to your time horizon. Over time, a higher risk profile does tend to generate higher returns. Every cloud has a silver lining.
Credit card bills, overdrafts, student loans; the interest due on these debts can be extortionate and clearing them is a good place for any 30-year-old to start. Otherwise, what started as a manageable monthly repayment becomes interest on top of interest and you can find yourself spending a fortune on keeping these debts under control. Money that could otherwise be grown in your pension.
It is also important to bear in mind the potentially negative impact these debts may have on your credit rating, making it more expensive to get funding for a car or a house later on. Bit by bit, do try to get rid of them.
If you are in the fortunate position to have a large enough deposit to buy a house you can take advantage of the record low interest rates we are currently experiencing.
At the time of writing, the UK interest rate is 0.25 percent and showing no immediate signs of increasing. Those waiting for the yield on their cash account to take off won’t be delighted by that sentence, but those considering a mortgage will be.
However, when considering a property purchase, it is very important to be aware of all the risks. Property prices can go down as well as up, so be careful not to take too large a mortgage and don’t buy property as a short-term investment. If your property represents all your savings, you’ve effectively put all your eggs in one basket. This means that your savings won’t benefit from the growth of any other asset classes or geographies.
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If you have anything left after pension contributions, debt pay down, mortgage payment and general living costs, save it! We have already mentioned how much your pension can benefit from compounding, well all other forms of saving can benefit from this too. Say no to the taxi and yes to the ISA. Or even set up a direct debit so that your extra cash is out of sight, out of mind… Your future self will look back upon your current self gratefully.
If someone in their 30s is following the above suggestions and starting to accumulate some wealth and assets, it would be sensible for them to make a note of where they would like them to go, should the very worst happen. Writing a will can also make sure that you don’t pay more inheritance tax than you need to.
Dying without a will means that you die ‘intestate’. This means that the intestacy laws of the country in which you reside will come into play and will decide how your assets are distributed on your behalf.
You can write a will yourself but will need to have it formally witnessed and signed. Alternatively, you can seek the advice of a solicitor.
Image: Unsplash.com/Bin Thi U
Risk Warning – With investment comes risk. The value of your investment can go down as well as up and you may get back less than you invest. Past performance or future projections are not indicative of future performance. We do not provide any investment, legal and/or tax advice. If this website contains information regarding capital markets, financial instruments and/or other topics relevant for investments of assets, the exclusive purpose of this information is to give general guidance on investment management services provided by members of our group. Please note our Risk Warning and the Website Terms.
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