Saving €500 a month may seem like a pretty daunting task at first glance, especially for young people on lower incomes. However, remember that there are tax benefits when you invest through retirement savings accounts and often your employer will also be willing to make additional contributions on your behalf. By maximising the advantages of retirement savings accounts, even employees on modest incomes can get close to saving €500 a month.
Let’s assume you’re a twenty year old living in Ireland earning an annual income of €20,000, which in fact is not that much more than the Irish minimum wage. Let’s also assume that you are able and willing to contribute 15% of your gross income to your workplace retirement savings plan, which will mean a reduction of €200 per month in your after tax income and tax savings of €50 per month, resulting in you contributing a total of €250 every month to your retirement savings plan.
If we further assume that your employer is willing to contribute 10%, that means a further €167 per month will be contributed to your retirement savings plan adding up to a total of €417 per month.
Table 1 below shows how much wealth you might accumulate using the Buy and Hold investment approach after forty five years if you save €417 per month. Annual investment costs are assumed to be 1.0%. It should also be noted that the table assumes that your inflation-adjusted real income remains static at €20,000 throughout your working life which is very unlikely, so the actual numbers would almost certainly be even higher than those presented below.
| Contributor | Monthly Contribution | Very Unlucky | Unlucky | Average | Lucky | Very Lucky |
|---|---|---|---|---|---|---|
| Buy | & | Hold | ||||
| Employee | €200 | €245,000 | €382,000 | €485,000 | €662,000 | €1,173,000 |
| Employer | €167 | €204,000 | €319,000 | €404,000 | €552,000 | €978,000 |
| Tax Savings | €50 | €61,000 | €96,000 | €121,000 | €166,000 | €293,000 |
| Total | €417 | €510,000 | €797,000 | €1,010,000 | €1,380,000 | €2,444,000 |
| Confidence Level (%) | 99% | 75% | 50% | 25% | 1% |
So if history is a reliable guide, even if your annual income is only €20,000 and you’re able and willing to contribute 15% and your employer’s willing to contribute 10%, using the Buy & Hold approach you can be approximately 99% confident of accumulating around €0.5 million in 45 years time and 50% confident of accumulating €1 million!
The breakdown in the above table also shows that you can be approximately 99% confident that the combined value of the employer and tax savings contributions might be €265,000 in 45 years time using the Buy & Hold approach and you can be approximately 50% confident that they might be worth over €0.5 million. Wouldn’t it be a shame to miss out on this wealth accumulation opportunity by neglecting to contribute to your employer’s retirement savings plan? Surely it’s better in your pocket than your employer’s or the tax man’s!
However, it’s vitally important that you start saving and investing in your twenties rather than in your thirties. In the example above, if you had started at age thirty instead of twenty, you could be 50% confident of accumulating just over €0.5 million after thirty five years. Deferring your decision to start saving and investing by ten years could cost you €0.5 million compared to the extra €24,000 you would have contributed in your twenties. That’s twenty times your investment which is a very high price to pay!
You can enter your own income and retirement savings account contribution details into our calculator to help you generate your own personal tables similar to those shown above.
Finally, we appreciate that finding €200 a month for someone earning only €20,000 a year could be very difficult, but at the same time it can be surprising how quickly relatively small expenditures can add up as shown in Table 2 below. As Benjamin Franklin once said, “Beware of little expenses; a small leak will sink a great ship.” Table 1 demonstrates that spending €200 a month on items such as those listed in Table 2 instead of contributing it to your retirement savings plan, could ultimately cost you €1 million in the long run.
Here it’s literally true to say that ‘your health is your wealth’.
| Expense | Per Month |
|---|---|
| Lottery (Play twice a week) | €35 |
| Coffee (2 cups a week) | €26 |
| Alcohol (2 pints a week) | €44 |
| Cigarettes (1 packet a week) | €61 |
| Breakfast Sandwich (1 a week) | €26 |
| Soft drinks (1 a week) | €8 |
| Total | €200 |