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22 Feb 21
In the final instalment of our series looking at pensions and retirement planning, Chartered Financial Planner Mark Russel looks at the concept of future self and how it can help you with your retirement planning. We hope you have found this series useful!
It has been scientifically evidenced that the human brain is unable to see your ‘future self’, what it actually sees is a stranger. The failure to identify with this ‘stranger’ is a barrier to long-term planning. Studies have shown that this phenomenon, known as ‘temporal discounting’ causes people to value immediate gains over future gains. Therefore, overriding this thought process is the key to unlocking your retirement strategy.
What to consider?
Every time you contribute to your pension you are taking care of your ‘future self’, so all your pension/retirement contributions are steps close towards you making work optional.
In order to achieve financial independence the earlier you start the better, the savings rate is of far more importance than the investment rate of return
Build a bigger savings pot by automating the movement of money into your savings using standing orders and banking apps. Warren Buffett addresses this very succinctly; ‘ don’t save what you have left after spending but spend what you have left after saving’.
Put a bit more in each month
When it comes to making a regular contribution into your pension, think ‘could I afford to put that bit more in each month’? Not only do you benefit from tax relief on each contribution you make but in many instances with the advent of work place pensions your employer will be contributing for your future self. This is essentially ‘free money’ and you should take advantage of it.
The irresistible force of compounding
Finally and of most benefit is the irresistible force of ‘compounding’ on your pension savings. Albert Einstein referred to compound interest ‘as the greatest mathematical discovery of all time, the eighth wonder of the world’. The earlier you start to save, the more you will benefit from compound interest.
Your future self will be glad you did all these things, even if they are a stranger to you at the moment!