The 17-year gap that could decide your financial future

Financial planning is often focused on the long term.

What are your life goals? How do markets move over multiple years? How much could compounding returns benefit an investment held over several decades?

This is all because small details can make a big difference over long time horizons, and putting things in place early to take advantage of this fact can have a considerable influence on your long-term security.

Financial planners are aware of this, which is why they recommend people start planning sooner rather than later.

Indeed, a recent report from Today’s Wills & Probate found that the average planner believes people should start planning around age 44. However, the average age at which the typical client gets started is 61.

Read on to find out the difference this 17-year gap could make.

17 years of a considered pension contribution strategy can boost your retirement prospects

The earlier you start contributing to a pension, the more time you have to build up a retirement fund and the more opportunity you have to adjust your strategy along the way.

Even small adjustments to your contributions can make a big difference over time. For instance, contributing £300 instead of £100 a month can lead to a difference of almost £90,000 over 20 years, assuming 5% average annual returns.

But many people wait until just a few years before they are set to receive their pension to start actively planning for it.

Starting earlier doesn't necessarily mean making large contributions from the outset. Increasing contributions when your salary rises, making additional payments when you receive a bonus, or simply reviewing whether your existing pension arrangements are still suitable can all make a difference over time.

There is also value in having time on your side. Retirement planning is rarely a case of setting a target once and leaving it untouched. Your income, spending, retirement plans, and attitude to risk can all change. Starting earlier gives you more opportunities to identify a shortfall and take action in good time.

Crucially, a 17-year head start gives you more room to manoeuvre. If you discover at 61 that you haven't saved enough for the retirement you want, your options may be more limited than they would have been if you had started planning at 44.

17 years is a long time for investment returns to compound

Time is one of the most important factors in long-term investing because returns can themselves generate returns, which is known as “compounding”.

For example, imagine you invest £10,000 into an account that offers 5% returns. After a year, your return will have generated £500, and you will have £10,500. The next year, your investment will generate £525, as this is a 5% return on £10,500.

Over time, the returns increase exponentially. Indeed, after 17 years, a £10,000 investment with 5% returns would have more than doubled its value and be worth approximately £22,900.

Of course, investment returns aren't guaranteed, and markets don't produce a steady 5% return each year. But the example shows why starting earlier can matter. Someone who invests for 17 years has significantly more time for their money to benefit from compounding than someone who waits until the later stages of their working life.

It also means there is more time to ride out periods of market volatility. A long-term investor can generally take a longer view of temporary falls in the value of their investments, rather than being forced to make decisions based on what markets are doing at a particular moment.

17 years is enough time to plan for care

Care costs are one of the most difficult parts of financial planning because nobody can know whether or not they will need care, what form it might take, or how much it could eventually cost.

That uncertainty makes early planning very useful.

Starting your care planning earlier gives you time to consider how you would want your finances to work if your circumstances changed. This could include reviewing your assets and income, considering the role of your property, and thinking about how potential care costs could affect the wealth you hope to pass on.

It also gives you time to have conversations with family members. Decisions about later-life care can be difficult when they have become urgent. Discussing your preferences and financial arrangements earlier can make it easier for everyone to understand what you want.

Moreover, if you leave it too late, you may not even consider care planning until you need it, which could considerably limit the control you have over how you fund it.

Planning early allows you to consider an eventuality that could have a significant financial impact and make sure it has a place in your wider financial plan.

17 years can significantly improve the efficiency of your estate

Estate planning is another area where leaving things late can reduce your options.

Starting to plan at 44 rather than 61 gives you more time to understand your potential Inheritance Tax (IHT) liability and consider the options available to you.

For example, you may want to make gifts during your lifetime. Some gifts can fall within specific exemptions or become exempt from IHT if you survive for a certain period. Starting earlier can therefore give you more time to make decisions and, where appropriate, allow those arrangements to take effect.

In our article from last month, we explained how the 17-year gap could amount to a nearly £400,000 difference for some families.

Get in touch

If you’re looking to get started on your financial planning, no matter your age, today is always a better time than tomorrow.

To speak to a financial planner, get in touch.

Email info@mlpwealth.co.uk or call us on 020 8296 1799.

Please note

This article is for general information only and does not constitute advice. The information is aimed at individuals only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.