Defer a car purchase and retire earlier
17 July 2006
Replace your car every five years instead of every three years and boost your pension by almost £240,000, says Fidelity International.
Car owners who wait five years to replace their vehicles rather than the more usual three years could retire far earlier by investing the loan payments in their pension, says Fidelity International.
This is just one of the ways that Fidelity International has calculated that people could boost their pension pots by thousands of pounds by postponing certain purchases. Individuals who choose to invest the typical monthly car loan payment of £352 for those extra two years can boost their pension pot by £238,674 over a 30-year period. This assumes the payments are invested in a portfolio compounding at 7 per cent per annum with annual charges of 1.5 per cent in the first ten years, falling to 1 per cent for subsequent years.
Even those who wait just an extra year and so replace their car every four years can typically add £142,268 to their retirement savings by investing the loan payments, according to Fidelity International’s analysis. Both calculations assume the original car loan is paid off after three years.
Given the looming crisis in long-term savings – the recently published Fidelity Retirement Index indicated that the typical household will face a near 60 per cent drop in income at retirement – individuals are increasingly having to face up to a decision whether to consume now, or consume later.
Simon Fraser, President, UK and Europe, Fidelity International, says: “Just by deferring a car purchase by a year or two, people can make a substantial improvement to their retirement prospects and, potentially, stop full-time work far earlier than those who embrace the “spend now, save later” ethic.
“No one is saying that individuals should not spend their earnings, but there needs to be a balance between consumption now and saving for the future. The sooner people start saving, the harder their money works for them. One pound invested in a pension at age 25 is worth nearly £84 by the time the individual reaches 60.”
