Waiting five years could cost you £116,000

People who put off retirement planning until the 2012 launch of Personal Accounts will miss five years of potential investment growth.

But one in three under 35s think they can defer saving until later in life, a new survey from Fidelity shows.

The government's introduction of Personal Accounts in 2012 may help encourage more retirement saving but people who wait until then to start could miss out on as much as £116,000.

An individual aged 30 who starts saving now, contributing the full £3,600 annual amount allowed in the Personal Account proposals, will build a pot of £612,000 at age 65.

If they defer the decision and wait for a Personal Account to be set up for them, the same contribution rate will amass them just £496,000 at 65.

Those who contribute the lower levels of £1,200 or £2,400 a year could also miss out on significant sums of money )as the table below shows).

However, the value of starting retirement saving early appears not to be getting through to many investors. Fidelity research shows that one in three under 35s believe they can defer saving until later in life and nearly one in five aged 35 to 54 agreed.

Once someone falls behind in their retirement saving, the cost of making up the gap becomes exponentially larger over time and will eventually reach a point where it is unsustainable.

By way of example, a 30-year old man is seeking to fund a retirement of two thirds of his final salary and he has been saving 5% of his salary a year.

This would require an increase to a contribution rate of approximately 15% of salary across the remainder of his working life.

But if we assume that he carries on paying only 5% then the amount required to meet the same target five years later, at age 35, has risen to 17%.

If the percentage increase is delayed continuously then by the age of 40 contributions need to rise to 21% of his salary, by 45 to 27% and by 50 to an unlikely 36%.

The table below gives examples of how much delaying can cost (all figures from Fidelity).

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