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Save early, save often

10 February 2017 | Topical insights

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Commentary by Robin Bowerman, head of marketing and communications for Vanguard in Australia.

Robin Bowerman

One of the attributes of Australia's mandatory national retirement saving system is that it starts young adults saving for retirement as soon as they join the workforce.

Without compulsory contributions to their "superannuation" accounts, many millennials – aged in their twenties to thirties and also known as Generation Y – might well be reluctant to start saving so early in their working lives. That's understandable given that their retirement might be 40 years away, or more.

Because saving is required, our challenge in Australia isn't convincing young people to get started. It's convincing them that saving for the really long-term is really worthwhile.

A recent New York Times article notes that it's "perennially true" that young adults don't make retirement savings a priority. Whilst some of the 28-to-32-year-olds interviewed for the article are diligent savers, others aren't. Some recognise the need to get started but just haven't yet got around to it.

As the Times tellingly acknowledges, "millennials are in an ideal position to get started" because their seemingly modest savings have the opportunity to grow substantially over time. They're poised to reap the rewards of what's sometimes called "the magic of compounding" – that is, earning investment returns on top of past returns as well as on one's original capital. Compounded earnings can really mount over the long term – particularly when "long term" means 40 or 50 years.

My colleague Peter Westaway, PhD, who serves as Vanguard's chief economist for Europe, correctly points out that compounding is most effective when interest rates are high. Unfortunately, today's unusually low-interest-rate environment isn't conducive to spectacular results for bank savings accounts and other interest-bearing vehicles. The good news is that compounding still works quite nicely for investments in equities and other securities.

Ways to get the most out of compounding include:

  • Save and invest as much as possible, as early in life as possible. Compounding needs plenty of time to produce best results.
  • Invest regularly to keep building investment capital and thereby accelerate the benefits of compounding.
  • Adhere to an appropriate long-term asset allocation for your portfolio, with appropriate exposure to growth-producing assets. (Learn more about this in Vanguard's Principles for Investing Success.)

A final thought on compounding: Disciplined retirement investors who reinvest their earnings automatically – rather than "cashing out" and spending the money along the way – are less likely to be distracted by alarming periods of market volatility and the ever-present din of investment commentary and advice from pundits and prognosticators. Investors who maintain perspective are content to let compounding work its "magic" without much interference.

As Peter Westaway noted, Albert Einstein called compounding the eighth wonder of the world, explaining that "he who understands it, earns it ... he who doesn't, pays it."

Take it from Dr Einstein: Save early, and save often. If you recognise the value of compounding at the beginning of your working career, you position yourself to enjoy its rewards at the end.

Important information:

Vanguard Asset Management, Limited only gives information on products and services and does not give investment advice based on individual circumstances. If you have any questions related to your investment decision or the suitability or appropriateness for you of the product[s] described in this document, please contact your financial adviser.

This document is designed for use by, and is directed only at persons resident in the UK.

The material contained in this document is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so. The information in this document is general in nature and does not constitute legal, tax, or investment advice. Potential investors are urged to consult their professional advisers on the implications of making an investment in, holding or disposing of units/shares of, and the receipt of distribution from, any investment.

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested. Past performance is not a reliable indicator of future results.

The opinions expressed in this document are those of individual author and may not be representative of Vanguard Asset Management, Ltd.

Issued by Vanguard Asset Management, Limited which is authorised and regulated in the UK by the Financial Conduct Authority.

VAM-2017-02-06-4312

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