Additional voluntary contributions are one of the most underrated and important functions of your pension. These contributions are exactly what you think. They are 100% voluntary and, unlike your 5% deduction and your employer’s 5% match, they are not mandated by legislation.
So, why then am I strongly suggesting that you contribute more of your hard-earned funds into something that won’t bear fruit till your retirement? Well, if you’ve been following along closely to my previous articles, you’ll know that when it comes to investing you only need 4 things:
- A plan
- Some discipline
- A little courage
- Time
Additional voluntary contributions embody all those things:
- They’re invested just like your mandatory pension contributions, so there’s no need to come up with another plan for them.
- Anything extra that you add goes through your employer and your payroll, so discipline is built-in and eventually you won’t even notice that it’s coming out of your pay.
- When you made your initial investment decisions you already exercised some courage, but it can’t stop there. Markets like to rock and roll; with a trusted advisor and some lion-level courage, you can stomach most of it.
- Time – well, in a pension fund, isn’t that the name of the game? It’s like one of those piggy banks with a timed lock on it; it’s designed to save you from yourself.
Although spending that disposable income may be tempting, I would advise you to delay that gratification and pay your future self first. What I mean by this is that for the cost of one lost weekend per month (i.e., one less weekend out with friends), you can essentially set yourself up for retirement as follows:
- Think in terms of spending an average of $100–$500 for a weekend out with friends.
- On average, the stock market will increase in value between 6%–10% per year.
- If you anticipate the lowest end of that average increase and don’t account for inflation, the math works out like this:
- Start with an initial voluntary contribution to your pension fund of $1,000.
- Next (and here’s where that lost weekend comes into play), consistently add $100–$500 per month for 40 years – work it into your budget right away and you won’t even notice it’s gone.
- You should end up with somewhere between $210,000–$1M in voluntary contributions in your retirement fund – and that’s not including the 10% mandatory contributions that you and your employer split contractually.
Oh, and because these additional contributions are voluntary, you can access them in the event of an emergency – it goes without saying that you should try not to, but, cars break down, kids need braces, and sometimes just leaving your house brings unexpected expenses! Either way, by adding additional voluntary contributions to your pension, your future self will thank you and your current self will have some reassuring extra cushion.
Melanie Gauntlett is Financial Pensions Advisor at Freisenbruch. To learn more, or if you have any questions, please contact her at mgauntlett@fmgroup.bm, or call +1 441 294 4660 or +1 441 296 3600
