Business

Marshmallows and pensions - all you need to know

Walter Mischel's famous psychology experiment in the 1960s on a group of four-year-olds has gone down in financial history as ‘the marshmallow test’
Walter Mischel's famous psychology experiment in the 1960s on a group of four-year-olds has gone down in financial history as ‘the marshmallow test’ Walter Mischel's famous psychology experiment in the 1960s on a group of four-year-olds has gone down in financial history as ‘the marshmallow test’

Do you like marshmallows? Well, there is evidence to show that a sweet tooth can seriously damage your wealth.

I’m talking about a famous psychology experiment carried out in the 1960s on a group of four-year-old children by Walter Mischel at Stanford University.

It has gone down in financial history as ‘the marshmallow test’ and it worked like this.

Each child was left alone in a room, with a large white marshmallow on the table in front of them. The supervisor said she was leaving the room for a few minutes, but told the child that if they keep their marshmallow until she got back, they would get a second one as a reward.

It was a test in delayed gratification.

Well, no surprises what happened next. Some of the children left their marshmallow untouched, some were not so disciplined and munched away. The children were followed into adolescence by Mischel and his team, who kept in touch with their parents and teachers to monitor their development.

Those who had self-control enough to delay their gratification turned out to be better adjusted and more dependable, and also scored an average of 210 points higher on the Scholastic Aptitude Test.

Well, on this page all roads lead to pensions saving, and this week is no exception.

Pensions saving is, after all, another exercise in delayed gratification. We put our marshmallow aside for now, and as a reward we can hope that some day we’ll have a whole plateful to enjoy, in the form of a decent old age pension.

Obviously, a young person in their 20s, at the start of their career, could tell you a dozen reasons why retirement is the last thing on their mind. Between getting married, buying a home and furnishing it, maybe having a child, or just postponing all that and having great holidays and social life – all these things can leave you, well, skint.

There are, however, very good reasons why you should keep your marshmallow and start your pension as early as possible.

The longer your money is in your pension, the longer it has to grow, especially with the ‘snowball effect’ of compound interest.

Here are some calculations from the pensions company Hargreaves Lansdown that prove my point. They show the benefits of starting to save for your pension as early as possible.

Based on an assumption that your pension savings could grow at 4 per cent per year, and that you are able to save £125 per month, look how well the savvy 20-year-old does in this scenario.

At 20, Brian starts a pension, saving £125 per month until age 65. He will save a total of £54,000 but with long-term growth and compound interest that will mushroom into a pension pot of £183,000.

Rosemary isn’t able to start saving her £125 a month into a pension until age 30. Her savings of £42,000 in total will grow to £112,000. (She is probably close to the traditional age for starting – on average we set up a pension for ourselves at around 32 years of age, although of course auto-enrolment will change all that in the future).

Sam starts his pension at 40. Better late than never. Saving his £125 a month until he’s 65, he pays in £30,000 which with compound interest grows to £63,000. That’s just over half what Rosemary achieved by starting just a decade earlier.

Margaret doesn’t get around to setting up a personal pension until well into the second half of her working life. At the age of 50, she picks up a copy of Monday’s Irish News, and reads a pensions column which reminds her that the state pension on its own isn’t going to sustain her in old age. She starts her personal pension right away, and over the following 15 years until she’s 65, she saves in £18,000, which grows to a pension pot of £31,000.

As you can see, putting off starting a personal pension by 10 years could reduce your final outcome by nearly half.

Are you still not saving into a pension? Then sit down now, have a cup of tea and a marshmallow, and think seriously about picking up the phone and getting it sorted. It’s never too late to start!

:: Michael Kennedy is an independent financial adviser and pensions specialist, and can be contacted on 028 71886005