Don't wait to start saving in the Employee Capital Plans

Few people think about retirement at the very beginning of their careers. According to the latest research, only 30 percent of young Poles are saving for their old age. In our twenties or thirties, we tend to focus on short- and medium-term goals, such as travelling, buying a car or a flat, postponing saving for the autumn of life. On the one hand, this is not surprising, as the prospect of retirement seems very distant, with more years until reaching the retirement age than our current age. However, every extra year of saving is extremely important! The longer we save and the higher the contributions we make, the more capital we can accumulate for the future.

Saving money? I will think about it later…

The latest survey on pension awareness and attitudes towards the pension system of Poles under 30 conducted by Prof. Katarzyna Sekścińska of the University of Warsaw shows a worrying trend among young Poles. As it turns out, many only intend to start saving when they reach the age of 34, while one in five women and one in four men do not plan to save for retirement at all.

There are about 7.5 million people aged between 18 and 29 in Poland. In ECPs, people under the age of 30 account for only 21% of all participants, with around 0.7 million ECP participants currently in this age group. As the expert explains, there is a psychological rationale behind this approach. When we retire, we are no longer beautiful and young. It is natural not to want to think about it, so we try to put off making a decision about it.

However, such an approach could cost a lot in the future. How much can we lose by giving up saving in ECPs at the beginning of our career? The amounts may come as a surprise to you.
 

Lost benefits

University graduates who enter the labour market are about 24 years old. If they intend to participate in the ECP scheme until the age of 60, they will have an average of 36 years of savings ahead of them. So why is delaying saving for retirement not a good idea? Let us analyse this with an example.

Peter is a university graduate. He is just starting his first job and found out about the ECP from his employer. He is now hesitating whether to join the programme right away or wait a few years. After all, he is very young. He still has time to start saving money....

Let us analyse two scenarios. In the first scenario, Peter decides to join the ECP immediately, at the age of 24, and in the second scenario he starts saving in the ECP when he turns 34. For this, we will use the calculator available on myppk.pl.

Let us assume that at the time of employment Peter's gross salary is PLN 6,000. This is the amount that will be used to calculate his first contributions if he starts saving at the age of 24. Our calculation will also take into account salary growth at 2.8 per cent per year. So in the scenario where Peter starts saving at the age of 34, we will take PLN 7,900 as the amount of his current salary to take into account salary growth over 10 years.

In both cases, we consider the simplest scenario, namely that Peter saves until age 60 and both he and his employer make only basic contributions. So in the first scenario we have 36 years and in the second we have 26 years of saving. We also assume that the annual return over the entire savings period will be 3.5%, the annual return over the withdrawal period: 2.27%, while management costs are 0.5%.
 

Time to check the results!

In the first scenario, starting to save at the age of 24, Peter can save a total of PLN 279,999 in his ECP account. On the other hand, when he starts saving at the age of 34, under the same conditions, his total savings will be lower at PLN 195,545.

The difference is indeed significant, at almost PLN 85,000. This also translates into amounts that Peter can withdraw at the end of the savings period. Withdrawing the funds at the age of 60 according to the scheme, namely 25 per cent at one time and the remaining 75 per cent in equal instalments, every month for 10 years, in the first scenario Peter would receive PLN 70,000 at one time and PLN 2004 per month. On the other hand, in the second scenario, the amounts would be PLN 48,886 one-off payment and monthly payments over 10 years of PLN 1,399.

Although both scenarios are beneficial for the participant, the difference in the amount of savings clearly shows that it is not worth waiting to join ECP.

Start with a good plan

The figures speak for themselves, yet young adults are delaying starting to save for their future retirement. Moreover, few (only 16 per cent) are thinking at all about what their situation will be like after retirement. Why is that?

Young people's lack of interest in the pension system and saving for the future may be due to their general attitude towards these issues. According to the aforementioned research, 53 per cent of young adults find these topics boring and 74 per cent find them difficult to understand. Particularly worrying is the fact that around 10 per cent of respondents do not even know if they have been enrolled in the ECP by their employer because they have not paid attention to it. Young people are not aware of whether they are contributing to the ECP or how much they are saving. Given this, they can hardly be expected to be able estimate their future pension.

Why do I encourage people to start saving under the ECP schemes from the very beginning of their careers? Although the prospect of retirement seems distant, by comparing different scenarios, it is clear that by starting earlier, a much larger sum can be accumulated. This is particularly relevant in the context of changing demographic trends. We are living longer, while at the same time the burden on the pension system is higher than ever. This means that we need to build up savings that will secure us for the long term. It is worth starting to plan now in order to build up substantial capital for the future.

Would you like to learn more about ECP? Visit the “ECP for employees” tab on our website. You will learn about the benefits of saving in the scheme and the rules of participation. Saving in ECPs simply pays off.