Lesson preview · Saving for later
Saving for later: early starts and defaults
~7 min · Free to read
Imagine Sam, aged 22, in a first full-time job. Sam does mean to save for retirement, just not yet. This year there’s a car to pay off. Next year there’s a holiday. Every year, “later” wins again.
Economists call this present bias: an extra pull towards what you want right now. Each delay costs Sam more than it looks, because savings grow.
Key Term
How retirement savings grow
A retirement savings scheme is a fund, often arranged through your job, that invests your money until you stop work. The extra money its investments make is your return. It isn’t guaranteed: in a bad year, a fund can lose money. Over time, you also earn a return on earlier returns. This snowball is called compounding.
Starting one year late doesn’t cost you 2,000 dollars. It costs what that first 2,000 would have grown into: about 11,700 dollars. Waiting five years costs about 54,000 dollars. The cards show a bigger lever still: whether joining takes any effort.
Key Term
Three ways to run a retirement scheme
- Compulsory. The law makes the saving happen. Since 1 July 2025, Australian employers have had to pay 12% of most workers’ normal pay into a retirement fund for them.
- Automatic enrolment. You are signed up unless you say no, which is called opting out. Britain began this in 2012. Among employees who qualify, the share saving in a workplace scheme rose from 55% in 2012 to 90% in 2025. Employers also had to start paying in, so the default wasn’t the only change.
- Voluntary. Nothing happens unless you sign up yourself, which is called opting in.
A default is what happens if you do nothing. Defaults work partly because doing nothing is easy. Joining an opt-in scheme takes a form, and present bias keeps saying “next week”. Under automatic enrolment, the same delay keeps you saving. Some people also take the default as the employer’s advice. That’s why, at the US firm in the cards, the share in the plan jumped from 37% to 86%.
Trap · Common Misconception
"Automatic enrolment forces people to save"
It doesn’t. In Britain, anyone can opt out, and workers who leave within a month of being signed up get back what they paid in. In a compulsory scheme, the law decides. A default changes what is easiest, not what is allowed.
Automatic increases can raise how much people save, too. In a plan called Save More Tomorrow, workers agreed that part of each future pay rise would go into savings automatically. Giving up money later feels easier than giving it up today. At the first firm to try it, in 1998, those who joined raised their average saving from 3.5% of pay to 13.6% in 40 months. The evidence is mixed: workers chose to join, so we can’t be sure how much of the rise the plan itself caused.
Trap · Common Misconception
"My employer's payment is free money"
It feels free, but it is part of your pay. In 2020, an Australian government review judged that workers had paid for most past rises in the compulsory rate, through slower wage growth. So in a scheme you can leave, treat it as pay you only collect if you stay in.
Tip
Check the default
At the US firm in the cards, most workers signed up automatically stayed at the default: saving 3% of pay. A default gets you saving, but check it’s enough.
Worked Example
Ana and Ben each save 2,000 dollars at the start of every year until they are 67. The money grows 4% a year after inflation (4% more than prices rise). Ana starts at 22 and Ben starts at 32. A spreadsheet gives their balances at 67, in today’s money: about 251,700 dollars for Ana and about 153,200 dollars for Ben. How much of each balance is growth, and what did Ana’s ten-year head start buy her?
Check yourself · no marks
Fees compound too. Two funds both earn 5% a year before fees. One takes a fee of 0.5% a year out of that return, and the other takes 1.5%. You put 10,000 dollars into each and leave it for 40 years. Roughly how much does each end with?
Commit to one first. Guessing and being wrong beats reading the answer cold.
Practice · 1 / 5
A company’s retirement scheme has always been opt-in: new workers join only if they fill in a form. The company switches to signing new workers up automatically, and anyone who wants to leave can fill in a form to opt out. Nothing else changes. What happens to the share of new workers in the scheme?
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