The greatest retirement advantage of the young? Their youth

The Institute for Fiscal Studies has estimated that 90 percent of younger workers are saving too little for a comfortable retirement. That comes as no surprise given the cost-of-living crisis and the decade-long stagnation in real wages.

But younger workers have a significant advantage over their older colleagues in terms of retirement saving – yes, it's their age – so it's worth considering how to start investing and what mistakes to avoid.

For most people, their largest pension pot is going to be their workplace plan. The key here is not merely to maximize contributions, but also to ensure that your investments work as hard as possible. The best way of benefiting from the "youth dividend" is regular, long-term saving into a globally diversified, tax-advantaged vehicle such as a company pension.

This allows tax relief and the miracle of compound returns to boost your pot over several decades. At the same time, dollar or pound cost averaging can help smooth returns. Cost averaging occurs when a regular sum is invested each month – which tends to happen automatically with workplace pensions. When markets are low, each monthly contribution buys more units. When markets are strong, fewer units are purchased. The net effect is that, without thinking about it, the amateur investor tends to buy most when the markets are at their weakest, something many professional fund managers fail to achieve.

As for the investments themselves, most online investment platforms have algorithms to help inexperienced investors select a globally diversified portfolio of low-cost funds.

What young investors should avoid most is being unduly cautious with their retirement funds. Holding a large amount of cash can be a significant barrier to wealth creation.

The right amount of risk to take is largely a function of your time horizon. If you are saving to buy an apartment in the next few months or years, it is clearly inappropriate to hold your deposit in stock or Bitcoin. It could disappear before you need it. But for someone possibly four decades from retirement, there's plenty of time to overcome the market's periodic panics.

Even with interest rates at levels not seen since the 2008 financial crisis, the most competitive bank deposit rates come nowhere near to matching inflation. According to Moneyfacts, the best easy access savings rate is 4.5 percent, barely half the UK's 8.7 percent inflation rate.

In contrast, the UK's benchmark FTSE-100, by no means the world's strongest performing index, has averaged an annualized return of almost 13 percent over the past 10 years.

Over a long enough period of time, the ups and downs of the stock market, especially on a global basis, tend to average out. Unfortunately, many long-term investors miss out by keeping too much money in cash – especially in the immediate aftermath of market volatility. The S&P 500 index fell 35 percent in little more than a month between February and March 2020 at the onset of the COVID-19 pandemic. By August of that year, the index had entirely recouped that loss and went on to end 2020 16 percent higher than it began.

Highlighting the stock market's long-term resilience and tendency to bounce back from misfortune overlooks another advantage that younger investors enjoy. People tend to focus on the value of what they have already invested. Most investors under the age of 40, though, will save more in the future than they have done to date. In that sense, a sharp market correction now might feel stressful, but could prove a boon to long-term wealth creation.

How much equity risk to take is, in many senses, a matter of personal taste. Huge returns are of little use if you can't sleep at night. However, traditional investing rules of thumb can help people get comfortable with greater levels of risk. One such rule suggests that equity exposure should be 110 minus your age. On that basis a 30-year-old saving for retirement could reasonably hold 80 percent of their retirement pot in equity funds and the balance in bonds.

So while caution in the face of political, environmental and economic turmoil is understandable, it can be damaging for younger investors to have it affect their investment decisions too much. The young have few enough advantages in life that they can't afford to ignore their greatest asset: youth.

Stuart Trow is co-host of "Money, Money, Money" on Switch Radio and author of "The Bluffer's Guide to Economics." Previously, he was a strategist at the European Bank for Reconstruction and Development.