Can I afford my future?


(Tommy Lowe) #1

Morning everyone :wave:

I’ve just finished my latest piece on one of the more boring (but super important) areas of saving & investing

This one is a little longer, so I’ll forgive you for not making it to the end, but if you do, and you have any thoughts or feedback, let me know :v:


(Jeff puckering) #2

‘10 years of pension contributions through your twenties, before stopping at the age of 30, with expected investment returns of 7% a year, amounted to higher returns than someone investing the same amount between the ages of 30 and 70.’

This is what they should be teaching in schools! Great article!


(Vik Paw) #3

I really like it, good points.

Personally I’d like to see more work done on the figures from that article, but that’s probably a whole new post in it’s own right.

If you alter the annual growth to a more realistic 5%, the balancing point alters quite a bit. I’d have to recheck my figures but I think around 20 years of consistent input beats 10 on and then nothing for the next 20.

Those 7%+ figures are always the ones quoted by those Financial Advisers who want you to sign up to their plans. The advice to start saving, and do it early is good, I just wish the figures were explained better and more realistic. Change the growth to 3% and it’s a huge difference.

Anyway, I digress, it’s a great article and has my 50 claps. :wink:


(Tommy Lowe) #4

Thank you both @Jeff @VikPaw for your kind words!

I had been working on some more complex maths, but in the end I wanted to keep the initial piece easy to digest, I might revisit in the future with a deeper piece if there’s sufficient appetite!

For disclosure, I’m not a financial advisor :slight_smile: but you are spot on, it makes it a lot easier to convince people to save if they can envision their money growing! Even if you’re only earning 1% though, it takes nothing away from the importance of saving for your retirement :v:


(Vik Paw) #5

I think one of the best takeaways is the point about investing a lump sum for a child at a very early age and letting that grow. Remarkable effect and really proves the point; more so than the pay for 10 then stop, compare that to doing this from 30-70.

My other view in these things is that if you are saving for pension, or anything for that matter, you need to have control over the period and termination of the process. Being sold a 25 year term at maybe 5% sounds great but if the final value is locked to a fixed date you lose all control and could be massively affected by a dip in the market. Having the ability to control the exit is an extremely important feature in my book. I wonder what happened to all who started a plan in 1983 for 25years.


#6

The good thing about articles like this is that it encourages young folk to save and invest, or for parents to invest for their children as it illustrates the benefits of doing so early.

However, what I think is missing is that older folk (by which I mean in their 40s and 50s) who have not saved for their retirements may think that it’s too late for them and they’ve missed the boat by not saving early, except that it isn’t too late. Someone in their 40s still has around 20 years in the workforce to be earning and contributing into a pension before retirement.

Starting later means that they won’t benefit so much from compounding but they will still benefit from tax relief and from their employer contributions.

There’s always going to be sequence of returns risk for retirees who rely on investments and 2008/2009 must have been a terrible time to retire. That’s why people getting close to retirement age often move some of their investments into ‘safer’ and less volatile things like bonds and ultimately cash, to cushion the blow of any stock market crashes.

Holding some cash means you can wait for your investments to recover and not have to sell too much at rock bottom prices.


(Tommy Lowe) #7

Apologies, this was aimed at a younger audience, I frequently get asked questions by friends about pensions etc so that’s part of the reason for this post.

Absolutely, I added a brief reference to this in my post, linking to my piece on age based asset allocation, but there is definitely scope to go deeper on the topic.


(Alex Sherwood) #8

I really like that idea..& I always get a kick out of graphs showing the power of compound interest :nerd_face: so I figured I’d compare a few scenarios to see how much of a difference making that investment early on makes.

To summarise:

Initial investment | Age of investment | Annual return | Value after 70 years
-----------------------------------------------------------------------------
1k                 | 1                 | 3%            | £7,687
1k                 | 1                 | 5%            | £28,978
1k                 | 1                 | 7%            | £106,532

Initial investment | Age of investment | Annual return | Value after 70 years
-----------------------------------------------------------------------------
1k                 | 20                | 3%            | £4,515
1k                 | 20                | 5%            | £12,041
1k                 | 20                | 7%            | £29,457

Initial investment | Age of investment | Annual return | Value after 70 years
-----------------------------------------------------------------------------
1k                 | 30                | 3%            | £3,262
1k                 | 30                | 5%            | £7,040
1k                 | 30                | 7%            | £14,974

Edit - Just made a small adjustment to the numbers figures there, as I’d included an extra year of returns in the ‘value after 70 years’ figure.


And in order to achieve the same return 70 years after being born if you invest later (assuming a 5% annual return), you’d have to invest ~£2,500 (~2.5x as much) at age 20 or ~£4,000 (4x as much) at age 30.

So it’s definitely doable if you’re only looking at matching the return from a £1,000 investment by investing at age 30. But obviously if it’s a £10,000 that you’re trying to match, then the average person isn’t have £40,000 to invest at that age.

I’ve done all of those calculations in this Google Sheets spreadsheet (please do check my maths!) & feel free to copy this if you want to experiment with the numbers.


#9

Hey, no need to apologise - it was a great piece, I was just reading it from a (slightly) older person’s perspective :slight_smile:


(Vik Paw) #10

@alexs I’m not sure what you’re trying to show, I may be mis-reading it.

Your values are the value of the inital investment in year 1 (investment date) after x number of years including compound interest with no further input into the pot. Is that what you wanted to show?

You don’t need to have those multiple columns in the second sheet, the figures are always the same, just offset. So you can read off the line for year 50 for an age 20 to 70 investment.

Row 24, Col M,N,O don’t refer back to the same part of the table, so one of them is offset to year 2. I don’t think it affects your conclusions though, which is basically start as early as possible!

Double the initial investment and the size of the pot at the end doubles. :slight_smile:

Couple this with a strategy at age 20 / 30 of making regular investments which is more likely and the effect is much better because your initial pot is also growing every year.

I made this based on that article to show the compound with constant contribution, and with the contribution only lasting 10 years.

No fancy graphs though :stuck_out_tongue:


(Alex Sherwood) #11

Yes :slight_smile:

That was just to enable some experimentation with different scenarios. Thanks for highlighting that for everyone else :raised_hands:

Whoops! Yes exactly :smile:

That’s very cool! I feel like maybe someone should write an explainer of compound interest & how it’s relevant in a variety of situations for this community :eyes:


(Alex Sherwood) #13

That would be awesome!


(Vik Paw) #14

@Cgwinning or @tommy whoever gets there first.
I don’t need it, but if we can goad you into it for the benefit of the community, then I shall not complain :wink:


(Vik Paw) #17

I heard beer. :beers:


(Tommy Lowe) #18

I prefer to call it creativity juice… You’re more than welcome to join us if you’re based in/around London @VikPaw :+1:


(Vik Paw) #19

Sadly not. I keep meaning to pop by the FreeTrade office, but haven’t had a chance yet.


(Tommy Lowe) #23

The government has announced it will be conducting consultations on a new form of pension, which may give you something else to consider when planning for your retirement - FT coverage here but here’s the Independent article as well

Essentially what this could mean is that instead of the individual (you) having to bear the risk of your investment choices, which is how it currently works with a standard defined contribution pension, your pot would be bundled with a bunch of others (say everyone in your organisation), leading to theoretically less exposure and lower management/administration fees. Critics however, suggest that this model could be unfair to younger members of the scheme, who may be called on to bail out older members of the scheme - from the FT

In CDC schemes operating overseas, if investments underperform, younger members of the plan can be asked to pay higher contributions to protect benefits for existing retirees.

One to keep an eye on maybe, although experts suggest this is years away from implementation.


#24

Rise in women’s state pension age prompts poverty concerns

:worried: Why would you accelerate these kind of changes?

All that planning and then you need to find a new form of income for the next 6 or so years.


#25

The move to equalise men and women’s pension ages started around 25 years ago and I think today was the final phase where the ages are actually the same.

So it’s something which the government has been planning all along and slowly phasing in, but the dispute is whether women affected should have been made more aware of the significance of the changes and the consequences to their future financial security in retirement.

Some claim that they were given hardly any notice, so hadn’t paid more into their pensions or made other arrangements. Others had even given up working early, thinking that they would be able to receive their pensions from age 60, not 65.

This is one reason why it’s important for all to be saving for their own retirements as the government is very likely to continue changing the goal posts.