Retirement fund
Discussion
BGarside said:
Don't understand why people talk about 'compounding' when the pension is invested in the stock market and the underlying funds/shares can go down as well as up. Returns are not guaranteed and may not 'compound' as a fixed interest investment would.
Am I missing something??
Deduct say 2% for inflation and another 2% for management fees and to use the 4% rule you'd need a minimum market return of 8% every year just to preserve the value of the pension pot. This seems unrealistic to me and I'm thinking of drawing 2-2.5% to live on eventually which means a larger pot is required.
To be fair the average return of the S&P since they included 500 stocks is 8%, but a 2% management fee is quite high!Am I missing something??
Deduct say 2% for inflation and another 2% for management fees and to use the 4% rule you'd need a minimum market return of 8% every year just to preserve the value of the pension pot. This seems unrealistic to me and I'm thinking of drawing 2-2.5% to live on eventually which means a larger pot is required.
BGarside said:
Don't understand why people talk about 'compounding' when the pension is invested in the stock market and the underlying funds/shares can go down as well as up. Returns are not guaranteed and may not 'compound' as a fixed interest investment would.
Am I missing something??
Deduct say 2% for inflation and another 2% for management fees and to use the 4% rule you'd need a minimum market return of 8% every year just to preserve the value of the pension pot. This seems unrealistic to me and I'm thinking of drawing 2-2.5% to live on eventually which means a larger pot is required.
Surely over the period any half decent pension plan will have seen "compounding" over the years, I would be very disappointed if I had invested in a pension for 30 + years and the fund saw no "compounding" over that period. Am I missing something??
Deduct say 2% for inflation and another 2% for management fees and to use the 4% rule you'd need a minimum market return of 8% every year just to preserve the value of the pension pot. This seems unrealistic to me and I'm thinking of drawing 2-2.5% to live on eventually which means a larger pot is required.
Yes markets go up and down but over the period the average yearly increase would be classed as "compounding"
Maybe I am wrong and not looking at it correctly
BGarside said:
Deduct say 2% for inflation and another 2% for management fees and to use the 4% rule you'd need a minimum market return of 8% every year just to preserve the value of the pension pot. This seems unrealistic to me and I'm thinking of drawing 2-2.5% to live on eventually which means a larger pot is required.
The 4% rule was designed to leave you with an empty pot after 30 years. LeoSayer said:
BGarside said:
Deduct say 2% for inflation and another 2% for management fees and to use the 4% rule you'd need a minimum market return of 8% every year just to preserve the value of the pension pot. This seems unrealistic to me and I'm thinking of drawing 2-2.5% to live on eventually which means a larger pot is required.
The 4% rule was designed to leave you with an empty pot after 30 years. BGarside said:
Don't understand why people talk about 'compounding' when the pension is invested in the stock market and the underlying funds/shares can go down as well as up. Returns are not guaranteed and may not 'compound' as a fixed interest investment would.
Am I missing something??
Compounding refers to using dividend payments to buy more shares in the same companies. This is what Accumulation funds do.Am I missing something??
Of course, as you say, market movements can wipe out any compounded gains but history has shown that over long time periods, stock market investments massively outperform fixed income.
BGarside said:
Returns are not guaranteed and may not 'compound' as a fixed interest investment would.
Am I missing something??
AFAIK, Bonds (the archetypal fixed income investment) return a coupon, which unless you reinvest it won't compound either? Growth stocks tend not to return dividends, but their prices over the long term seem to exhibit compound growth behaviour.Am I missing something??
Compounding is doing quite nicely for me in my ISAs. Am now making more money on growth than the annual money I pay in. Took about 8 years to get there.
They need to be seen as very long term investments to ride out the lows. The returns are never stellar, but always ahead of inflation.
There's always going to be a particular hot stock, or a bitcoin, but unless you really know what you are doing or get very lucky steady investment in funds and using compounding is the way to go.
They need to be seen as very long term investments to ride out the lows. The returns are never stellar, but always ahead of inflation.
There's always going to be a particular hot stock, or a bitcoin, but unless you really know what you are doing or get very lucky steady investment in funds and using compounding is the way to go.
LeoSayer said:
BGarside said:
Deduct say 2% for inflation and another 2% for management fees and to use the 4% rule you'd need a minimum market return of 8% every year just to preserve the value of the pension pot. This seems unrealistic to me and I'm thinking of drawing 2-2.5% to live on eventually which means a larger pot is required.
The 4% rule was designed to leave you with an empty pot after 30 years. Its designed to give you the same income annually from your investments, in line with inflation, over 30 years.
There are few people who retire at 55 who will need their income to remain the same as it was when they were 56 when they are 86.
If you dont like the 4% rule then use 3% or 3.5% for a safer outlook.
4% is based on
7% return
2% inflation
1% tax
FWIW.
BarryGibb said:
LeoSayer said:
BGarside said:
Deduct say 2% for inflation and another 2% for management fees and to use the 4% rule you'd need a minimum market return of 8% every year just to preserve the value of the pension pot. This seems unrealistic to me and I'm thinking of drawing 2-2.5% to live on eventually which means a larger pot is required.
The 4% rule was designed to leave you with an empty pot after 30 years. As an aside for anyone who's trying to do their own back-of-an-envelope calculations you can IMO ignore inflation and keep everything in "today's money". This simplifies things enormously both in terms of the arithmetic and in trying to get your head around what future money will actually feel like in terms of its buying power when the time comes.
In order to make your simplified arithmetic work you just use "real investment return" in your sums instead of "arithmetic investment return". For instance, if you think your investment returns will average 7% p.a. and inflation will average 2% p.a. you simply use 5% (7 - 2) as your anticipated investment return figure.
The only certainty when trying to predict the future is that your numbers will be never be "right", or if they do turn out to be right it's pure coincidence! So long as your guesstimates are good enough to land you "in the right ball-park" it's essentially job done.
One thing is certain, you won't be paying in £1,000 a year for 10 years and then drawing out £10,000 a year for 25 years! Just looking at the average length of retirement these days should bring home the desirability of committing to SIPP and ISA as early as possible to maximise the benefits of tax free compounding.
In order to make your simplified arithmetic work you just use "real investment return" in your sums instead of "arithmetic investment return". For instance, if you think your investment returns will average 7% p.a. and inflation will average 2% p.a. you simply use 5% (7 - 2) as your anticipated investment return figure.
The only certainty when trying to predict the future is that your numbers will be never be "right", or if they do turn out to be right it's pure coincidence! So long as your guesstimates are good enough to land you "in the right ball-park" it's essentially job done.
One thing is certain, you won't be paying in £1,000 a year for 10 years and then drawing out £10,000 a year for 25 years! Just looking at the average length of retirement these days should bring home the desirability of committing to SIPP and ISA as early as possible to maximise the benefits of tax free compounding.
rockin said:
One thing is certain, you won't be paying in £1,000 a year for 10 years and then drawing out £10,000 a year for 25 years! Just looking at the average length of retirement these days should bring home the desirability of committing to SIPP and ISA as early as possible to maximise the benefits of tax free compounding.
If you can wait to 67 to retire, get 6% plus inflation returns, and start at birth, you might be pleasantly surprised....Really emphasises the importance of starting as early as possible,
red_slr said:
BarryGibb said:
LeoSayer said:
BGarside said:
Deduct say 2% for inflation and another 2% for management fees and to use the 4% rule you'd need a minimum market return of 8% every year just to preserve the value of the pension pot. This seems unrealistic to me and I'm thinking of drawing 2-2.5% to live on eventually which means a larger pot is required.
The 4% rule was designed to leave you with an empty pot after 30 years. BarryGibb said:
You sure?
I'm pretty sure it refers to this - https://www.retailinvestor.org/pdf/Bengen1.pdfGroat said:
That's surprising.I don't know what I expected but that doesn't seem like much and I genuinely don't mean that in the "I'd need at leat £5M to retire comfortable" way some do
Groat said:
Wish there was a date on that article. This is less optimistic https://www.pensionbee.com/press/average-pension-p...
xeny said:
BarryGibb said:
You sure?
I'm pretty sure it refers to this - https://www.retailinvestor.org/pdf/Bengen1.pdfhttps://www.kitces.com/blog/bill-bengen-4-percent-...
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