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    • ry50
    • By ry50 1st Dec 17, 12:18 PM
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    ry50
    Understanding pension pot calculation
    • #1
    • 1st Dec 17, 12:18 PM
    Understanding pension pot calculation 1st Dec 17 at 12:18 PM
    Hi,


    I'm trying to work out the value of what my pension pot might be in 20 years. I understand the online calculators factor in conservative growth (say 5%) and inflation etc.


    what I don't understand is the growth rates I am currently getting with the projected rates.


    to illustrate: I've had 90k invested over 3 years. i've made zero contributions. it's grown by 50%. projecting forward (completely speculatively, I realize), if I reduce that growth to say 10% a year instead of the 16% amount I've been getting - the end amount is still way over my lifetime cap.




    what am I missing here?


    I realize that consistent growth rates of 10% a yr over 20 yrs are very unlikely, but when I look at the performance of some investment trusts over 50 yrs, that is exactly what many achieve?


    thanks
Page 1
    • molerat
    • By molerat 1st Dec 17, 12:30 PM
    • 17,474 Posts
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    molerat
    • #2
    • 1st Dec 17, 12:30 PM
    • #2
    • 1st Dec 17, 12:30 PM
    Some years the value may go down, some years +50%, some years +1%. I had one that increased by 99% over 5 years. A bit of a fright when the pot went down by 14% one year though !
    www.helpforheroes.org.uk/donations.html
    • Linton
    • By Linton 1st Dec 17, 12:45 PM
    • 8,621 Posts
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    Linton
    • #3
    • 1st Dec 17, 12:45 PM
    • #3
    • 1st Dec 17, 12:45 PM
    1) In the past 50 years inflation has averaged 5.8% - see here.
    2) The past few years have been unusually good to investors with the capital value of assets rising rapidly whilst inflation is very low.
    3) 5% in real values (ie above inflation) has been considered a reasonable average return. There may be reasons to believe returns these days are lower. For planning purposes I would suggest 3% or less above inflation. In my retirement planning I used and continue to use 1% above inflation.
    • dunstonh
    • By dunstonh 1st Dec 17, 12:59 PM
    • 89,873 Posts
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    dunstonh
    • #4
    • 1st Dec 17, 12:59 PM
    • #4
    • 1st Dec 17, 12:59 PM
    to illustrate: I've had 90k invested over 3 years. i've made zero contributions. it's grown by 50%. projecting forward (completely speculatively, I realize), if I reduce that growth to say 10% a year instead of the 16% amount I've been getting - the end amount is still way over my lifetime cap.
    You are overdoing the likely returns. We dont know what your investments are but something around 5-7% is more typical.

    An average of 3 years which included an unusual event that spiked asset values (devaluation of sterling following the referendum result) is not the way to work out what you are likely to get. A stockmarket correction is -10%. A crash is -20%. The dot.com period and credit crunch both fell by 43%.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. Different people have different needs and what is right for one person may not be for another. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
    • ry50
    • By ry50 1st Dec 17, 1:17 PM
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    ry50
    • #5
    • 1st Dec 17, 1:17 PM
    • #5
    • 1st Dec 17, 1:17 PM
    So you think its basically a case of expecting future returns to look like past returns...


    oh well. shame - I know we had a sterling boost and I know the last few decades have been stock market winners, but I just thought even being a fraction of that would be at least 8-9%
    • AnotherJoe
    • By AnotherJoe 1st Dec 17, 1:38 PM
    • 7,671 Posts
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    AnotherJoe
    • #6
    • 1st Dec 17, 1:38 PM
    • #6
    • 1st Dec 17, 1:38 PM
    I realize that consistent growth rates of 10% a yr over 20 yrs are very unlikely, but when I look at the performance of some investment trusts over 50 yrs, that is exactly what many achieve?

    What am I missing here ?
    Originally posted by ry50
    Perhaps that what are the odds
    A) you can choose which investment trust over the NEXT 20 years will have that performance
    B) you are confident enough to put all your investment in whichever one of those you’d pick and leave it there through ups and downs for 20 years
    • ry50
    • By ry50 1st Dec 17, 2:14 PM
    • 3 Posts
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    ry50
    • #7
    • 1st Dec 17, 2:14 PM
    • #7
    • 1st Dec 17, 2:14 PM
    I guess i'll have to report back in 5 years!! I've picked 4 trusts and will just stick everything in there and leave it
    • enthusiasticsaver
    • By enthusiasticsaver 1st Dec 17, 3:04 PM
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    enthusiasticsaver
    • #8
    • 1st Dec 17, 3:04 PM
    • #8
    • 1st Dec 17, 3:04 PM
    I think it is dangerous to expect investment returns to be steady over a relatively short number of years. I am working on a 10 year cycle and counting on a conservative 3 - 4% return which is still better than cash but lower than some others expect. I would rather underestimate than over estimate. Our income investments are yielding 4% dividends which we are taking each month to supplement pensions.

    I think currency exchange does seem to have affected investments in the last few years which have inflated most investment pots. Why are you not making pension contributions now?
    2 weeks to go until early retirement in December . Debt free and mortgage free.

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    • dunstonh
    • By dunstonh 1st Dec 17, 3:31 PM
    • 89,873 Posts
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    dunstonh
    • #9
    • 1st Dec 17, 3:31 PM
    • #9
    • 1st Dec 17, 3:31 PM
    So you think its basically a case of expecting future returns to look like past returns...
    With hundreds of years of history behind us, the long term average returns, net of inflation, are broadly similar. The longer you are invested, the closer you get to the long term average. So, yes. it is common sense to look at long term returns rather than short term periods which have been much better than normal.

    I know we had a sterling boost and I know the last few decades have been stock market winners
    The last two decades have generally had lower returns than the long term average. Why do you think endowment policies fell short in that period but no period previous?

    Nowdays, you hope to double or get close to double your value in 10 years (exc inflation). When I stated 20 years ago, maturities then were getting 4x in 10 years, then fell over time to 3x and now double. Cautious investments are highly unlikely to do double.

    but I just thought even being a fraction of that would be at least 8-9%
    The last two decades are closer to 5%p.a. average than 8-9%.


    I've picked 4 trusts and will just stick everything in there and leave it
    if you have a bespoke portfolio of single sector funds then 4 funds is nowhere near enough. That would be bad investing. If you have 4 multi-asset funds then that is fair enough.

    It is important that when picking your own investments, you understand how things work. Otherwise, misconceptions can lead you do making very bad decisions.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. Different people have different needs and what is right for one person may not be for another. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
    • Superscrooge
    • By Superscrooge 1st Dec 17, 8:46 PM
    • 916 Posts
    • 633 Thanks
    Superscrooge
    Hi,

    I'm trying to work out the value of what my pension pot might be in 20 years. I understand the online calculators factor in conservative growth (say 5%) and inflation etc.

    what I don't understand is the growth rates I am currently getting with the projected rates.

    to illustrate: I've had 90k invested over 3 years. i've made zero contributions. it's grown by 50%. projecting forward (completely speculatively, I realize), if I reduce that growth to say 10% a year instead of the 16% amount I've been getting - the end amount is still way over my lifetime cap.

    what am I missing here?
    Originally posted by ry50
    You seem to be trying to calculate whether your £90K pension pot in 20 years time will have grown sufficiently to breach the current value of the lifetime allowance.

    But don't forget the lifetime allowance (if it still exists in 20 years) will also have increased.

    'From 6 April 2018, the government intends to index the standard lifetime allowance annually in line with the Consumer Prices Index'
    • Thrugelmir
    • By Thrugelmir 1st Dec 17, 11:22 PM
    • 56,196 Posts
    • 49,572 Thanks
    Thrugelmir

    oh well. shame - I know we had a sterling boost and I know the last few decades have been stock market winners, but I just thought even being a fraction of that would be at least 8-9%
    Originally posted by ry50
    Exchange rates gyrate. What goes down is equally likely to go back up. Those gains could evaporate before your eyes before you know it.
    “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble”
    ― Warren Buffett
    • bigadaj
    • By bigadaj 2nd Dec 17, 8:05 AM
    • 10,803 Posts
    • 7,100 Thanks
    bigadaj
    I guess i'll have to report back in 5 years!! I've picked 4 trusts and will just stick everything in there and leave it
    Originally posted by ry50
    I think you've primailry missed out the potentially devastating effect of inflation, for those prepared to invest and take on higher risk then the last decade has been a nirvana, with net increases almost unmatched in history. This does ignore the relative lack of increase in true value, ie currencies have effectively been devalued, as teh next stage after central banks and governments have failed to ignite inflation and had to push QE and so inflate asset prices. The U.K. Government has unusually been very successful in reducing currency worth, meaning as a uk based international investor you've seen sterling denominated returns far higher than someone in the us or eurozone.

    So you're large increases in fiat currency haven't actually meant that you can get that much more on physical assets in many areas.
    • bigadaj
    • By bigadaj 2nd Dec 17, 8:07 AM
    • 10,803 Posts
    • 7,100 Thanks
    bigadaj
    With hundreds of years of history behind us, the long term average returns, net of inflation, are broadly similar. The longer you are invested, the closer you get to the long term average. So, yes. it is common sense to look at long term returns rather than short term periods which have been much better than normal.



    The last two decades have generally had lower returns than the long term average. Why do you think endowment policies fell short in that period but no period previous?

    Nowdays, you hope to double or get close to double your value in 10 years (exc inflation). When I stated 20 years ago, maturities then were getting 4x in 10 years, then fell over time to 3x and now double. Cautious investments are highly unlikely to do double.



    The last two decades are closer to 5%p.a. average than 8-9%.




    if you have a bespoke portfolio of single sector funds then 4 funds is nowhere near enough. That would be bad investing. If you have 4 multi-asset funds then that is fair enough.

    It is important that when picking your own investments, you understand how things work. Otherwise, misconceptions can lead you do making very bad decisions.
    Originally posted by dunstonh
    Where do you get hundreds of years from, Barclays equity gilt study goes back no more than 130years and f&c as the oldest it around 150?
    • westv
    • By westv 2nd Dec 17, 10:37 AM
    • 4,370 Posts
    • 1,990 Thanks
    westv
    Where do you get hundreds of years from, Barclays equity gilt study goes back no more than 130years and f&c as the oldest it around 150?
    Originally posted by bigadaj
    Because we still know how stock markets performed prior to the introduction of indexes??
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