Taxpayer 'Bonus'. £520,000 we don't need to find.

Graham_Devon

J_i_m wrote: »

Yeah, to be honest.. I was going to retort about the unliklihood (is that even a word?) of that life style, let alone those circumstances. But on balance of probability I decided that wotsthat was being ironic and didn't mean his post to be taken seriously.

Oh another one of those ironic 'in reflection' posts?

wotsthat

Graham_Devon wrote: »

BTW, how have you worked it out? Totaled the earnings up and then taken 25%? Thereby creating money from thin air?

In the first 10 years of her working life her pot would only be standing at approx £200 (allowing for take home pay). Yet within 60 years, you've created £500,000

You also appear to have her living past 110 years old (based on her starting her nursing career at 16 years old). As I say, simply amazing women.

Missed the edit. It's simple to calculate. Year one: take 25% of earnings and multiply by the interest rate. Year two: take 25% of earnings and add to the year one total plus more interest etc. etc.

Don't be embarrassed a lot of people don't get it.

Yep noted on the age. I just took 1930 as the starting point from your data. Add c0.5% to the interest rate and we're back at £500k.

It's the beauty of it all. Seemingly small interest rate increments over a long period make a big difference.

Graham_Devon

Yep, well, fair enough, if she lives that long AND pays into a pension AND saves 25% of take home pay AND saves 25% of her pension we might be getting somewhere.

But were quite some way away now from your orgiinal point that 500k could be saved from her WAGES, which was my objection.

Afterall, we've introduced saving the pension (which I assume has the best index link going?) for god knows how many twighlight years she lives for.

chewmylegoff

The lack of understanding of compound interest is concerning...

It seems likely that she accumulated funds by a combination of saving and inheriting whatever her parents left. It doesn't really matter how she accumulated the money though as it has now paid off three seconds of interest on the national debt. For the avoidance of doubt, interest on gilts is non compounding (although if you have to also borrow the money to pay the interest on the gilts...).

wotsthat

J_i_m wrote: »

Yeah, to be honest.. I was going to retort about the unliklihood (is that even a word?) of that life style, let alone those circumstances. But on balance of probability I decided that wotsthat was being ironic and didn't mean his post to be taken seriously.

The lifestyle is unlikely but that's what being reported.

Take the circumstances as you will but getting rich is simple function of compounding. The longer you have and the higher the interest rate the richer you'll be.

wotsthat

Graham_Devon wrote: »

Yep, well, fair enough, if she lives that long AND pays into a pension AND saves 25% of take home pay AND saves 25% of her pension we might be getting somewhere.

But were quite some way away now from your orgiinal point that 500k could be saved from her WAGES, which was my objection.

Afterall, we've introduced saving the pension (which I assume has the best index link going?) for god knows how many twighlight years she lives for.

The pension was two thirds of the average wage in 1980 increasing by 3% pa so a negative indexing. Apart from letting her live too long:) I couldn't have skewed the data more towards your skeptical POV.

Graham this time in 50 years you could be a millionaire - cushty!

Loughton_Monkey

wotsthat wrote: »

......Somewhat unique circumstances but shows that given time a person on quite modest means can build a substantial pot that 'unbelievably' can exceed total lifetime earnings.

I live on c80% of earnings and aim to live on less in the near future. Let's meet up in 20 years and compare notes.

Thanks to accounts I have kept since I started work, I can confirm that this situation is quite feasible. When I retired, my total net wealth was 110% of my lifetime earnings (from employment). Since retirement, of course, it has risen slightly to 120%.

Purely in £note terms, my total spending for my 34 years of work amounted to 74.2% of employment earnings, but it differed year on year, and there is a clear pattern of the %age not spent rising as I earned more. So depending upon your age, 80% (decreasing) might well achieve this.

My earnings include employer pension contributions (estimated for the FS ones, but probably underestimated). My wife also worked for a while at comparatively much lower salary but that doesn't change the thrust of the calculation. The retirement net worth obviously came mainly from house equity, and interest/investment income. I had no material lottery wins/inheritances.

I don't see this as particularly startling, since it is purely an issue of mathematics more than anything else. Look at it this way. Say you retire (earning 100 units) at age 55. Hence you are probably spending 75 units, and want this to continue. Whilst you wouldn't put all your cash into an annuity, if you did so, you would get around 2.5% on an RPI escalating one. So in very round figures, you need total wealth in the order of 40 times your 75 units of expenditure. That's 3,000 units, or 30 times your last salary. This figure includes the value of your pension pots. So taking into account the fact that you earned less than 100 units early in life it can still equate to a 35 to 40 year career.

Over the whole piece, there is quite a bit of [what I would call] 'leverage'. Do the maths on 75%, and then again on 76%, assuming a small 'real' investment rate on savings accumulated through the years. The 75% may well allow me to continue spending at the same level at age 55, but had you always spent 76%, your savings/investments are consistently 24 units instead of 25. That's 4% lower than me.... and you want to spend 1.3% more than me!

Ouch!

Once you assume consistent spending of 85% or more of income, even if you wait for state pension age, it is likely you are going to have to take a quite significant drop in spending power - although this ceases to be true on modest salaries and the nearer your earnings are to State Pension value.

This is why - when I see apparently intelligent people building up a lifestyle of 100% of income - the word 'lemming' always comes to mind...

wotsthat

Graham_Devon wrote: »

Yep, well, fair enough, if she lives that long AND pays into a pension AND saves 25% of take home pay AND saves 25% of her pension we might be getting somewhere.

But were quite some way away now from your orgiinal point that 500k could be saved from her WAGES, which was my objection.

Afterall, we've introduced saving the pension (which I assume has the best index link going?) for god knows how many twighlight years she lives for.

For the sake of completeness I ran the figures again with her starting work in 1940 aged 18 rather than 1930 aged 8:o

I'd said she needed a compound return of 6.3% to amass a pot of £500k; on the new calculation she needed 6.5% so a long way from a fantasy.

I'm not saying this is what happened but highlighting that it is possible. When she died she could have easily built a sum that exceeded, by some margin, her total lifetime earnings.

The pension I've covered. As an aside I was the executor of my grandmother's estate when she died recently aged 89. She lived in a council flat and lived on a modest 50% company pension (left by my grandfather) plus the state pension. She kept a small book that listed her monthly outgoings for the last few years of her life. Her only 'vice' was visiting Bournemouth and staying in decent hotels for a couple of weekends a year and I could see that she was transferring money to her less well off sister on a monthly basis. She saved, by my reckoning, 50% of retirement income and had done since 1984 when she retired aged 63.

If your objection is that this sum couldn't have been accumulated from wages (as evidenced by the pot being bigger than lifetime earnings) and ignoring compounding then yes you are correct. However, I'm not sure what you're objecting to if I've understood you correctly.

Wealth creation is a simple function of time and compound interest. Both of these are variable (we don't know how much time we have or what future interest rates will be) so we don't know the final return. What's certain is that if people don't save, for whatever reason, their return will be zero.

ash28

Graham_Devon wrote: »

Yep, well, fair enough, if she lives that long AND pays into a pension AND saves 25% of take home pay AND saves 25% of her pension we might be getting somewhere.

But were quite some way away now from your orgiinal point that 500k could be saved from her WAGES, which was my objection.

Afterall, we've introduced saving the pension (which I assume has the best index link going?) for god knows how many twighlight years she lives for.

I think it could be saved from wages easily....compounding is the key.

If someone starts saving at the age of 20 and saves until they are 60 and you start off with £1000 and save £100 a month compounded monthly with an average interest rate of 8% and average inflation of 5% (bearing in mind it's only been the last few years where inflation and interest rates (2008) have been so low) and save for 40 years with your £100 a month increasing with inflation (save £1200 the first year, £1260 the second etc) After saving for 40 years you would have around £678k - and if inflation averaged 3% you would have £520k.

And if you didn't increase your savings amount at all you still have over £350k.

I know an average of 8% interest seems high at the moment but over the course of a lifetime rates will vary, they have over mine, massively. The Nottingham Building Society has an ISA that pays 4% for a year..or with a bit of a risk you could invest in peer to peer lending that returns about 6%.

If you started off with £0 and saved £100 a month under the same conditions you would have £654k.

My sister and her husband always lived quite carefully and they always saved her salary (part time after having the children), and only dipped into their saving if they absolutely had to, unlike us who tended to have the holidays, the hobbies, the stuff for the kids. She retired from work at the age of 46, she had no pension provision - would have been too young anyway to take any pension she might have had. I don't know how much they have, but according to their daughter I would be shocked at what they have.

They didn't invest the money as such, they saved it using Tessa's ISA's NS&I and fixed term savings plans, building society etc, so the money was never at risk.

chucky

wotsthat wrote: »

Don't be embarrassed a lot of people don't get it.

The lack of financial intelligence of some people is scary, no wonder they're in the financial state they're in.

More cringeworthy is that these forum users don't let themselves be educated by others who are more intelligent.