Pension or....

atush

suicidebob wrote: »

What type of investment would you recommend? And what sort of growth is reasonable with that timescale?

Equities of some type, collective- not single shares. As this spreads risk.

Ones that go for growth, others that go for income. Collective, as unlike single shares they re less risky if one company falls in hard times. Global rather than UK only focus. As markets can differ world wide so spreads risk further.


you could conservatively expect equities to return 2% or more Above inflation over longer periods. Some years you would se less, others you would see much more. They even out in the end, with the tip going to beating inflation and cash returns.

jimjames

suicidebob wrote: »

Is this just a stupid idea?

You've asked the question. Hopefully the previous answers have given a clue but I think yes it is, over the timescales you are looking at. But on the positive side you are thinking about pensions and you've come to a good place to ask questions!

suicidebob wrote: »

What percentage of these funds have returned an average of 3.5% for the last 7 years?

An equity income fund will currently give around 4% income plus capital growth. Last year that growth was around 15%.

At a guess I'd say all equity income funds have given an income of over 3.5% for the last 7 years. Capital value would be different.

If you had 7% annual return which should be achievable with equities then you'd be at £320,000 rather than £200,00 by your target date and give it a few more years to 32 (not 27) you'd pass the £500,000 mark.

The power of compounding!

Reaper

Your biggest oversight is inflation. 3.5% growth is hopeless if inflation is running at 5%. Just at the moment it is unusually low but, given all the QE money sloshing about, it isn't going to stay that way forever.

While I am not clear you mean real bonds (as opposed to building society ones) if you do go for them falling interest rates have pushed bond prices to a peak, but as it is not possible to lower interest rates any further they can only go downhill from here, it is just a matter of when.

At least equity funds offer a degree of inflation protection depending what they invest in. For example - if they include Tesco shares and inflation rises to 5% Tesco might put its prices up 5% and their profits rise to match leading to higher dividends and a higher share price. I'm simplifying and it may not work as well as that but you get the idea.

Going for "no risk" investments is actually very high risk as it is very likely to fail to keep up with inflation. There's no use retiring on £8.5k as planned only to discover that's not enough to buy a packet of cheese and onion crisps!

guymo

Reaper wrote: »

Your biggest oversight is inflation. 3.5% growth is hopeless if inflation is running at 5%. Just at the moment it is unusually low but, given all the QE money sloshing about, it isn't going to stay that way forever.

I think it is worth reinforcing that this plan is not likely to succeed even with inflation at low levels.

The Bank of England target for inflation is 2%. CPI inflation has just dipped below 2% but has been running significantly higher for years. Even if inflation stays at 2% for the entire period, that means the value of a pound in 2041 is like 58p today, so the £8500 that OP plans to draw annually has the buying power of more like £5000. Do you really want to live on £500 a month?

This is the reason that pension funds invest in stocks.

jimjames

suicidebob wrote: »

gives me a fund of just over £200K
Retire in year 28 when I reach 65
I will take £50K immediately, then pay myself £8.5K per year, rising 2% every year until I reach 85, so final year I will withdraw around £11K.
I intend for this to cover my basic living expenses, with state pension and private pension funding any treats and entertainment, holidays etc
This leaves me with a surplus of £19K which will hopefully be enough to cover any breaks in employment

I think there may be a flaw in your calculations for retirement as well.

Take £50k out and you have £150k left.

To get £8.5k pa from £150k then you'd need a return of just under 6%. Unless your intention was to take the money from your capital instead which means it will last 150/8.5 = 17 years (not taking any interest into account).

That then means 17 years into your retirement you have no capital left.

If you have a company pension scheme then paying into that will generally include free money from your employer. If you aren't maximising the matching by your employer then you're losing out.

I want guaranteed income, and obviously want to achieve the highest growth possible with absolute minimal risk

If this is just for extra money in retirement then looking at S&S ISAs may be worthwhile. You can invest monthly and all income & growth inside is tax free. The limit per year is just under £12k so that easily covers your contributions.

The value of your investments will go down as well as up but if you are paying in over such a long time then any drops will mean you can buy more at that time which should even out over 30 years. You can set your risk level depending on what you put inside the ISA but highest growth with no risk isn't something that is possible.