Understanding pension pot calculation

ry50

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

molerat

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 !

Linton

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

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%.

ry50

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

ry50 wrote: »

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 ?

Perhaps that what are the odds
A) you can choose which investment trust over the NEXT 20 years will have that performance
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

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

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?

dunstonh

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.

Superscrooge

ry50 wrote: »

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?

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

ry50 wrote: »

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%

Exchange rates gyrate. What goes down is equally likely to go back up. Those gains could evaporate before your eyes before you know it.