Investing and retirement plans

Manesova83

Hi all,

Just wondering how people factor the inherent uncertainty involved in investing into their retirement plans. I mean I'm trying to work out how much I need to save to have a certain amount by the time I'm a certain age, but it seems impossible without some kind of accurate estimate of stock market growth over that time. Do people just guess what investments will return when planning for retirement?

I'm in my mid-30s and have only just got round to thinking about retirement and what I'll need. I only started investing earlier this year, and in that time the value of my investments has only gone down. Bad timing, I know, but it just makes the whole planning thing seem particularly hard.

Thanks

Linton

Manesova83 wrote: »

Hi all,

Just wondering how people factor the inherent uncertainty involved in investing into their retirement plans. I mean I'm trying to work out how much I need to save to have a certain amount by the time I'm a certain age, but it seems impossible without some kind of accurate estimate of stock market growth over that time. Do people just guess what investments will return when planning for retirement?

You plan by making historically pessimistic assumptions on long term return and possibly inflation. In my case it was 4% return and 3% inflation. Then specify your objectives, for example £500K by the time you retire at 55 and calculate how much you need to invest over the intervening years to get there. A spreadsheet is almost essential.

Each year you review progress. If reality diverges too far from plan you can change the assumptions, objectives or the plan.

I'm in my mid-30s and have only just got round to thinking about retirement and what I'll need. I only started investing earlier this year, and in that time the value of my investments has only gone down.

Would you have preferred that prices had risen so your money would have bought a smaller amount of investments?

kidmugsy

Yes, I don't envy people this problem. Our own pensions are DB which carry a different risk but, we hope, a lesser one.

My own feeling is that one has to try to time the market given that the present is not a promising time to plunge into equities. That will still leave you needing to summon up the will to invest when there's been a crash which, for all you will know, might be followed by a further slide down.

Many people on MSE take an uncritically sunny view of equity investment, ignoring its history of erratic returns - and in some countries complete wipe-out. Luck helps - the luck of having money to invest when shares are good value.

So keep taking advantage of pension contributions, at least to the extent that maximises your employer's contribution, but currently perhaps ensure that the money is invested to mitigate risk rather than to seek high returns.

We are still investing in SIPPs with the money currently going into gold and commodities. Maybe we'll prove right, maybe not. But we are retired and more concerned to preserve capital than to make it grow. Keeping up with inflation would do for us at the moment.

AlanP_2

Manesova83 wrote: »

Hi all,

Just wondering how people factor the inherent uncertainty involved in investing into their retirement plans. I mean I'm trying to work out how much I need to save to have a certain amount by the time I'm a certain age, but it seems impossible without some kind of accurate estimate of stock market growth over that time. Do people just guess what investments will return when planning for retirement?

I'm in my mid-30s and have only just got round to thinking about retirement and what I'll need. I only started investing earlier this year, and in that time the value of my investments has only gone down. Bad timing, I know, but it just makes the whole planning thing seem particularly hard.

Thanks

Are you investing within a pension wrapper? If you are I would be surprised if the value is less than the value of what you, personally, have contributed as provider will have received a tax related top up from HMRC on your behalf.

If you aren't investing within a pension wrapper why not? There may be valid, logical reasons so not necessarily a bad choice.

Personally I would also open a LISA whilst you are still below 40, even if you don't contribute to it regularly it leaves that option open to you later on.

Good point made above about lower prices suiting you at this point in your life. 25 years of low equity prices followed by a 100% increase the year before you want the money would be an ideal outcome (unrealistic, but makes the point).

AnotherJoe

Manesova83 wrote: »

Hi all,

Just wondering how people factor the inherent uncertainty involved in investing into their retirement plans. I mean I'm trying to work out how much I need to save to have a certain amount by the time I'm a certain age, but it seems impossible without some kind of accurate estimate of stock market growth over that time. Do people just guess what investments will return when planning for retirement?

I'm in my mid-30s and have only just got round to thinking about retirement and what I'll need. I only started investing earlier this year, and in that time the value of my investments has only gone down. Bad timing, I know, but it just makes the whole planning thing seem particularly hard.

Thanks

No, you dont know, its the exact opposite, its Good Timing !!!

What you want at the start of your investing "career" is years and years of low prices. The analogy thast been used before, imagine every month you buy something non perishable in your supermarket. Lets say dishwasher tablets. One day you go in and they are half price. Do you (a) buy more, (b) buy the same as usual, or (c) dont buy any because they are cheap at the moment?



As to how much, sure if you had lots of spare money then you could indeed try to estimate just how much you would need.
But there are two limits that come into play ahead of that.
First of all there's a £1m limit. So work out at what rate of savings from your current point you would need to get to that at the retirement age you'd like. Use a compound interest calculator on the web. Most people are going to be struggling to reach that.
Second limit, what can you afford.

Suppose the compound interest calculator says you need to save £1200/month for the next 30 years to accumulate £1M at 5%. *

Now, with tax relief that probably is between £800 to £100/month.
With employers contribution, depends how much, maybe now its down to say £500-£700/month.


Now, suppose you say "well theres no way i can save £700/month"
OK, then your dilemma is solved, save what you can afford taking into account mortgage, food, council tax holidays etc etc etc etc etc. So, if you can save say £200/month, maybe that £300 after employers cont and tax. OK so save that.


There is, as it happens another rule of thumb (which i think provides a too low number). Take your age. Halve it. From now on always save that %. Eg if you are 32 now, save 16%. And keep saving 16% when you are 35, 40 , 45 etc.





* Chosen as i think thats a reasonable rate to get. I've had closer to 8-9% over my investing career. Some may say 3 or 4%. I think thats too low as you can get 3-4% via dividends. Whatever, ignore inflation then you dont need to back calculate what say £2m is in todays terms. Dont say 8% including inflation. Guess that inflation will be 3% so 5% is real growth. And yes it is a guess.

Albermarle

Between now and you retiring , there could be a lot of unpredictable things happening in your life, not just stock market volatility.
So although it is good to plan ahead you may find times when you are unable to save as much as you want and other times , maybe more.
The only thing for sure is that the more you save the better , regardless of where it is invested

bostonerimus

Manesova83 wrote: »

I'm in my mid-30s and have only just got round to thinking about retirement and what I'll need. I only started investing earlier this year, and in that time the value of my investments has only gone down. Bad timing, I know, but it just makes the whole planning thing seem particularly hard.

Thanks

The quality of your timing has nothing to do with the current direction of stock markets. It would have been better for you to start in you 20s and worse if you started in your 40s, the earlier you start the better. Starting in your mid-30s you are doing better than many others.

Retirement planning uses historical average returns and inflation numbers and if you want to be careful you plan should to use the most conservative values...so maybe your return number should be a couple of % greater than inflation.

The other side of the equation is knowing how much you spend and for that you need a budget. So figure out how much you spend. Then take off amounts that you won't be spending in retirement....maybe your mortgage will be paid off etc...and take off any other income you'll have like state pension. Then inflate the number over 20 or 30 years. Then multiply that number by 25 and you have a rough idea of the size of the pension pot you'll need for a 30 year retirement.

ruperts

Plenty of info out there on historical returns. I personally use 4% on top of inflation for an 80% equity portfolio. Some people argue you should be more pessimistic, but that's not for me.

Manesova83

Thanks everyone for your thoughts.

A bit about my situation: earlier this year I moved from the UK to another country in the EU for family reasons. I am still working for my UK employer, but due to complications around health insurance and social security, I am doing so as a self-employed contractor - so no more employer pension contributions. Anyway, as I've lived abroad most of my adult life and worked mostly on a self-employed basis, there's very little in my UK pension pot.

So, as things stand, the money I am saving and investing is what I would use when I retire, alongside my state pension (or pensions - I should be able to claim one in the UK and one abroad).

I currently have some money invested in a S&S ISA, and an equal amount invested through a bank where I now live. With the two combined, about 70% is in equities and the rest in bonds. I plan to invest whatever I can each month, but it's impossible to know what I'll be earning in 5/10/15/20 years' time, which makes it difficult to plan. So the plan is just to save as much as I can.

The majority of my money is held in a limited-access savings account at 1.6%, because I plan to use it to pay off my mortgage in 5 years' time. Once that's cleared, I'll have more money available to invest.

So it seems 4-5% seems a realistic long-term return. I'll go with that next time I do some projections.

Thanks again.

Audaxer

ruperts wrote: »

Plenty of info out there on historical returns. I personally use 4% on top of inflation for an 80% equity portfolio. Some people argue you should be more pessimistic, but that's not for me.

If you mean an average return of say 6.5% (4% plus 2.5% average inflation) that does seem optimistic, especially after a strong bull run for the last 10 years.

Kit_Katt

In short you have longevity on your side and buying units cheaply now is great for the long term.