How are your pension pots doing

Albermarle

noclaf said:

Albermarle said:

noclaf said:

Due to a number of changes last year (consolidating old pensions into a SIPP, changing job so new pension scheme etc) I've given up trying to accurately track performance.

We know Equities and Bonds have taken a bit of a battering last but I don't hold the latter at present and with 15 years to retirement trying not to get too bogged down with the movements in markets and pension fund performance. 

Once fund selection was determined I tend to focus more on my monthly contributions and this is where I'm finding it more challenging, specifically what is the minimum I should put in monthly/annually to achieve a 'reasonable' size pot in retirement. Based on 'back of a fag packet' maths, I use what I think is a conservative assumption of 3% returns per year for the next 15 years, no idea if this is too conservative or I'm expecting too much!

Presume you mean 3% above inflation? Possibly a bit too optimistic, but not wildly so. Maybe better to aim lower, and then be pleasantly surprised if it is better.

Maybe I've been calculating this incorrectly, using the online compound interest calculator I just input 3% as the interest rate, current pension value, expected/assumed monthly contributions and expected timeframe. So I don't think I'm including inflation? 

If you get a return on your investments of average 3% pa, but inflation is 5% pa you are going backwards in real terms.
So you can not ignore it . Of course we do not know what the average inflation rate will be over the next 10 years, but you would hope that investments growth at least keeps up with it.
Before 2022 happened, when this question about expected growth was asked many times on these forums. The answer range was between 0% above inflation to about 3%. Probably the most common prediction was 1%, with a hope that it might be a bit more.

garyelder

Regarding our pension pots
Are we expecting a better year this year it’s  had a reasonable start in 2023
my pension pot was down nearly 10% last year, last week up about 0.75%

[Deleted User]

garyelder said:

Regarding our pension pots
Are we expecting a better year this year it’s  had a reasonable start in 2023
my pension pot was down nearly 10% last year, last week up about 0.75%

Nobody knows.  

JohnWinder

For many of us ‘how are your pots doing?’ is an assessment of how well it will fund our retirement spending, if needed in addition to the much desired state pension (inflation linked) and DB pension (if inflation linked) or lifetime annuity inflation linked.
For these people, even assuming they know their spending needs, knowing their pot size before, at or even after retirement still leaves them uncertain about whether the ‘4% rule’ will hold, or whether they have the right asset mix, or whether they should reduce their spending after two bad years, or how much cash buffer they should hold, and a bunch of other uncertainties. There is an alternative way to judging ‘how’s my pot?’
That way is to compare how much you will/do spend each year, with how much you need to buy a  low risk inflation protected income (like the ‘much desired SP, DB and annuity). With that you can rest in peace until you rest in peace.
It’s called the ‘funded ratio’, with how much you need to buy the secure income (on top), over how much you’ll secure income you want until you die. If the ratio is 1, you just made it; if it’s 1.5, you’ve got more than you need; if it’s <1, keeping working or tone down your retirement aspirations or get greater returns.
So, how to calculate the numerator - your needed pot size? Identify a low risk, inflation protected income stream such as an annuity or a bundle of linkers that will last until you’re surely dead, then ask or calculate what it will cost to buy them. Game over. And note: the higher the interest rates, the less you'll have to spend to get that income. We'll return to that.
For example, if linkers were yielding 0% and you needed £1000/year for 40 years, your pot needs to be £40k.
Now an interesting thing about this approach is: if your pot was mostly stocks with bonds, and the bond yields rose during the last year, your pot would have lost money and disappointed you. But your pot, now compared with last year, will buy you linkers that are yielding more than they were last year and so you’d need fewer of them to fund your spending. Thus your calculation of the funded ratio would give a higher value this year (after the bond prices fell) than last year. So what was disappointing by one measure is uplifting by the FR measure.
Taking this approach to retirement spending funding, you get to swap the uncertainty of market based assets, and the imponderables of the 4% rule etc, and dare I think it the fees paid to those who keep helping you deal with these challenges, for the certainty of a known inflation linked income stream that never needs advice/management/rebalancing etc. What’s not to like? Well, there’s a couple of things, but while you’re thinking about them think about it.

garyelder

Deleted_User said:

garyelder said:

Regarding our pension pots
Are we expecting a better year this year it’s  had a reasonable start in 2023
my pension pot was down nearly 10% last year, last week up about 0.75%

Nobody knows.  

Well I just thought China is opening up which should free up materials, inflation seems to be starting to come under control and the markets are doing better 

Albermarle

garyelder said:

Deleted_User said:

garyelder said:

Regarding our pension pots
Are we expecting a better year this year it’s  had a reasonable start in 2023
my pension pot was down nearly 10% last year, last week up about 0.75%

Nobody knows.  

Well I just thought China is opening up which should free up materials, inflation seems to be starting to come under control and the markets are doing better 

The 'mood music' seems to be that some improvement is expected/hoped for. After a bad year, I guess the chances of a good year improve , but for sure might not happen. As said 'nobody knows' 

[Deleted User]

garyelder said:

Deleted_User said:

garyelder said:

Regarding our pension pots
Are we expecting a better year this year it’s  had a reasonable start in 2023
my pension pot was down nearly 10% last year, last week up about 0.75%

Nobody knows.  

Well I just thought China is opening up which should free up materials, inflation seems to be starting to come under control and the markets are doing better 

There are too many factors at play.  World economies, profits and expectations of future profits are complex beasts.   Some are known (like the two you mentioned) and as such are already accounted in stock prices. These factors are still uncertain and can easily go the other way.  Others are unknown and will trigger market movements. Predicting stock prices is a mug’s game.

Prism

garyelder said:

Deleted_User said:

garyelder said:

Regarding our pension pots
Are we expecting a better year this year it’s  had a reasonable start in 2023
my pension pot was down nearly 10% last year, last week up about 0.75%

Nobody knows.  

Well I just thought China is opening up which should free up materials, inflation seems to be starting to come under control and the markets are doing better 

What makes predicting close to impossible is that none of those things matter. What matters is how different is the reality of those things to the predictions that the market has already made about them. For example, China could open up fully and the Chinese stock market could go down if the reopening is slower or different than the market has already predicted.