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    • Vegas2010
    • By Vegas2010 5th Mar 18, 4:16 PM
    • 10Posts
    • 10Thanks
    Vegas2010
    Trying to forecast future pensions
    • #1
    • 5th Mar 18, 4:16 PM
    Trying to forecast future pensions 5th Mar 18 at 4:16 PM
    Hoping someone may spare a minute to comment, but I think realistically I may need a financial advisor.

    My wife is looking to change from being employed with reasonable earnings and pension contributions to self-employed which initially at least will be low earnings, no pension but more time with the family (assumption is it stays like that). As such, I’m trying to assess where we are on pensions and what shortfall we need to consider making up.

    Both 37 so assume 23 years to retirement at 60, and then state pensions in due course at 68.

    Our current pensions are:

    Wife

    As at 30 June 17 - £94k split Aviva Pension Global Equity XE (68%), Aviva Pension Higher Income XE (7%), Aviva Pension Managed XE (14%), Aviva Pension North American XE (11%).

    One more year of contributions of about £4k, and an 0.25% AMC charge on all funds.

    Me

    Pension 1 – As at 30 June 17 - £40k all invested in FL Blackrock (50:50) Global Eq Index (Aguilia C) IE with no further contributions and 0.15% AMC
    Pension 2 – As at 1 Mar 18 - £32k in the Company’s specific passive 50/50 Global equity fund through standard life
    Pension 3 – As at 1 Mar 18, c£3k with contributions of £500 per month ongoing. Need to check how the pensions via new employer are invested.

    I struggle with this as forecasts always seem so conservative and not even suggesting a doubling of investment over a 30 year period. What basis do you estimate your pension income on?

    If I assume the 4% growth after inflation then in 23 years at 60 the four pensions without further contributions should be c.£414k, plus then £138k of contributions to pension 3. Multiplying those contributions by 1.5 for growth over the 23 years gives a total pot of £621k. 4% withdrawal without eating into capital would be c.£24k a year.

    I think realistically we want £36k post tax a year (in todays money) in retirement with mortgage paid off which would require another £300k of savings in that time (assuming 4% rule) although state pensions as mentioned would kick in for both later on.

    Appreciate not everyone agrees with that rule hence the post – are those calculations sensible, too optimistic or conservative? Would the pension per year be higher as 4% doesn’t factor in reducing capital


    Or do I have to accept that the conservative pension forecasts are accurate and I need to contribute more? It's been over 10% and at times 20% contributions for both of us since we started in our mid 20s.


    Thanks for any help!
Page 1
    • Brynsam
    • By Brynsam 5th Mar 18, 4:20 PM
    • 922 Posts
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    Brynsam
    • #2
    • 5th Mar 18, 4:20 PM
    • #2
    • 5th Mar 18, 4:20 PM
    The only universally accepted (or nearly so) run of thumb seems to be along the lines of save as much as you can as soon as you can....but not necessarily in a pension and don't forget the rainy day fund.

    Your first thought - that this is one for a financial adviser - is likely to be your best thought. There are so many things to factor in apart from pensions: life cover, PHI (aka income protection), a possible change in mortgage provider...
    • Vegas2010
    • By Vegas2010 5th Mar 18, 4:27 PM
    • 10 Posts
    • 10 Thanks
    Vegas2010
    • #3
    • 5th Mar 18, 4:27 PM
    • #3
    • 5th Mar 18, 4:27 PM
    The only universally accepted (or nearly so) run of thumb seems to be along the lines of save as much as you can as soon as you can....but not necessarily in a pension and don't forget the rainy day fund.

    Your first thought - that this is one for a financial adviser - is likely to be your best thought. There are so many things to factor in apart from pensions: life cover, PHI (aka income protection), a possible change in mortgage provider...
    Originally posted by Brynsam


    Thanks - definitely right on all parts. I have reasonable cover for life and income protection through work but need to get something for my wife.


    We have treated ourselves over the years but I'd say we've been relatively sensible rather than exuberant and saved (£80k outside of pension, and paying mortgage off early). Whilst it's best guess I want to try and make sure we have a minimum cover but without being unnecessarily tight to save given we'll likely inherit money as well in the future (although hopefully not for a long time).


    Edited to say I realise this random old username (not my normal log in) I'm using doesn't tie to that!
    • xylophone
    • By xylophone 5th Mar 18, 4:42 PM
    • 25,371 Posts
    • 14,967 Thanks
    xylophone
    • #4
    • 5th Mar 18, 4:42 PM
    • #4
    • 5th Mar 18, 4:42 PM
    which initially at least will be low earnings, no pension
    She can still contribute to a personal pension - if she has no relevant earnings, (or earns £3,600 or under) she can contribute up to £2880 and receive tax relief of £720.

    If she has low relevant earnings, for example £6000 a year, she could contribute up to £4,800 to the pension and receive tax relief of £1,200.
    • Linton
    • By Linton 5th Mar 18, 8:54 PM
    • 9,378 Posts
    • 9,509 Thanks
    Linton
    • #5
    • 5th Mar 18, 8:54 PM
    • #5
    • 5th Mar 18, 8:54 PM
    You cant forecast future returns with any meaningful accuracy. The best you can do is to make what you hope is a reasonable guess, update your figures with actuals and revised estimates of needs annually, and then if the forecast final pot differs significantly from what you want it to be change the plans. The change could be some or all of:
    - change retirement date
    - change assumed return
    - change contribution
    - change assumed inflation
    At each stage keep to what you think is reasonable given where you are and past history. So over time you will always have the best estimate you can make that gets increasingly accurate as you approach retirement.

    In my view an initial assumption of 4% return above inflation is reasonable for this purpose.
    • Thrugelmir
    • By Thrugelmir 5th Mar 18, 10:21 PM
    • 58,454 Posts
    • 51,828 Thanks
    Thrugelmir
    • #6
    • 5th Mar 18, 10:21 PM
    • #6
    • 5th Mar 18, 10:21 PM
    If I assume the 4% growth after inflation then in 23 years at 60 the four pensions without further contributions should be c.£414k, plus then £138k of contributions to pension 3. Multiplying those contributions by 1.5 for growth over the 23 years gives a total pot of £621k.
    Originally posted by Vegas2010
    Markets do not rise incrementally year on year. Historically there are extended periods of low returns and likewise periods of high returns. Forecasting ahead no one can predict where in the cycle you'll be.

    As has been said already. Save as much as you can as early as you can. Compounding of income reinvested is your friend. Over the years this will achieve much of the required heavy lifting.
    Financial disasters happen when the last person who can remember what went wrong last time has left the building.
    • Vegas2010
    • By Vegas2010 6th Mar 18, 9:29 AM
    • 10 Posts
    • 10 Thanks
    Vegas2010
    • #7
    • 6th Mar 18, 9:29 AM
    • #7
    • 6th Mar 18, 9:29 AM
    Thanks all for comments. Appreciate there is no correct answer just trying to make an educated best estimate.


    Pleased that nobody has said I'm crazy, and my feel is we are ahead of most on planning for a reasonable retirement income. Given that I'm inclined to take the pressure off and not contribute specficially to a pension for my wife over the next couple of years. Peak nursery bills at present with our two kids, and a new business so any savings will go to accessible savings/investments and continue to contribute to my pension. We can then reassess and run the numbers in two years time.


    Life assurance though feels critical so will get that for my wife, and check I have got the cover I believe I've got.
    • Anonymous101
    • By Anonymous101 6th Mar 18, 11:36 AM
    • 1,082 Posts
    • 468 Thanks
    Anonymous101
    • #8
    • 6th Mar 18, 11:36 AM
    • #8
    • 6th Mar 18, 11:36 AM
    I calculate the size of my pot myself. I don't like the forecasts provided by the pension companies. A lot of them are based on buying annuities still and that isn't what I intend to do.

    To forecast your own pot size you need to do two calculations the formula's are easily found on the internet so just google and adapt as necasary.
    1) "Compound interest of principle" - will give you a forecast value of the pot you already have.
    2) "Future value of a series" - will give you a forecast of the value of your expected contributions in future.

    You'll need to make a set of assumptions such as annual growth (usually thought to average 3-5% after inflation) and how many years you're likely to be contributing for as well as how much.

    I find that by doing this myself I'm able better understand how my contributions affect my likely retirement dates and to predict what my total pot could be worth in various circumstances. You don't get anywhere near as good an understanding of this if you don't do the calculations for yourself IMO.
    • Anonymous101
    • By Anonymous101 6th Mar 18, 11:39 AM
    • 1,082 Posts
    • 468 Thanks
    Anonymous101
    • #9
    • 6th Mar 18, 11:39 AM
    • #9
    • 6th Mar 18, 11:39 AM
    Here you go, these are the ones I use for convenience.
    Looks more complex than it is once its in excel

    Principle amount P
    number of years t
    Interest rate r
    Number of interest compounds per year n
    Compound interest for principal = P(1+r/n)^nt

    Annual payment PMT

    Future Value of a series = PMT * (((1 + r)^t - 1) / r)
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