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How realistic is a £1m pension?

It takes a brave millennial even to glance at the personal f..

It takes a brave millennial even to glance at the personal finance media these days.

Barely a week seems to pass without those born between the early 1980s and the mid-1990s being told of their vanishing chances of ever enjoying a comfortable retirement, say, or even owning a house.

Still, on our Value Perspective blog, we always prefer to do our own analysis so lets crunch a few numbers relating to that first possibility.

As someone at the younger end of the millennial generation, I certainly have an interest in doing so and the exercise really brought home the profound effect of compounding – what Albert Einstein is often said to have called “the eighth wonder of the world” and “the most powerful force in the universe”, even if in reality he probably never said any such thing.

How Einstein's wonder works: 1p to £5.5m in 30 days

Compounding – the interest or growth earned not only on a loan or investment but also on the interest or growth previously earned – may indeed be a wonder but it is a deeply underappreciated one.

We once illustrated the power of compounding, by posing the question: “Given the choice, would you rather have £500,000 upfront or 1p doubled every day for 30 days?”

“Most people would instinctively take the half a million but compound interest does not work on instinct but maths,” we continued.

“Doubling up from 1p on day one, it would be day eight before you had more than £1. After three weeks, however, you would have just shy of £10,500 and, on day 30, your 1p would have become the best part of £5.5m – or £5,368,709.12, to be exact.”

However realistic the financial medias exhortations for millennials to start saving for their retirement – NOW! – may actually be, they stem from this basic idea that compounding is an extremely powerful thing, especially if you can harness it over time.

How much might you need to save?

To put some numbers around that idea, then, lets think about the monthly contributions it would take from different ages to build up a £1m pension pot by the age of 70.

What we have done is to calculate how much money someone aged 20, 25, 30 and so on up to 65 would have to save each month to reach that £1m target at different rates of annual growth – from 2 per cent up to 10 per cent a year.

And while some might view that latter figure as hopeful at best, value-oriented investors have solid grounds for believing it is by no means unrealistic.

We have discussed before the so-called value premium investors could enjoy if they follow a value-based strategy over the longer term – and clearly the longer term is what we are looking at here.

As we noted, for example, in our 2017 anti-forecast: “From 130 years of history, not only do we know the market tends to make 6 per cent or 7 per cent a year on average, we also know value tends to make around 2 per cent a year on top of that."

Of course, that level of performance cannot be guaranteed in future but it is reasonable grounds for considering the spread of annual returns we have.

And, as you can see from the table below, the ranges are quite extraordinary – if, for example, you start at 25, then 7 per cent average annual growth will see you needing to save £262 a month to hit the £1m target. Procrastinate 15 years, however, and that more than triples to £815.

Amount required to save per month in £

Age to start saving

/return needed

Age 20 Age 25 Age 30 Age 35 Age 40 Age 45 Age 50 Age 55 Age 60 Age 65
2% 970 1,141 1,359 1,643 2,026 2,568 3,387 4,760 7,522 15,835
3% 718 875 1,077 1,345 1,712 2,237 3,038 4,395 7,138 15,430
4% 522 660 843 1,091 1,436 1,939 2,717 4,050 6,769 15,033
5% 373 491 653 877 1,197 1,672 2,423 3,726 6,413 14,644
6% 263 361 500 698 991 1,436 2,154 3,421 6,072 14,261
7% 182 262 379 552 815 1,227 1,909 3,137 5,744 13,887
8% 125 188 285 433 667 1,045 1,686 2,871 5,430 13,520
9% 85 134 212 337 542 885 1,486 2,623 5,129 13,160
10% 57 95 157 261 439 747 1,306 2,393 4,841 12,807

Source: Schroders April 2018

The difference an early start to saving can make is even more starkly illustrated if we shift the numbers into graph form, as we have below with the 2%, 4%, 6%, 8% and 10% growth rates.

One final caveat, of course, is that the erosive effects of inflation mean £1m will buy you a lot more today than it will in 10 years time – let alone 40 or 50.

Still that does not change the underlying message of the following graph, those scary press articles and possibly even your own parents – start as early and put away as much as you can.

Amount required to save per month in £

Source: Schroders April 2018

  • Roberta Barr is an author on The Value Perspective, a blog about value investing. It is a long-term investing approach which focuses on exploiting swings in stock market sentiment, targeting companies which are valued at less than their true worth and waiting for a correction.

Important Information: The views and opinions contained herein are those of Roberta Barr, Investment Analyst, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. The sectors and securities shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell. This communication is marketing material.

This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. The opinions in this document include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. Issued by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA. Registration No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.

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