Planning for a comfortable retirement takes a little effort and no small amount of financial discipline – to ensure you are setting aside a reasonable amount each month so this might provide you with reasonable pension fund at retirement.
We are all aware of the “magic” of compound interest (earning interest on your interest) and how this can be the real driving power for the long term investor.
Another variable is the potential rate of return that might be achieved over the term of your investment…
……it is important to ensure that you can accept the downside of any associated risk – whilst by no means scientific a broad rule of 1:3 is a good measure of risk / reward….
Hence if seeking to have a portfolio designed such that it might yield an annualised return of 4% p.a. you might need to accept a downside risk of up to 12% during periods of market volatility. Similarly if seeking a 6% annualised return the downside risk could be nearer 18%.
Pension funding is a LONG TERM commitment and many clients are investing for 25 + years. This investment term allows sufficient time for the investor to recover from any downside risk that will no doubt occur over this time period. As a general rule the longer you remain in the market the more likely your investments will grow in value. Hence it is important to appreciate that RISK is a key component of seeking upside from a pension portfolio.
Many investors can often take an investment stance that might be considered a little too cautious and this could result in a poorer outcome. Where your investment time period is 25 years plus you can afford to take a little more investment risk….
Client aged 36 at outset elects to invest € 500 per month into their pension plan and seeks an investment return (gross of management charges of 1% p.a.) of 4% p.a. On this basis if he secures an annualised return of 4% p.a. he might secure a pension fund at age 68 of € 322,518
The client is anxious to boost his pension plan and considers whether he might stretch to investing an additional € 100 per month (€ 600) – if he elected to do so the final pension fund at age 68 might be € 387,022
Of course the same client could have the markets do a bit more of the “heavy lifting” – and seek to reposition the portfolio to seek a somewhat higher annualised return of 5% p.a. (1% additional annual return).
If he elected to continue to invest € 500 per month and did indeed secure 5% p.a. the anticipated final fund value at age 68 will be € 389,643.
Whilst it is important to position yourself such that you are comfortable with the level of risk associated with your pension we would also add a note of caution – don’t be too risk adverse especially when you might have 15 + years to your anticipated retirement date.
Of course where you might have 10 years or less away from your retirement age you need to take a more prudent approach as you do not have sufficient time to recover market losses over this type of investment period.
All pension growth is tax exempt and you receive tax relief (subject to limits) on your contributions.
Assumptions: investor age 36 at outset / investment term of 32 years / investing monthly as indicated above / retirement age of 68 / 100% allocation rate / 1.00% p.a. cost of managing funds / no monthly policy fees
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