Getting the best returns on funds could mean saving less
Many people dream of the day when they will have the financial choice to retire, and most are aware that to do so comfortably they will need to put away a substantial amount during their working lives.
Let us take the example of twin brothers, Alan and Barry, aged 40. Both have average-sized pension funds already, and both are hoping to retire on an income in today’s money of £30,000 a year.
Taking Alan first, and by making various assumptions about his current pension fund, investment returns and entitlement to the state pension, Alan would have to save £960 a month to achieve his goal at the age of 65.
Amazingly however, it could cost Barry £734 a month to retire five years earlier at the age of 60. That’s £226 a month less than Alan needs to save to receive the same £30,000 a year five years earlier.
This is not a printing error, but an example of the power of compound returns. For Alan, we have assumed that he will receive a 5% a year return on his pension fund, as well as anything else earmarked for retirement, and for Barry, we are using a 7% return.
This may be a simplified example but what it does illustrate is how important it is to make the most of your retirement savings, both in terms of what is accumulated to date, and anything you save in the future.
Unfortunately, we come across many people who have accumulated pension pots from past employment who have no idea about how much they are being charged for them, or how they are performing.
Yet the reality is that if you can eke out an extra percentage or two each year in investment returns it could mean having the chance to retire several years early.
So how can this be achieved? Many personal pension providers from the past have long since ceased to market their products and have little incentive to provide comprehensive fund choices or competitive product charges.
Put simply, it is frightening how often we come across very poorly performing “actively managed” funds with associated high costs. On the other hand, by choosing index tracking and passively managed funds you can reduce risk, and almost certainly reduce costs.
In reorganising your finances it is important to decide on the level of risk you are prepared to take and to design the portfolio accordingly.
From there, it is also essential to create a diversified portfolio which invests in all the major assets classes, and to rebalance the fund on a regular basis so that it does not sway from its original objectives.
In our experience few, if any, of these steps are taken with old and possibly forgotten pension funds, yet by spending a little time now, it could mean saving less and retiring early.
By Bill Saunders
Published in The Press and Journal on