Pensions as simple as 1, 2, 4, 72…
You may ask what this sequence of numbers, namely one, two, four and seventy-two has got to do with successful pension planning...
"One" marks you the individual. That's to remind you the responsibility these days for your standard of living in retirement is down to you. That's especially the case since the demise of Final Salary Pension Schemes and With Profit Plans.
"Two" is to remind you there's two distinct parts to your adult life. The first part focuses on production, you creating income and building wealth. The second part is when you're in consumption mode, consuming energy, food and so on. In retirement few of us continue to produce income.
The quality of your life in retirement depends entirely on how well you've invested surplus income during your production years. Four reminds us few of us are successes over the long haul. Survey after survey over the last forty years tells us only 4% achieve financial independence, investing well enough during our production years to enjoy our later consumption years. (Retirement).
So, what's "seventy two"? Those who understand the rule of seventy two are likely to be the ones who focus on proper investment, and become part of the 4%. This rule of seventy two cuts through the mumbo jumbo of technical jargon that surrounds investment and pensions.
Take the return you're getting on your investments after tax. Divide that number into seventy two, and it tells you how many years it takes to double your money. If you leave your money wallowing in banks or building societies, getting a return of only say 1% per annum, then it will obviously take 72 years to double your wealth. Got it?
On the other hand if you were to achieve 8% per annum (as one of our most recommended funds has done over the last 20 years) then your wealth would have doubled every 9 years.
To put all this into perspective after 20 years £100,000 invested into funds with an 8% per annum growth rate will be worth just over £450,000. But if left to earn just 1% per annum in a deposit account over the same period then that same £100,000 will be worth just £122,000.
This explains why many people in retirement struggle to maintain their standard of living based on the value of the capital they have grown.
Please remember that past performance is no guide to future returns.
Your investment may fall as well as rise and you may not get back what you put in.