"The quality of your life in retirement depends entirely on how well you've invested surplus income during your production years."
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 the individual. One is you, or in their case each of them. 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 3% per annum, obviously three into seventy two equals twenty four. So it takes twenty four years to double your wealth. Got it?
Achieve 14% and your returns over the same period jumps to over eleven fold. If you're a 40% taxpayer, and you invest the same amount into a pension plan, achieving 14% return as before, the increase return thanks to tax relief rises in total almost twenty fold.
So to put that simply, £10,000 would become £20,000 in the first example, £232,000 in the second example, and £387,000 in the last one - all from the same original investment.