The old saying goes “do what you love, and you’ll never work another day.” As I write this on 14th February, Valentines Day, I feel impassioned to write this post from the heart (though as you well know, that’s often not a good way to invest in markets, where the analytical mind prevails). So taking a step back from trading today, I had time to reflect.
I’m 30 years of age and life is pretty good – ‘doing what I love’. And whilst I’m a believer that happiness is in the present, rather than past regrets or future desires, we all need to put our ‘thinking hat’ on sometimes and make some grown up decisions around our long term plans. I was reminded of this today when a successful business person approaching retirement asked me about what to do with their pension that they were looking to now draw down (that is, keep the principal invested and withdraw the gains each year). Without violating personal privacy, the portfolio was worth around £1,000,000 – nearly ten times greater than the £105,000 UK average.
So this got me thinking about what I would do in their position, and what I would need to do to get there. Now before we go any further, lets put things in perspective. £1 million may sound like a lot of money (it is, depending on the context!) but if you are to see out your retirement on that with a reasonably assured income, you probably won't invest it in anything more exotic (riskier) than government bonds. With the 10-year US Treasury yield at 2.7%, you would at best (if held to maturity – traders!) derive an income on the principle of £27,000 which is equivalent to the average UK salary.
That’s not too bad – after all, that is sufficient for the ‘average’ brit to live off, with the typical mortgage obligation and other outgoings that you are unlikely to have at retirement. But for someone who has been able to save £1 million during their 30 or so working years, they most likely would need to compromise their lifestyle somewhat and forget about buying that new Bentley they always dreamt of (which as a car lover myself, also rather dashes my hopes!). The point to emphasise here is that even with an apparently significant sum in pension pot, we cant live like rockstars in retirement (what’s more, with the annual SIPP allowance at £40,000 , you would have been approaching the contribution limit to have set aside this much).
This is what reminded me of the importance of saving, and with the right education, investing for the long run in order to compound returns. So what would a 30 year old like me need to do in order to live (without rockstar status) on at least the UK average salary throughout retirement from 57? Working through the numbers, it might not be as big a task as you think.
- Firstly, we know that from 30 years old to the ripe old age of 57, you have 27 years to save and invest to grow that nest egg.
- We also know that the UK government affords tax relief / a contribution of 25% (generally) of what you pay in to your SIPP, pension or similar Lifetime ISA.
- And we shall assume inflation of 2%, which as a market cynic you know I hate, but to keep this example simple will suffice.
- But what we of course don’t know, is the level of future returns for our investments (some sources suggest as high as 9% before inflation, though again the cynic in me finds that wildly optimistic!).
So based on the above assumptions, what do we need to save, at different rates of return, in order to achieve our £1 million retirement target?
As you can see, depending on how rose tinted your investing spectacles are, in order for a 30 year old to have £1 million upon ‘early’ retirement at 57 and draw the national average salary (assuming bond yields are at least current levels), you need to save somewhere in the region of £500 to £2,000 per month. I acknowledge that this may not be realistic for some people, whilst for others, it may be considerably less than the lease on their Porsche 911 Turbo! Irrespective of your earnings, the table once again demonstrates the power of compound interest and how investing early and wisely can make this much less daunting.
You know by now that this is what inspires Lex and myself to teach about personal finance and help people take control of their financial future. What’s more, we practice what we preach, and cut through the B.S. of other so-called ‘trading educators’. There are no shortcuts, and we teach no gimmicks. But when you do what you love, and love what you do, it couldn’t possibly be any other way...
If you would like to learn more about how to navigate markets and manage your own investment portfolio, check out our MDT Online Course or join me at our Trading Club for weekly insights exclusively for the members of the Academy.
Have a great weekend, doing what you love!