My golden rule of pensions: eight points clear

It’s a mark of getting older that you start to think the pensions pages are a really interesting part of the newspaper.

Well, I’m not grey yet, but I’ve just completed my planning – and finally, found a simple rule to invest by. (There’s a simple rule for anything if you look hard enough.) That rule: to get the fund value I want aged 60, I need to keep eight percentage points between the inflation rate + the fund fee rate, and the fund growth rate.

The reasoning behind this is that with a reasonable and annually rising contribution from me, the funds’ value when I hit 60 will provide a One Percent Principle level of income, adjusted for inflation and rising with it. While the pot it’s drawn from will still be growing at above inflation even after the cost of my monthly withdrawal is taken into account – because the amount I draw per year as a percentage of the fund will be less than the (by that time large) pot’s annual growth rate minus inflation and fees. in other words, the pot will last forever. That’s important, because I plan to live a long, long time.

(The One Percent Principle – aim for a salary that gets you into the top 1% of wage earners – is relevant. The current level in the UK, about £100K, is enough to provide an excellent lifestyle for a family, but not enough to be tempted by anything that needs a crew. A rich man once said, “The three things that lost me most money were my boat, my plane, and my divorce. The moral: if it flies, floats, or fucks – rent it.)

Of course, nothing’s certain. Funds can crash; economies can fail. But I see 60-year olds struggling on a State pension because they did nothing, their dignity gone; I’m just playing the percentages here, and I’ve decided what’s riskier.

But keeping to this rule means my quarterly review of funds becomes easy: if there aren’t eight points of blue sky between costs and growth, I switch that fund into another that’s performing better. While past returns are no guarantee of future performance, the reasonably risky funds I’m in all show five-year averages of 16% or more, well above the level I need even with costs of 2% a year and inflation rising to around 2.5% in the UK.

So that’s all you’ve got to do. Decide what annual income you want at your retirement date in today’s pounds, work out the monthly contribution needed to amass a pot where that annual rake-off as a percentage of the total pot is no more than a safe bank savings rate minus inflation, and start paying that monthly contribution into a fund with eight percentage points between negative and positive NOW. (It’s eight for me; if you’re still in your 20s it may be lower. If you’re in your 40s, you’re already in the danger zone where there’s no reasonable chance of finding good enough funds to invest in.)

Incidentally, no ‘safe’ savings method will provide this performance, so I’d suggest you talk to a proper IFA (the ‘I’ is the most important bit) and start planning your future prosperity. In the last couple of years, I’ve gone from wondering why anyone bothers with pension planning, to wondering why anyone doesn’t.

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