In the UK news this week it has been reported that, for a comfortable retirement, people need to save a ‘pension mountain’ of £260,000.
Cue the doom-mongers and naysayers. ‘Who could ever hope to save this amount of money?’
Using the 4% rule this would give an annual income of £10,400. Doesn’t sound very comfortable to me.
So, how do we climb this ‘Mountain’?
The lifetime limit on pensions is currently just over £1m. Most people would expect £1m is more than enough to provide a gold-plated retirement of luxury.
Again, using the 4% rule, this would provide an annual income of £40k. Not exactly enough to buy a yacht, but more comfortable than just over £10k per year.
Obviously, the actual pension pot needed in retirement varies from person to person, but the general rule of thumb in the FI community is 25x annual expenses, with safe withdrawal rates (SWR) at 4%.
For simplicity, we’ll assume a person needs £40k a year for their expenses using 4% SWR. How much does this person need to save to get the £1m pension pot required?
Below I’ll set out the contributions needed to achieve that £1m, starting at different ages, calculated using Monevator’s compound interest calculator.
I have assumed that the pension is invested in the stock market (low-cost index funds) and achieves a 7% annual growth rate. I’ve used the earliest point of being able to draw the money, currently 55 years old for personal pensions. Tax relief on contributions assumed to be at basic rate. (Gross contributions in brackets)
Age when start saving Net (Gross) Contrib./month /Year Final value at 55
20 £453 ( £566) £5440 (£6800) £1,005,811.00
25 £666 (£833) £8000 (£10000) £1,010,730.00
30 £1000 (£1250) £12000 (15000) £1,015,147.06
35 £1533 (£1916) £18400 (£23000) £1,008,899.07
40 2533 (£3166) £30400 (38000) £1,021,746.03
45 not achievable by 55 – max contribution £40k gross/y £591,343.97
50 not achievable by 55 – max contribution £40k gross/y £246,131.63
The above shows that around 40 years old is the limit on being able to achieve a £1m pension pot by the age of 55.
The key then to amassing a £1m pension pot is to start as early as possible, to allow compound interest to work its magic.
One interesting strategy, if you have children or grandchildren, could be to invest £5/day (£155/month) in a pension for them from birth until the age of 20. No further contributions would be needed for their pot to reach £1m by the time they are 55! What a fantastic gift that would make.
The investment strategies to get there yourself depends on your personal situation and risk tolerance. – The simplest option would be to invest into low-cost index funds via a SIPP, or you may take a high risk route and invest in the Dogs of the FTSE! You may have a company pension with little choice of funds. John at UK Value Investor outlines his proposed journey here.
When should we stop contributing to a pension?
The lifetime limit on pensions is currently £1,030,000.00. Anything above this is taxed at 55%.
So we need to monitor contributions and pension values to ensure it doesn’t go above this limit. The Escape Artist has a great post about getting on top of your pension situation – Do you even know what going on in your pension?
Below I’ll set out some maximum amounts we would want in a pension at certain ages, after which we don’t want to make further contributions to avoid breaching the lifetime limit.
Age Value when to stop saving Final value at 55
20 £95,000 £1,014,275.24
25 £135,000 £1,027,654.43
30 £185,000 £1,004,075.04
35 £260,000 £1,006,117.96
40 £370,000 £1,020,841.67
45 £510,000 £1,003,247.19
50 £720,000 £1,009,837.25
As you can see above, the figures are relatively quite small in the early years. So if a person had a windfall through an inheritance, or some other event, and was looking to invest the money in their pension it would be useful for them to keep these figures in mind so as not to contribute too much and end up breaching the lifetime limits.
In summary, a £1m pension pot is achievable, especially if you START EARLY.
What do you think?
Is a £1M pension pot unachievable for a normal person?
Are you aiming for a £1m pension pot?
Hi, love this post – I know sometimes £1m seems like a massive number!
I don’t think my pension will ever get there – I’m about £200k at the moment, and I reckon it will end more near £700k level, but you never know. But I know I can live on well less the £40k, so all is good.
I’m really not sure what after inflation growth rates we’ll get – but is your 7% after inflation? Not sure the FTSE has returned that, but seems more reasonable with a global portfolio.
What about yourselves – what numbers are you at and what do you aspire to?
Hi Ms ZiYou
Thanks for your comment.
No I don’t think my pension will get there either. I’m just over the 100k level, but I’m hoping to build it up as much as possible over the next couple of years to get to over 500k.
With respect to investment returns I have ignored inflation and just based the figures on expected 7% return on a low cost global equity portfolio.
Great post Mr Fu.
In answer to your questions. I think it is readily achievable to build-up a pension pot of £1m. But to do so you have to start early. There will be many middle-income earners who have DB schemes in payment which in today’s money would be worth close to a £1m. I think it’s a bit more difficult with a DC scheme. Not necessarily because they tend to be ‘less generous’. Mainly because all the choice and options are in your “control”. There are strong incentives to not put money away. It’s possible to get stung by bad investments/default fund apathy.
Do I want a £1m pension pot? I might not have a choice! By your calculations, I’m near the borderline. That’s quite re-assuring as that means you got a similar answer to me when I crunched my numbers. In general, I don’t everyone should want a £1m pension pot won’t be the right thing for everyone. Broadly speaking, a mix of pensions, ISAs and insurance will be the right way to go for most people.
Hi YFG
Yes starting young is the key. If starting at age 20 all that is needed is just over £5k per year.
Great news that you might achieve a £1m pot. Like you say a mix of investments will be probably best for most people, especially the FI crowd when early access is needed. I just did the figures to illustrate the example of when to stop saving as I have not really seen those figures published before anywhere.
Who wants to be a millionaire!? If someone had asked me when I was in my 20s, my answer would have been a solid ‘yes’, although the only way I could think of being one was to win the lottery, which I participated in regularly and enthusiastically back then.
Looking at your table, I started saving into a company pension at age 25 but didn’t get on the FI path until between 40 and 45 so being a pension millionaire isn’t achievable for me, but that’s no great loss.
My FI ‘number’ is a bit more than the ‘pension mountain’ of £260k which I think is a realistic goal for me – it’s taken me 9 years to get to half that number and 5 of those years were before I knew what a “savings rate” meant.
I think my number combined with what I think the value of my company pension is comes to around £500k so perhaps I won’t be a millionaire but a semi-millionaire!
I won’t be using a 4% rule as I intend to partially deplete my pot until my company pension and the state pension kick in so I’m planning a ‘fixed income’ of sorts.
PS – thanks for linking my Dogs of the FTSE portfolio – not a recommended strategy for peace of mind!