Sixty year plan

When I reached thirty I began worrying about pensions.  This was partly driven by the woeful state of my own company pension at the time, and also by some insights I gained in my early twenties working in the actuarial industry.

The conventional wisdom in the pension industry is that you save in equities while you’re working to get the best return and put then put the money in something ‘safe’ the day you reach retirement.  This holds whether you are saving up yourself, contributing to a defined contribution pension scheme or indeed managing a fund on behalf of a final salary scheme.

The problem with this approach is that every year the window of high growth opportunity shrinks  – if you plan to retire at 60, there are 30 years of growth for the contributions you make aged thirty, but only 20 years of growth for the contributions made at 40.

So I turned the problem on its head.  My first assumption was that I would stop working at age 60 and I would die aged 90.  This allows a strategy to be framed called ‘thirty in, thirty out’.  The principle is that the contribution at age 30 becomes the income at age 60, the contribution at age 31 becomes the income at age 61 and so on until the contribution at age 59 (last year of work) becomes income in the last year of life (89).

The thing about this strategy to focus on is that there are thirty sets of thirty year investments going on.  This means that every year each contribution can be placed in an investment vehicle giving the best possible returns over 30 years.  There is no need to suddenly place the whole fund into a ‘low risk’ investment vehicle at an arbitrary age.

When I explain this strategy to people they quite often get hung up on the assumption about date of death.  But really it doesn’t matter.  The principle and the mathematics still holds – if you are aged 40 and want to plan for a retirement at 60 until 100, then the strategy is 20 in, 20 out, except in this case that each contribution has to provide income for two years rather than one (so you better make it around 1.5 times larger to start with).

So how much did I save under this plan?  I wanted to target a net income in real terms of £15,000 aged 60 so I chose an investment vehicle I thought would easily double in real terms over thirty years and invested £7,000 into it.  The choice of vehicle will be the subject of a future blog post.

This year I am 15 years into my 60 year strategy and it seems to be just about holding up despite the poor stock market returns over the last 8 years.  My original £7,000 investment is worth £19,000 today – a real rate of growth of around 30% given that inflation probably averaged around 3% in the last 15 years.  The absolute return was around 7%pa.  The fund would now need to grow at 8% pa in absolute terms over the next 15 years keep on track with the original objective –  pretty achievable given that it is inside an ISA so all capital and income gains are tax free.

And if it doesn’t quite make the full 8% I shall have to tighten my belt a little in that first year.

Read more on this topic . . .