Time flies, take it from me. And it passes so fast that retirement comes along before the majority are ready for it emotionally or financially. Survey after survey confirms the average pension fund is somewhere below £50,000 and with annuity rates plummeting we’ll be lucky to afford broken biscuits.
Two pals of mine are approaching retirement faster than a speeding bullet and between them have pension funds of less than £50,000. Goodness knows what their retirement will be like, even with their state pension thrown in. Like so many people, they realised too late that they should have saved properly. “Plenty of time”, they used to tell me. As grannies used to say, you cannae put an old head on young shoulders.
I left school back in 1965 with no knowledge of money or tax with which to make my life that bit easier. I didn’t learn anything valuable about real life at university either, and apparently nothing’s changed for youngsters today.
So we learn instead from the news and our pals and end up being sold pups by sales folk interested only in making money for their employers or themselves.
So here’s some tips learned over my 40 years as an IFA .
One is the value of compound interest. Over a 20 or 25-year period to retirement the first five years of contributions to savings produce the same results as the next 15 years. So start early and save twice as much over the first five years. If you keep it up after that, wonderful .
Sir John Templeton, one of the world’s greatest investors, said the main objective for investors was to secure real returns after inflation and tax.
So you should always look for the best ways to save tax – starting with pension plans and individual savings accounts (Isas). Remember, too, that the returns are only as good as what you invest in.
How do you evaluate what produces the best returns ? Well, a good place to start is with the number 72! Divide your net returns into 72 and you’ll know how fast or slow your savings take to double.
Say it takes 72 years to double your returns if they’re just 1 per cent a year and 4 per cent takes 18 years (72 divided by four). Invesco Perpetual’s Neil Woodford’s 14 per cent a year since 1989 doubles your money every five years or so.
There’s a long-running debate about whether you should bother trying to find managers like Woodford who consistently beat the FTSE 100 Index.
Some experts insist that if just 25 per cent of managers beat such benchmarks, we should just buy funds that track the Index. But there’s a few problems here. What is the index anyway ?
I don’t know many people who appreciate that the Dow Jones Index, meant to replicate the huge US economy, has only 30 shares in it. Only one has been in the index all the time. Over the last ten years I can’t think of two better companies than Apple and Amazon that reflect modern life here and over there. Neither has been in the Dow Jones.
Over here the FTSE is skewed from reality because of how it’s constructed. Highly regarded stockmarket analyst Rob Arnott has, for as long as I can remember, been pointing out that if these indices were constructed sensibly, returns would be between 2 and 4 per cent higher each year and our pension deficits would be wiped out.
But why settle for average? Isn’t it better to spend a bit of time spotting the managers who consistently trounce the trackers and their competitors, delivering significant extra returns to their customers? A quarter of a thousand funds is 250, so they’re not that hard to find. Remember, of course, that 100 per cent of index trackers fail to match their benchmark .
So, start as early as you can, remember the Rule of 72 and save in tax-free boxes. Don’t pay attention to the TV news – buy when the markets are low and everyone’s saying that we’re doomed. Also insist on the best managers. Do all that and you’ll be able to look forward to a great retirement.
l Alan Steel is chairman of Alan Steel Asset Management