I recently joined a new workplace pension/401k provider having started at a new company.
The company has a generous employer contribution and the provider has great fund options.
However, when I saw my provider’s predicated pension value at retirement, I was shocked.
In 30 years, the statement says that I could have only up to $160,000 when I come to retire.
This is equivalent to today’s money, so in reality it’ll be more, but they don’t say how much.
Using an annual 5% withdrawal rate, this is equivalent to an annual income of $8,000 today.
Having examined my statement, I know that my pension pot will be way higher in 30 years.
In this article, I discuss my pension statement and show you how they came to this figure.
I also share my own calculations as to what I think my pension amount would actually be.
Finally, you can use the MYB Realistic Pension Calculator to calculate your own pension pot.
Let’s Look at Their Assumptions
The first thing to note is they don’t share their assumptions as part of their prediction letter.
You have to search for a separate document: Statutory Money Purchase Illustration (SMPI).
In this document, you can see what growth rate they assumed for your chosen pension fund.
For my fund, they’ve used an annual growth rate of 6% which is quite low for stocks/shares.
That’s because they subtracted annual inflation (2.5%) and annual fees (0.5%) i.e. 3% total.
That means they predict it would grow average 9% a year in total and 6% inflation adjusted.
Even 9% is low, considering that a stocks only global index fund may return 12% on average.
I’d use 10% to see what my pot would be in total and 7% to see what it’d be post inflation.
Another thing this figure doesn’t account for is my increase in income over the next 30 years.
It assumes I will be paying the same contributions every year, which we know is unrealistic.
How Much Do I Actually Need?
I know that $160,000 definitely won’t be enough for me in retirement. How do I know this?
Because an annual 5% withdrawal rate would only give me a gross income of $8,000 a year!
That’s the equivalent of $667 a month — which is not much at all, especially in 30 years’ time.
The question is: how much income would I like and what size pension amount would I need?
In terms of a monthly income, let’s say that I would be content with $3,000 every month.
That’s equivalent to an annual income of $36,000 a year (we’ll say gross income for now).
We need to figure out the minimum amount I’d need in my pension to achieve this income.
For a 30 year retirement, let’s say I would be comfortable with a 5% annual withdrawal rate.
To determine our pension size, we multiply $36,000 by the inverse of 5% i.e. 1/5×100 = 20.
Therefore, I’d need $36,000 x 20 = $720,000 in my pension. That’s almost 5 times $160,000!
Is That Much Money Even Possible?
$720,000 sure is a lot more than 160,000. The question is — is this even possible to achieve?
This is where the MYB Realistic Pension Calculator comes in. We need to test some numbers.
Some starting variables: 30 years old, current pot of $5,000, and let’s say my salary is $45,000.
In terms of annual return, I would use 10%, personal (3%), employer (4%), and tax relief (1%).
To see how much it would actually be worth, I’ll use an annual return of 7% inflation adjusted.
Using a 10% annual return, I can see that in 30 years’ time, I am projected to have $784,000.
Using a 5% annual withdraw rate, that is equal to an income of $39K a year/$3,267 a month.
Using a 7% annual return in 30 years’ time, this is equal to having $418,113 in today’s money.
Using a 5% annual withdrawal, this is similar to an income of $21K a year/$1,742 a month.
Assuming you have a partner, you can double this to give you $42k a year/$3,484 a month.
But I’m Planning to Retire Early
The above calculations work well if you’re planning to continue working for the next 30 years.
However, if you’re planning to retire early, then the above calculations need to be adjusted.
This is because you and your employer will stop contributing to your pension once you retire.
Therefore you need to use the MYB Early Retirement Calculator to predict remaining growth.
I’m planning to retire in 10 years, so I need to see what my pension would be worth by then.
According to the MYB Pension Calculator I would have almost $70K in my pension in 10 years.
Using this figure, I’ll add it as the starting amount in the MYB Early Retirement Calculator.
Using 10% annual return in 20 years, I’d have $471K; an income of $24K/year or $2K/month.
Using 7% annual return in 20 years, I’d have $271K; an income of $14K/year or $1.1K/month.
Similarly, if you have a partner, you can double these figures if they also have a pension.
What Your Pension is Invested in is Crucial
As you can see, I am confident that my pension will be worth far more than $160K in 30 years.
However, I would not be confident had my pension not have been invested in stocks/shares.
I researched all of the funds offered by my new pension provider and choose the best one.
The best of what they offered was that they have low cost global index funds to invest in.
I chose a fund that tracked either the FTSE Developed ex UK or the FTSE Global All Cap Index.
It is so important that you do your homework on all funds provided by your pension provider.
The default fund that you are placed in is not always the best option, so you must research.
Have a go with the MYB Realistic Pension Calculator and the MYB Early Retirement Calculator.
If you have a pension letter or joined a new scheme, look at their predicted pension value.
Then have a go using the MYB calculators and see what your actual pension value might be.
To find out more about early retirement, check out our articles on retirement and investing.
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Are you on the path to early retirement? How is it going? Feel free share in the comments!
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