I recently received my annual pension statement.
It’s a document issued every year that shows you how much you have saved so far and how much you could have at retirement.
I saw how much I saved, but when I saw how much I could have at retirement, I was shocked.
In 30 years, the statement says that I could have up to £160,000 when I come to retirement.
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% withdraw 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 will break down my statement and show you how they came to this figure.
Then, I will share my own calculations as to what I think my pension pot would actually be.
Finally, you can use the MYB Realistic Pension Calculator to calculate your own pension pot.
Let’s Take A Look At Their Assumptions
The first thing to note is they don’t share their assumptions as part of the annual statement.
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 me, they’ve used an annual growth rate of 6% which is quite low for stocks and shares.
That’s because they subtracted annual inflation (2.5%) and annual fees (0.5%) i.e. 3% total.
That means they predict that my fund would grow 9% a year in total and 6% in real terms.
Even 9% is low, considering that a stocks only global index fund may return 12% on average.
I would use 10% to see what my pot would be in total and 7% to see what it be post inflation.
One thing this figure also 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 Want in Retirement?
So I know that £160,000 probably won’t be enough for me in retirement. How do I know this?
Well I know an annual 5% withdraw rate would only give me a gross income of £8,000 a year!
That’s the equivalent to £667 a month – which is not much. I know that I can do better.
The question is: how much income would I like and what size pension amount would I need?
In terms of monthly income, let’s say that I would be happy with £3,000 a month.
That’s equivalent to an annual income of £36,000 a year (we’ll say gross income for now).
Now we need to figure out the minimum I would 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 different to 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 will use 10%, personal (3%), employer (4%), and tax relief (1%).
To see how much this would be worth today, I’ll use an annual return of 7% (3% for inflation).
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.
As you can see, £418,000 is almost 3 times the amount of £160,000 predicted in 30 years.
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.
As you can see, these figures are lower than the previous figures, but still more than £160K!
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.
For me, I researched all the funds offered by my pension provider and choose the best one.
The best out of what they offered: they don’t have low cost global index funds to invest in.
However, I chose the fund that was invested in stocks for a large range of global companies.
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 received your pension statement, take a look at their predicted pension amount.
Then have a go at using the MYB calculators and see what your actual pension might be.
To find out more about early retirement, check out our articles on retirement and investing.
Do you know what your FIRE Score is? Take our FIRE Quiz to see how close you are to FIRE.
Are you on the path to early retirement? How is it going? Feel free share in the comments!
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