A million doesn’t go half as far as it did, but making a million is still the first goal of almost any new entrepreneur I meet.

It’s also a target for many savers.

For example, a million pounds can buy you a (hopefully) steady and inflation-proofed income stream from equity income investment trusts that’s well above the average household income – provided you’re prepared to ride out the volatility of equities. With luck you wouldn’t even need to touch your capital.

Alternatively, if you’re a passive investor and a fan of the 4% rule you might use your million to model a £40,000 a year income in retirement. (But be aware of the many caveats!1)

But what if you’re still 20 years from hitting the magic number? In that case, inflation strips away the buying power of your hoard. You’ll need much more than a million to buy the equivalent income or assets that you could today.

This was why we created the millionaire calculator, one of Monevator’s small but shiny collection of personal finance tools.

The millionaire calculator enables you to work out:

• When you’ll make your million, based on your current savings and returns.

• How much you need to save to make a million by a particular age.

The rate your savings grow is shown in a pretty graph, which demonstrates the power of compound interest.

There are also three currency options, because we’re internationalists around here.

Understand the effect of inflation

Unlike with some calculators I’ve included an inflation setting in this tool.

Look below the graph and you’ll see what your eventual million is worth in today’s money. The tool also tells you how much you’ll need to save to reach the equivalent of a million today by that target age.

The bad news is you’ll need to save a lot more than you think, but at least the millionaire calculator gives it to you straight.

Play around with the interest rate setting. This is the rate of return. To get a flavor for what’s reasonable, look at my articles on UK historical rates of return, or US rates of return if you’re from over the pond.

If you’re 25 and 100% invested in equities, a 7% return with 2% inflation seems reasonable to me in the current climate. Use a 5% return if you’re more skeptical about future returns, and 3% inflation if you’re skeptical about central banks. Dial down further if you’re older and have more low-yielding fixed income in your portfolio.

Two final points:

• Real life is much more volatile than the smooth graphs from such tools suggests. It’s best to over-save, and be left with the problem of how to spend the excess.

• While having a target sum like a million can be very motivating, you may need to grow your income to get there in a reasonable time.

I hope you enjoy the millionaire calculator. Send us a postcard when you make it!

Also check out our mortgage repayment calculator and compound interest calculator.

1. This so-called rule is not a rule, 4% may be far too high a withdrawal rate in the current environment, and it assumes you eventually spend all your capital. A deeper discussion is for another day! [↩]

What caught my eye this week.

A reader prompted an email discussion with my co-blogger The Accumulator about what the £1 million pension lifetime allowance (LTA) meant for where you should hold your different asset classes.

The reader said he thought bonds should go into his SIPP and equities into his ISA, since there was a lower chance of the total return from bonds eventually pushing him up against the LTA. In ISAs, of course, his equities could grow indefinitely without any such fears.

Interesting and novel idea, I thought, albeit a rich person’s headache to have. The Accumulator was less convinced. We kicked about various pros and cons.

I also thought about this when reading a White Coat Investor article this week on these sorts of allocation decisions (albeit in a US context).

Because as much as I like discussing investing minutia with my co-blogger, I agree with the White Coat Investor that getting things approximately right is infinitely preferable to being paralysed by attempting to get them exactly right.

WCI writes:

“The truth is that investment management is probably the least important aspect of your financial success and certainly the easiest to automate.

Maybe it’s okay to quit trying to optimize it (especially since nobody really knows the optimal asset allocation a priori) and just get something reasonable done.

You can certainly save yourself a lot of hassle and advisory fees that would help make up for any under performance issues.”

I often get emails from anxious readers who’ve been wondering for half a year what platform to use to begin investing £50 a month on, or something similar.

It’s great that they’re paying attention to costs and consequences. But at this level it’s far more important that they just get started.

Have a great weekend!

[continue reading…]

Gentle reader, I have a confession to make. As I have written before, a short spell working for a FTSE 100 engineering firm in the early 1980s had left me with a generous-looking pension as I approached retirement.

For years – literally decades – I had filed the annual statements, marveling at how projections of my annual income in retirement inexorably rose.

Gold-plated pension

Seven or eight years ago, the engineering firm’s pension trustees launched an early retirement enhanced benefit scheme. The hope was to persuade pension fund members to transfer out, or take higher immediate benefits in exchange for lower longer-term benefits.

They paid for a firm of financial advisers to offer advice, and calculate projections. I duly filled in the forms, wryly noted the resulting recommendation to take the money – and then I did nothing.

Why cash in a gold-plated, and partially inflation-linked, final salary pension fund?

As I turned 60, this pension had become – again, quite literally – one of my most treasured possessions, offering a retirement income of £5,000 or so a year, for as long as I lived. Even better, a reduced widow’s pension would be paid to my wife, should I die before her.

No longer. As of early April, that pension is part of my past, not my future.

Take the money

What happened? Last autumn’s bond market turmoil, in short. As gilt yields plunged in the wake of the Brexit referendum result, pension transfer values rose accordingly.

Some pension fund members were being offered transfer multiples of 30-40 times projected annual pension income. Not surprisingly, they were tempted to take the cash.

Among those tempted was former government pension minister and retirement activist Ros Altmann, who saw the transfer value of two pension schemes roughly double, with the transfer value of one scheme reportedly rising from £108,000 to £232,000, and the transfer value of another climbing from £57,000 to £104,000.

She took the money. As did, according to the Pension Regulator, about 80,000 other people.

Among them me.

Gulp

Now, a few caveats.

For a start, I didn’t get a multiple of 30-40 times that £5,000. More like 20 – but certainly a helluva lot more than the same firm had dangled in front me of a few years previously.

In part, I suspect, that lower multiple is because I wasted several weeks trying to resist the temptation.

I dallied because while I’m a fairly confident and experienced private investor, a pension transfer is a lot more than a transfer of a pension.

It’s really the transfer of a risk, and an obligation.

As a member of its pension fund, my former employer was obligated to pay me that annual income, and to shoulder the associated risks.

No longer. As of the transfer, all of that is on my shoulders, instead.

Repent at leisure

Now, not for nothing are pension experts and the Financial Conduct Authority (FCA) alike concerned about the increasing frequency of such pension transfers.

Just because a transfer value happens to be high is not a sufficient reason for executing a transfer. Particularly if you have no or little experience in personal investing – and even more so if one of the prime motivations is simply to get your hands on the tax-free cash.

And it’s of little help to point out that the rules governing such transfers call for mandatory advice from a financial adviser if the sum involved exceeds £30,000.

For a start, that’s arguably too high, and – perhaps more to the point – the advice that such advisers are obligated to offer can be of little help in real-world decision-making.

Short-term pain, long-term gain

What do I mean by that? Simply that central to the FCA-mandated adviser calculation is something called the ‘critical yield’, which loosely translates as the rate of return that you’d have to achieve in order not to be worse off, in income terms, after the transfer transaction.

Which scarcely figured in my own calculations at all.

I know I’ll be worse off, in the short term.

But what I’m interested in is longer-term income, longer-term inflation proofing (hopefully 100%, not roughly two-thirds), and the prospect of a six-figure lump sum to leave to my heirs. That is the trade-off in which I was interested.

Dilemma

The timing of the now-complete transfer was unfortunate. (And not solely in terms of the recent health scare which has unfortunately delayed my promised follow-up column on actively-managed ‘smart’ income ETFs.)

Basically, you don’t have to be Howard Marks – prescient though he can be – to worry that we might be in bubble territory with the stock market.

So my six-figure sum is currently uninvested, sitting there as cash, while I figure out what to do.

• Sit it out and wait for a hoped-for correction? I’ve succeeded in that in the past. But I might have a long time to wait.

• Drip feed into the market as opportunities present themselves? The trouble is, at present those opportunities seem few and far between.

• Dive in and lock in income now, rather than remaining uninvested?

What would you do? Dear reader, my confession is complete. But I’d welcome your answers in the comments below, please.

Further reading: See our article on one reader’s experience of transferring a final salary pension into a money purchase scheme.