Am I saving enough for retirement?

The Greybeard is exploring post-retirement money in modern Britain.

I am sure we’ve all (at least around these rarefied parts) at some time asked ourselves: “Am I saving enough for retirement?”

For years, it’s been a boringly predictable question that has been used to frighten people into upping the amount that they put into their pensions.

Towards the end of every tax year, for instance, the usual scare-story projections are trotted out by lazy journalists looking to file a feature on SIPPs or Additional Voluntary Contributions.

IFAs – those fine, upstanding members of the community – are also keen advocates of the ‘are you saving enough for retirement’ question.

(You’re not? Well, they have just the product for you.)

Most Monevator readers, I’d guess, will have long since learned to switch off when they see the words. Broadly speaking, we will have decided years ago what level of saving was appropriate for our circumstances, and proceeded accordingly.

The savings vehicle of choice might have differed – one man’s SIPP is another woman’s ISA, and all that – but there would be no denying the commitment to serious saving and investing.

Miserly returns

Up until recently, I’d have put myself very firmly in that camp, too.

Now, I’m not so sure.

Take a look at the UK’s latest historic equity returns, as published in the prestigious Barclays Equity Gilt Study 2016, released in March.

Continuously published since 1956, the Barclays study tracks the real (after inflation) returns on cash, equities, and bonds, all the way back to 1899.

Here are the real returns (% per annum) for UK equities, gilts, and cash:

2015 10 years 20 years 50 years 116 years
Equities (shares) -0.1 2.3 3.7 5.6 5.0
Government bonds (gilts) -0.6 3.0 4.3 2.9 1.3
Cash -0.7 -1.1 0.9 1.4 0.8

Source: Barclays Capital Equity Gilt Study 2016.

No surprises there, perhaps. 2015 was a dud, and real returns from equities over the past ten years were just 2.3% a year. Only over the past 20 and 50 years do we see serious returns being achieved.

The only consolation is that cash and bonds didn’t do much better, either, although gilts have fractionally outperformed equities over ten and 20 years.

So much for the risk premium, Mr Ross Goobey1.

Rear view vision

Now let’s turn the clock back ten years, and look at the 2006 edition of the Barclays Equity Gilt Study.

UK equity real returns (% per annum) as per a decade ago:

2005 10 years 20 years 50 years 106 years
Equities 18.9 5.0 7.4 6.6 5.2

Source: Barclays Capital Equity Gilt Study 2005.

You don’t need to have made a recent visit to Specsavers to see the difference.

Ten years ago, the expectations of equity returns, based on past returns, were very different from those of today – and much, much, higher.

And that, what’s more, was in 2006 – in other words, a time when the UK’s stock markets were well into the post-dotcom ‘lost decade’.

Take the equity returns you’d have been looking at in 2005 as having been accrued over the previous 20 years, for instance: 7.4% a year. Incredibly, that’s twice the return of 3.7% seen in our latest figures.

The past ten years? 5.0% a year in 2005 – just over twice the return seen in the latest figures.

Flawed assumption?

All of which matters – at least to many Monevator readers – because the mid-2000s was when many of us were formulating our retirement plans.

Looking back at my own spreadsheets, for instance, I see that I was pumping £530 a month into various retirement-related investment vehicles, by way of regular monthly savings.

That’s net of any tax relief, and also excludes any end-of-year lump sum investments made for tax purposes.

Small beer to some, perhaps. But, totaling it all up, I was probably putting aside £9,000-£10,000 a year.

Again, small beer to some. But significant enough at the time, and especially so given my own circumstances, with one child still in primary school, and one just started in secondary school.

Save more! Save more!

The point is this: doing those same sort of calculations today, and looking at today’s expected investing returns, those Barclays Equity Gilt Study figures suggest that I would need to be putting aside considerably more.

And I’m not at all sure that would be possible, for someone at a similar stage of life, and with similar financial circumstances.

Heck, even though I’m in the fortunate position of being able to invest considerably more these days, it’s still a pinch at times – even though one child has left home, and the other is at university.

What to make of it all?

For me, the bottom line is that even though I was aware – on an intellectual level – that returns over the past few years had been lower, I was unprepared for how much lower they appear to have been.

Or that even though 2015 saw the FTSE 100 finally surpass its dotcom peak – some 15 years afterwards – the intervening years were so dismal as to still halve the long-term returns compared to 2006.

Am I saving enough for retirement? Possibly so. Just.

But I bet many others aren’t, even though they thought that they were.

Note: You might want to all Greybeard’s previous posts about deaccumulation and retirement.

  1. George Ross Goobey was the fund manager who in the late 1940s and 1950s famously persuaded pension funds to invest in equities, not just gilts.

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