# Private Pension - How much to contribute to equal minimum wage



## marathonic (7 Nov 2012)

The current minimum wage is €17,992 per year. To achieve this via a private pension by age 68, you'd need the following contributions:

*Assumptions:*
Growth After Charges: 6% 
Inflation: 2.5%
Growth After Charges and Inflation: 3.5% 
Annuity Rate at retirement: 5%
Pension Pot required at retirement: €359,840

*Total Contributions Required*

*Starting at age 20:* €251.77
*Starting at age 25:* €314.24
*Starting at age 30:* €396.93
*Starting at age 35:* €509.51
*Starting at age 40:* €668.80
*Starting at age 45:* €906.85

Obviously, you should be able to survive on less than minimum wage if you have your mortgage paid off and you'd be very well off if you achieved a minimum wage private pension and the state pension still existed when you retire (something I'm not willing to bet on).

The above is just an illustration to show that, whilst it's better than nothing, someone contributing €50 per month (3% of a €20,000 salary) probably isn't doing enough, even if they do so at 20.

Also, the above are total pension contributions - it won't cost you this much because you'll receive tax relief and, potentially, employer contributions.

It's also worth noting that the above growth rates are probably a little optimistic - especially if your pension has high charges.


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## kennyb3 (8 Nov 2012)

Can you at least put some realistic growth assumptions. You've left out the pension levy (next 4 years at least).

Aside from that I like the purpose of the post


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## marathonic (8 Nov 2012)

kennyb3 said:


> Can you at least put some realistic growth assumptions. You've left out the pension levy (next 4 years at least).
> 
> Aside from that I like the purpose of the post


 
As I'm working across the border, I usually keep my posts as generic as possible. Besides, if the current plans are for the levy to last 4 years, they should be negligible for all in the categories above, i.e. those with at least 23 years left until retirement.

Regarding the growth figures, I feel they are realistic for me. My employers pension scheme has total charges of 0.4% so a 6% after charges growth rate would be 6.4% overall.

I can't really tweak the post for everyones circumstances but the idea is that the post should be a wake-up call for the twentie-somethings who feel smug in the knowledge that they're contributing €50 per month to their plan - which, although better than nothing, probably won't cut it when they reach retirement if it's their only retirement provision.


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## kennyb3 (8 Nov 2012)

marathonic said:


> As I'm working across the border, I usually keep my posts as generic as possible. Besides, if the current plans are for the levy to last 4 years, they should be negligible for all in the categories above, i.e. those with at least 23 years left until retirement.



It's an Irish site, your whole I can do this or that in Nortern Ireland/UK is getting tedious.



marathonic said:


> Regarding the growth figures, I feel they are realistic for me. My employers pension scheme has total charges of 0.4% so a 6% after charges growth rate would be 6.4% overall.



Where can you get 6.4% guaranteed? How many funds have had 6.4% compound growth ever year over 30 years? You know thats a whopping 504.37% growth over that period? Can you show me funds achieving this please.



marathonic said:


> I can't really tweak the post for everyones circumstances but the idea is that the post should be a wake-up call for the twentie-somethings who feel smug in the knowledge that they're contributing €50 per month to their plan - which, although better than nothing, probably won't cut it when they reach retirement if it's their only retirement provision.



I admire your intentions, it's just its pointless if you use 6% growth rate. If you use 3% i'm fine with that.


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## marathonic (8 Nov 2012)

kennyb3 said:


> It's an Irish site, your whole I can do this or that in Nortern Ireland/UK is getting tedious.


 
That was a response to your intitial query about charges and growth rates. I was saying, in my company, I can get pretty low charges when compared to some products in the market. Can you not do that in the Republic? Also, growth after charges - does it really matter whether that's a management charge or a government levy if the end growth-rate is the same?



kennyb3 said:


> Where can you get 6.4% guaranteed?


 
Nowhere - that's the point of assumptions/estimations.



kennyb3 said:


> How many funds have had 6.4% compound growth ever year over 30 years? You know thats a whopping 504.37% growth over that period? Can you show me funds achieving this please.


 
Kind of pointless looking at funds over the past 20 - 30 years as charges were A LOT more significant in past decades when compared to what's available now. You're better looking at stockmarket indexes - you can just get a fund that tracks the index as opposed to an actively managed fund so this makes sense.

*FTSE All Shares Index:* 

*1985:* 682
*2011:* 2858

That's a 319% return over 20 years - incorporating the current crisis into the figures. 


*S&P 500 Index (as at 2011):*

*5 year average return:* -0.25%
*10 year average return:* 2.92%
*15 year average return:* 5.45%
*20 year average return:* 7.81%
*25 year average return:* 9.28%

You can see how the recent crisis has skewed the short term returns above but the long term figures look pretty good.


*European Shares (as at December 2011):*

"since 1970 the price return of MSCI Europe was 5.7%, even though the total return was 9.6%, meaning that 3.9% of the total return came from dividends"



*I like to think of the potential return as follows (some may disagree):*

2.5% for real GDP growth (we should return to this eventually) + 2.5% for inflation + 2% for dividend yield = 7.0% long-term total return.


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## JoeRoberts (8 Nov 2012)

_*



FTSE All Shares Index: 

1985: 682
2011: 2858

That's a 319% return over 20 years

Click to expand...

*_ 
That just means that fund value at 1985 has increased, takes no account of the price of units bought in intervening period. It's a useless figure unless it was a once-off payment into a fund. If you were paying €100 / mth since 1985 it would be interesting to see what the internal rate of return on investment was.


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## marathonic (8 Nov 2012)

JoeRoberts said:


> That just means that fund value at 1985 has increased, takes no account of the price of units bought in intervening period. It's a useless figure unless it was a once-off payment into a fund. If you were paying €100 / mth since 1985 it would be interesting to see what the internal rate of return on investment was.



I'm just trying to show how a return of more than 7% has been perfectly achievable in the past, not that that means it will be in the future.

FYI, the figure that I've found for the average annual return of the FTSE All Share Index over the 25 years from 1986 until 2011 is 10.18%.


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## JoeRoberts (8 Nov 2012)

It doesn't show that 7% has been achieved for a continuous monthly investment over 25 years. That average is just an annualised average calculated the same as your original figure of 319%, based on the first and last price.


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## marathonic (8 Nov 2012)

JoeRoberts said:


> It doesn't show that 7% has been achieved for a continuous monthly investment over 25 years. That average is just an annualised average calculated the same as your original figure of 319%, based on the first and last price.



The point of the thread isn't to show that, based on monthly contributions, a particular return can be achieved or has been achieved in the past.

There's no point in calculating the return based on monthly investments because you could then argue "but I invest on the 12th every month, not the 1st". 

Another point: Calculating the returns based on monthly investments rather than the annual opening and closing prices will become less and less relevant as years go on.

As an example of what I mean, let's say you're investing a 15% contribution for 10 years and, for the purposes of this example, we'll assume no salary/fund growth. Your pot now stands at 150% of your salary. 

At that point, you are adding a monthly contribution of approximately 0.83% of your total pot size - so if the index deviates by 10% up or down at the particular point you make your monthly investment, the impact to your total return will be 0.083% (or €0.83 for every €1000). 

As you can see, the swings of the stockmarket through the year make a gradually reducing impact to the monthly return when compared to the annual return. Instead, the pot size itself becomes the thing that has the major impact on performance - and that has been invested for the entire year.

Anyway, what point are you trying to prove? That 7% has not been achieved in the past because the above figures are annual opening/closing figures? 

Based on the FTSE All Share's 10.18% average return over 25 years, one would have to have been VERY unlucky to achieve anything under 9% solely due to the fact that they contribute on a monthly basis.


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