This is an archived version of this page. The current blog is here
Back to part 1, forward to part 3
So a short middle section before I get onto what happens when you actually retire.
Ironically, I haven't mentioned pensions themselves so far (btw, there's a fantastic post by Dan Davies about pensions which you should read) If you have a final salary pension then you know what you're getting, modulo the risk that your scheme collapses. If you're like me and have a "defined contribution" scheme, then essentially it's just more savings, but in a different pot. The good bit is that you don't pay tax on the contributions, the bad bit is that you're more restricted what you can do with the money when you retire - you may have to buy an annuity at some stage.
Anyway, repeat the compounding procedure for each pension fund - how much do you have now, how much do you (or your company) put in per year, and compound to retirement (look carefully at what your pension is invested in. I've moved a lot of mine out of equities and into lower risk securities because when it comes to pensions I'd rather have lower growth and less risk than be worrying about whether my pension will be wiped out if the market crashes).
another thing you might or might not want to think about is whether you will inherit any money at some point. If you do, you can either just put it in the savings pot at roughly the point you think you'll receive it (later rather than sooner let's hope) and compound it from that point, or you can also do a "what if" calculation just by taking the likely amount you'll receive and compounding it for how long you think you'll have the money for up to retirement.
Finally (before I talk about retirement) you might want to think about whether you'll buy a bigger house. In that case your savings go down, and your mortgage term may extend, but at the end of the day, you are hopefully sitting on a bigger asset than if you'd stayed put. Note that that means that if you don't have enough cash then you may need to trade down your house sooner rather than later, but hopefully you'll get some growth in the value of the house anyway.
That's it for this part. At this stage you should have a picture of how much money you'll have at retirement, both in savings, pensions, and in the value of your house. The final part will talk about how to think about what happens to that money when you stop earning.
Posted by MFreestone at April 21, 2006 08:31 PM