How do people calculate investment goals and future values?

[Ruleof72]

I have started to take investing more seriously recently. I am consuming lots of content on YouTube, Instagram and online generally but what I can’t seem to understand is how people are calculating their end goal figure and also, how they are calculating the estimated value of any investment.

If I invested £60k today - what would that be in 30 years? Everyone seems to have a different answer! I also have no idea how much I would want to have invested!

I’m not an expert but if you look into different funds you can see their % performance over the past decade and then I would take that and knock a bit off so if it’s 17% I’d work on 15% growth year on year. Obviously nothing is guaranteed but you can choose lower risk options for, generally, lower returns.

Thank you! I didn’t know this.

5% return pa on average is realistic

remember that inflation will go up over that time and depending on what investment vehicle you use your gains may be subject to tax

S&S ISAs and need to figure out what to do with the rest!

How's your pension? Can you add to that?

Inflation + 5% is a reasonable number to use for your models. There's a good chance you'll get more than that most years, but best to plan on the cautious side and then get a nice surprise if it turns out higher. You could also run the numbers for 7% as a comparison.

As for how much you want invested, that depends on far too many variables for there to be an exact number. Many people work on a rule of thumb of retiring with 25 x their desired annual income. That allows for a 4% withdrawal rate, which has historically been considered 'safe' for a 30-year retirement.

However, 4% withdrawal is calculated on a 60:40 stocks:bonds portfolio (which isn't a common alance these days) and invested in the US market (which has typically run hotter than the UK or global market). Many people suggest 3-3.5% is better for UK investors.

It’s an NHS pension so should be fairly good. We will downsize in retirement as our house is quite big and we would like to move to the coast so should have a decent amount of money from the sale of our home.

I have done a few investment calculations and a 60k lump sum, £500pcm payments over 30 years at 5% return would be £675,446 which is a decent return but I’d need around £1million (I am not sure how much my pension will be so that might change things).

First thing is to get your head round your pension. That's a fixed, guaranteed income, so all planning needs that as a base.

The NHS pension is based on career average earnings. They contribute 20.8% and I contribute around 10%. I won’t know what my figures are until the end as my salary will change over the years but on todays figures, it will be around 45k a year.

You're in an excellent position in that case. Are you only in the 2015 section? That keeps it simpler. Still worth making sure you understand all the the options for increasing it and taking it early. And the lump sum commutation factor.

Employer contributions are irrelevant. They make no difference to the value of your pension.

If you've got £45k+ pension, plus state pension, do you really need an additional £1 million pot? That would be around £100k a year income..

I won’t “need” it but I want to maximise income so I can retire early.

bit simplistic to assume past returns is going to reflect future. either way be more conservative than optimistic.

If you plan to retire early you won't get the full amount from your NHS pension. Assuming your age from your 30 year timeline, you are likely to be on a pension that pays out at 65 or older. The pension will reduce a bit for every year earlier than that you choose to start claiming. If your plans is to use the private pension to bridge the gap then it makes sense to work your calculations there on a shorter timescale.
Also any models/projections will depend on what your investment approach is - level of risk you are prepared to take. And of course nothing is guaranteed so while you can give yourself an idea to work from, it's really an art more than a science.

If you plan to retire early you won't get the full amount from your NHS pension. Assuming your age from your 30 year timeline, you are likely to be on a pension that pays out at 65 or older. The pension will reduce a bit for every year earlier than that you choose to start claiming

That reduction is an actuarial reduction to ensure that (assuming average life expectancy) people taking the pension early do get the same amount from their pension as people (who have paid the same in) taking it at normal pension age. It's less per year, because it's spread over more years.

Put the lump sum into an all-world ETF (Exchange Traded Fund) in a stocks and shares ISA (the max is £20k per year, so you will have to work out how to deposit it) and then add £500pcm. Estimating a conservative average of 8% per annum return over 30 years, I think you will very likely hit the £1mn.

That's with being very risk averse and conservative. If you want to be a bit more daring, then you can have about 10-20% or so of your portfolio in faster-growing but perhaps more short-lived thematic ETFs, e.g. space or semiconductors, which are on fire at the moment, but will need you to keep an eye on them.