I read with interest, and, some sadness an article in the
Sunday Times on 6th April, 2014 by Ian Cowie. It concerned regular saving for retirement
over four decades, starting in 1970. The
hero of the article was a chap called “Bad Timing Bob” (BTB), who committed to
putting aside a fixed amount each year into a fund that tracked the FTSE All Share
Index. His savings were as follows:-
| Decade |
Per Year
|
Total
|
| 1970-79 |
1,000
|
10,000
|
| 1980-89 |
2,000
|
20,000
|
| 1990-99 |
3,000
|
30,000
|
| 2000-12 |
4,000
|
52,000
|
Grand Total
|
112,000
|
|
Unfortunately for BTB every time he felt able to invest
in the FTSE All share index he did so at the top of the market for that decade. In the 1970’s he invested in 1972 just before
the oil crisis; in the 1980’s he invested just before Black Monday in 1987; in
the 1990’s he invested at the end of 1999 just before the dot com bubble burst,
and; finally he invested in October 2007, just before the financial crisis occurred. So what was the value of his pension pot over
the 43 years he had been saving after all these ill timed forays into the
market I hear you ask? Well the article
states it was in excess of £632,000.
Well I was astounded, and, sad as I wished I had been more prudent, and,
started saving earlier! So gobsmacked
was I, that I tried to recreate the scenario to prove it to myself. However this is where I became unstuck. I could not recreate the scenario. There could be various reasons for this as
the article did not give in detail the criteria of any assumptions used. I did contact the Sunday times for more details regarding their calculation but alas my email fell on deaf ears.
Anyway not being perturbed I am going to share my
calculations with you, as the results are still revealing. For my calculations I managed to obtain the
FTSE All share historical price data from 29/12/1972 to the present day. This was monthly up until 1985, and, daily
after this. The base date for my calculations
was 29/12/1972, the value of the index stood at 218.2, and, I assigned this
date a share value of £1.00. From this date I
calculated the daily/monthly percentage change and applied it to my base value.
On the 24/04/14 the FTSE All share
index stood at 3580.59, some 16.4 times the starting value, hence my closing
share price on this day was £16.40. For
each year I show the minimum, maximum, and, average of my calculated share
price. In the years BTB purchased shares
I always use the maximum price for that year.
For each year I also calculate the return he yields from the value of his share
portfolio, which is based at the average price for the year (I allow him not to
be always unlucky!), multiplied by 2.8%.
This is based on the most recent yield I obtained for FTSE All share
index. Please note this is not
historical, I have just assumed this rate applies to all years for the
calculation. This return is added to the
cash which is available for investment. In
addition I have calculated a return on the cash waiting to be invested. Up until 1999 this is based on a yearly savings
rate return I found on a website less 1.5% for prudence. From 1999 it is based on the lowest yearly
rate available as compiled by the Building Societies Association. Again the interest earned is added to the
cash available for investment. So here it
is the whole calculation (Please allow for rounding errors):-
FTSE All Share Price
|
Cash Saved per year
|
Acc. Cash
|
Invested
|
No. of Shares
|
Valuation
|
Share Yield @ 2.8%
|
Interest earned on Cash
|
Cash Interest Rate %
|
|||||
Year
|
Min
|
Max
|
Average
|
||||||||||
1970
|
1,000
|
1,000
|
35
|
3.5
|
|||||||||
1971
|
1,000
|
2,035
|
71
|
3.5
|
|||||||||
1972
|
1.00
|
1.00
|
1.00
|
1,000
|
0
|
3,106
|
3,106
|
3,106
|
0
|
3.4
|
|||
1973
|
0.69
|
0.90
|
0.84
|
1,000
|
1,000
|
3,106
|
2,597
|
101
|
51
|
5.1
|
|||
1974
|
0.31
|
0.68
|
0.47
|
1,000
|
2,152
|
3,106
|
1,471
|
101
|
129
|
6.0
|
|||
1975
|
0.47
|
0.72
|
0.62
|
1,000
|
3,382
|
3,106
|
1,934
|
149
|
193
|
5.7
|
|||
1976
|
0.55
|
0.79
|
0.70
|
1,000
|
4,724
|
3,106
|
2,164
|
193
|
254
|
5.4
|
|||
1977
|
0.76
|
1.03
|
0.89
|
1,000
|
6,171
|
3,106
|
2,765
|
250
|
339
|
5.5
|
|||
1978
|
0.89
|
1.05
|
0.99
|
1,000
|
7,761
|
3,106
|
3,064
|
303
|
369
|
4.8
|
|||
1979
|
1.02
|
1.28
|
1.13
|
1,000
|
9,433
|
3,106
|
3,505
|
362
|
642
|
6.8
|
|||
1980
|
1.10
|
1.41
|
1.25
|
2,000
|
12,437
|
3,106
|
3,880
|
457
|
1,119
|
9.0
|
|||
1981
|
1.28
|
1.53
|
1.42
|
2,000
|
16,014
|
3,106
|
4,410
|
572
|
1,185
|
7.4
|
|||
1982
|
1.45
|
1.75
|
1.57
|
2,000
|
19,770
|
3,106
|
4,890
|
690
|
1,392
|
7.0
|
|||
1983
|
1.81
|
2.16
|
2.01
|
2,000
|
23,853
|
3,106
|
6,232
|
842
|
1,252
|
5.3
|
|||
1984
|
2.18
|
2.70
|
2.37
|
2,000
|
27,947
|
3,106
|
7,376
|
989
|
1,537
|
5.5
|
|||
1985
|
2.67
|
3.22
|
2.90
|
2,000
|
32,474
|
3,106
|
8,993
|
1,161
|
1,971
|
6.1
|
|||
1986
|
3.05
|
3.83
|
3.58
|
2,000
|
37,606
|
3,106
|
11,135
|
1,365
|
2,903
|
7.7
|
|||
1987
|
3.60
|
5.68
|
4.71
|
2,000
|
0
|
43,874
|
10,835
|
50,986
|
1,428
|
0
|
8.3
|
||
1988
|
3.99
|
4.48
|
4.27
|
2,000
|
3,427
|
10,835
|
46,290
|
1,392
|
267
|
7.8
|
|||
1989
|
4.22
|
5.62
|
5.09
|
2,000
|
7,087
|
10,835
|
55,142
|
1,742
|
741
|
10.5
|
|||
1990
|
4.41
|
5.62
|
5.01
|
3,000
|
12,570
|
10,835
|
54,257
|
1,871
|
1,516
|
12.1
|
|||
1991
|
4.53
|
5.88
|
5.44
|
3,000
|
18,957
|
10,835
|
58,980
|
2,182
|
1,719
|
9.1
|
|||
1992
|
4.98
|
6.25
|
5.60
|
3,000
|
25,859
|
10,835
|
60,720
|
2,424
|
1,730
|
6.7
|
|||
1993
|
6.10
|
7.79
|
6.68
|
3,000
|
33,013
|
10,835
|
72,423
|
2,952
|
1,373
|
4.2
|
|||
1994
|
6.63
|
8.08
|
7.21
|
3,000
|
40,339
|
10,835
|
78,138
|
3,317
|
1,557
|
3.9
|
|||
1995
|
6.73
|
8.26
|
7.55
|
3,000
|
48,213
|
10,835
|
81,797
|
3,640
|
1,977
|
4.1
|
|||
1996
|
8.21
|
9.23
|
8.68
|
3,000
|
56,830
|
10,835
|
94,091
|
4,226
|
1,728
|
3.0
|
|||
1997
|
9.12
|
11.42
|
10.25
|
3,000
|
65,784
|
10,835
|
111,079
|
4,952
|
2,414
|
3.7
|
|||
1998
|
9.93
|
13.22
|
12.03
|
3,000
|
76,150
|
10,835
|
130,321
|
5,781
|
3,236
|
4.3
|
|||
1999
|
12.17
|
14.86
|
13.38
|
3,000
|
88,168
|
10,835
|
144,982
|
6,528
|
3,350
|
3.8
|
|||
2000
|
13.07
|
14.97
|
13.97
|
4,000
|
0
|
102,046
|
17,653
|
246,553
|
6,904
|
0
|
4.2
|
||
2001
|
9.75
|
13.96
|
12.29
|
4,000
|
10,904
|
17,653
|
216,888
|
6,378
|
273
|
2.5
|
|||
2002
|
8.17
|
11.82
|
10.18
|
4,000
|
21,555
|
17,653
|
179,639
|
5,633
|
517
|
2.4
|
|||
2003
|
7.30
|
10.12
|
9.07
|
4,000
|
31,705
|
17,653
|
160,163
|
5,372
|
602
|
1.9
|
|||
2004
|
9.79
|
11.06
|
10.31
|
4,000
|
41,680
|
17,653
|
182,059
|
6,265
|
875
|
2.1
|
|||
2005
|
10.97
|
13.09
|
11.87
|
4,000
|
52,820
|
17,653
|
209,456
|
7,344
|
1,426
|
2.7
|
|||
2006
|
12.82
|
14.81
|
13.85
|
4,000
|
65,590
|
17,653
|
244,465
|
8,682
|
1,837
|
2.8
|
|||
2007
|
13.90
|
15.94
|
15.15
|
4,000
|
0
|
80,108
|
22,677
|
343,590
|
9,621
|
0
|
3.3
|
||
2008
|
8.66
|
15.08
|
12.48
|
4,000
|
13,620
|
22,677
|
283,126
|
8,309
|
123
|
0.9
|
|||
2009
|
8.17
|
12.70
|
10.66
|
4,000
|
26,052
|
22,677
|
241,783
|
7,499
|
26
|
0.1
|
|||
2010
|
11.39
|
14.24
|
12.91
|
4,000
|
37,577
|
22,677
|
292,673
|
9,247
|
225
|
0.6
|
|||
2011
|
11.72
|
14.49
|
13.51
|
4,000
|
51,050
|
22,677
|
306,285
|
10,005
|
204
|
0.4
|
|||
2012
|
12.52
|
14.31
|
13.68
|
4,000
|
65,259
|
22,677
|
310,260
|
10,515
|
261
|
0.4
|
|||
2013
|
14.48
|
16.54
|
15.71
|
76,035
|
22,677
|
356,192
|
0.4
|
||||||
Totals
|
112,000
|
432,227
|
|||||||||||
As you can see even with my assumptions the whole exercise totals a pension pot of £432,227, deriving from the share portfolio valuation of £356,192 plus the uninvested cash of £76,035. Even after BTB's unfortunate share purchase timings this is still a considerable sum. According to my calculations this would purchase you an annuity of around £19,576 a year.
Now for the next unbelievable number! £836,067.
This is the size of the pension pot if BTB had purchased shares each
year. It assumes he always paid the
maximum FTSE All share price each year, but his portfolio valuations for
calculating the yield are based on the average price for that year. Due to the fact that he is purchasing shares
every year, there is no longer any interest being earned on the cash
balances. This size of pension pot would
purchase an annuity of around £37,866. My goodness it even sounds like enough to
retire on!
After recovering from above finding, I then started to
think more closely about the amount being saved. It started to dawn on me that saving a £1,000
in the 1970’s may have been a tall order.
This fact was born out when I obtained the yearly household income
details from the ONS website. In 1970
the household income figure was £1,656.
It seems highly unreasonable that a household starting out on this
salary could afford to save a £1,000. In
order to bring more meaning to the numbers I have recalculated the figures
based on saving a percentage of the household income. The figure I used was 10% up until 1989, and,
15% from 1990. The results of the exercise
are shown below (again please allow for rounding errors).
FTSE All Share Price
|
Average Household income
|
Cash Saved per year
|
Acc. Cash
|
Invested
|
No. of Shares
|
Valuation
|
Share Yield @ 2.8%
|
|||||
Year
|
Min
|
Max
|
Average
|
|||||||||
1970
|
1,656
|
166
|
166
|
|||||||||
1971
|
1,802
|
180
|
346
|
|||||||||
1972
|
1.00
|
1.00
|
1.00
|
1,997
|
200
|
546
|
546
|
546
|
546
|
15
|
||
1973
|
0.69
|
0.90
|
0.84
|
2,309
|
231
|
246
|
246
|
819
|
685
|
19
|
||
1974
|
0.31
|
0.68
|
0.47
|
2,719
|
272
|
291
|
291
|
1,244
|
589
|
16
|
||
1975
|
0.47
|
0.72
|
0.62
|
3,386
|
339
|
355
|
355
|
1,734
|
1,080
|
30
|
||
1976
|
0.55
|
0.79
|
0.70
|
3,781
|
378
|
408
|
408
|
2,251
|
1,568
|
44
|
||
1977
|
0.76
|
1.03
|
0.89
|
4,042
|
404
|
448
|
448
|
2,686
|
2,392
|
67
|
||
1978
|
0.89
|
1.05
|
0.99
|
4,603
|
460
|
527
|
527
|
3,187
|
3,144
|
88
|
||
1979
|
1.02
|
1.28
|
1.13
|
5,198
|
520
|
608
|
608
|
3,661
|
4,132
|
116
|
||
1980
|
1.10
|
1.41
|
1.25
|
6,337
|
634
|
749
|
749
|
4,194
|
5,238
|
147
|
||
1981
|
1.28
|
1.53
|
1.42
|
7,113
|
711
|
858
|
858
|
4,753
|
6,748
|
189
|
||
1982
|
1.45
|
1.75
|
1.57
|
7,365
|
737
|
925
|
925
|
5,283
|
8,317
|
233
|
||
1983
|
1.81
|
2.16
|
2.01
|
7,738
|
774
|
1,007
|
1,007
|
5,750
|
11,536
|
323
|
||
1984
|
2.18
|
2.70
|
2.37
|
8,114
|
811
|
1,134
|
1,134
|
6,169
|
14,650
|
410
|
||
1985
|
2.67
|
3.22
|
2.90
|
9,045
|
905
|
1,315
|
1,315
|
6,578
|
19,045
|
533
|
||
1986
|
3.05
|
3.83
|
3.58
|
9,791
|
979
|
1,512
|
1,512
|
6,973
|
24,998
|
700
|
||
1987
|
3.60
|
5.68
|
4.71
|
10,905
|
1,091
|
1,790
|
1,790
|
7,288
|
34,295
|
960
|
||
1988
|
3.99
|
4.48
|
4.27
|
12,339
|
1,234
|
2,194
|
2,194
|
7,778
|
33,227
|
930
|
||
1989
|
4.22
|
5.62
|
5.09
|
13,109
|
1,311
|
2,241
|
2,241
|
8,177
|
41,611
|
1,165
|
||
1990
|
4.41
|
5.62
|
5.01
|
14,943
|
2,241
|
3,407
|
3,407
|
8,782
|
43,977
|
1,231
|
||
1991
|
4.53
|
5.88
|
5.44
|
15,770
|
2,366
|
3,597
|
3,597
|
9,394
|
51,133
|
1,432
|
||
1992
|
4.98
|
6.25
|
5.60
|
15,752
|
2,363
|
3,795
|
3,795
|
10,001
|
56,043
|
1,569
|
||
1993
|
6.10
|
7.79
|
6.68
|
16,005
|
2,401
|
3,970
|
3,970
|
10,511
|
70,252
|
1,967
|
||
1994
|
6.63
|
8.08
|
7.21
|
16,723
|
2,508
|
4,476
|
4,476
|
11,064
|
79,788
|
2,234
|
||
1995
|
6.73
|
8.26
|
7.55
|
17,203
|
2,580
|
4,815
|
4,815
|
11,647
|
87,923
|
2,462
|
||
1996
|
8.21
|
9.23
|
8.68
|
18,494
|
2,774
|
5,236
|
5,236
|
12,214
|
106,065
|
2,970
|
||
1997
|
9.12
|
11.42
|
10.25
|
19,680
|
2,952
|
5,922
|
5,922
|
12,733
|
130,528
|
3,655
|
||
1998
|
9.93
|
13.22
|
12.03
|
20,936
|
3,140
|
6,795
|
6,795
|
13,246
|
159,321
|
4,461
|
||
1999
|
12.17
|
14.86
|
13.38
|
22,004
|
3,301
|
7,762
|
7,762
|
13,769
|
184,234
|
5,159
|
||
2000
|
13.07
|
14.97
|
13.97
|
23,234
|
4,647
|
9,805
|
9,805
|
14,424
|
201,453
|
5,641
|
||
2001
|
9.75
|
13.96
|
12.29
|
25,176
|
3,776
|
9,417
|
9,417
|
15,099
|
185,504
|
5,194
|
||
2002
|
8.17
|
11.82
|
10.18
|
25,271
|
3,791
|
8,985
|
8,985
|
15,859
|
161,377
|
4,519
|
||
2003
|
7.30
|
10.12
|
9.07
|
26,130
|
3,920
|
8,438
|
8,438
|
16,693
|
151,449
|
4,241
|
||
2004
|
9.79
|
11.06
|
10.31
|
27,569
|
4,135
|
8,376
|
8,376
|
17,450
|
179,967
|
5,039
|
||
2005
|
10.97
|
13.09
|
11.87
|
28,224
|
4,234
|
9,273
|
9,273
|
18,159
|
215,454
|
6,033
|
||
2006
|
12.82
|
14.81
|
13.85
|
30,080
|
4,512
|
10,545
|
10,545
|
18,871
|
261,325
|
7,317
|
||
2007
|
13.90
|
15.94
|
15.15
|
30,390
|
4,559
|
11,876
|
11,876
|
19,615
|
297,196
|
8,321
|
||
2008
|
8.66
|
15.08
|
12.48
|
30,485
|
4,573
|
12,894
|
12,894
|
20,470
|
255,568
|
7,156
|
||
2009
|
8.17
|
12.70
|
10.66
|
30,924
|
4,639
|
11,795
|
11,795
|
21,399
|
228,149
|
6,388
|
||
2010
|
11.39
|
14.24
|
12.91
|
32,096
|
4,814
|
11,203
|
11,203
|
22,185
|
286,321
|
8,017
|
||
2011
|
11.72
|
14.49
|
13.51
|
31,477
|
4,722
|
12,739
|
12,739
|
23,065
|
311,514
|
8,722
|
||
2012
|
12.52
|
14.31
|
13.68
|
31,477
|
4,722
|
13,444
|
13,444
|
24,004
|
328,411
|
9,195
|
||
2013
|
14.48
|
16.54
|
15.71
|
9,195
|
9,195
|
24,560
|
385,761
|
|||||
Grand Totals
|
96,003
|
385,761
|
||||||||||
So on a more “normal” scenario the final figure totals
£385,761, enough to purchase an annuity of £17,471, slightly more than half of
the final household income. If you were
able to manage to increase your contributions each decade by 5%, and, ending with a
contribution percentage of 25% of the household income, the pension pot would
be valued at £512,474.
So the moral of the story? Start saving regularly, and, early. Unfortunately at my age for me it is now too
late! Oh dear.
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