When A Million Is Not Enough

A Million Is Not Enough

On Saturday morning, I woke up to an email from a long-time reader of this blog. To preserve anonymity, let’s call him Carl.

Carl sent me a link to this story from the Sunday Times and asked for my views.

I was still in bed, the title – and the picture of a sun-drenched pool – were catchy enough, and so down the rabbit hole I went.

A millionaire retirement

For those of you as intrigued as I was, you can read the article for free with a trial subscription. For everyone else, the author (as the title suggests) was trying to bring home two key points:

Point #1: A £1m pension pot is well within reach for most people

Point #2: A £1m pension pot is nearly not enough to be a “wealthy” (whatever that means) pensioner

Sadly, the rest of the article was a mish-mash of unrelated pension facts, investing advice, and a sprinkle of quotes by financial industry “experts”.

In other words, your typical financial press junk food – a waste of time and bad for your (financial) health.

That being said, I thought the two core points were interesting enough for a proverbial double-click in today’s post.

Dreaming Big

When it comes to life, it usually makes sense to aim as high as possible. Even if you land short, you’ll still end up in a great place – and our finances are no exception.

Hence, I am actually in broad agreement with the author on the fact that achieving a £1m pension pot isn’t as unrealistic as people think it may be.

In fact, these three pension millionaires can give you a realistic blueprint on how to hit the seven-figure mark in your retirement portfolio:

Pension Millionaires

No, you don’t need to be a banker or a lawyer. That being said, life also has a habit of throwing curveballs our way.

It can be a stint of unemployment or a health issue.  Some folks end up making a bad financial decision or two. Divorces are far from rare. Few people are lucky enough to get through life without a bump in the road.

For many others, it unfortunately boils down to a simple lack of financial awareness. If, for whatever reason, you haven’t paid attention to your finances early on, you may find yourself out of runway for your investments to compound.

The chart below is a helpful reminder of how much difference a couple of decades can make:

Total investment required for $1m

Start at the age of 25, and you need to contribute a grand total of 149k over 40 years to join the millionaire club. Delay until you hit 45, and the price of admission goes up nearly threefold – a neat $420k over 20 years.

Which is to say that if you are young, employed, and reading this article, a £1m pension is well within your reach. But does it really mean you’ll be able to live it up in retirement?

The World £1m Pension Is Not Enough

According to the Sunday Times, “a £1m pension pot would buy a 65-year-old an income of £17,580 if they bought the best annuity on the market”.

I haven’t checked, but the number looks directionally correct – and it’s not necessarily that the annuity providers are trying to take advantage of us (though there is some of that, too).

It’s also fair to say that £17k a year is a far, far cry from putting a bottle of Veuve and caviar on your brunch menu once you punch out of the workforce. It’s fair to say that for £1m, it’s an absolute pittance.  What is the point of making all that effort in the first place?

The sad reality is that a combination of longer life expectancies (c.83 years of women and 79 for men) and historically low bond yields have decimated guaranteed returns we can get on our money.

But the point that this – and countless other – retirement articles ignore, is that the above scenario represents just one possible outcome. In search of that guaranteed income, they’ve implicitly traded away all the upside.

So what’s in it for you if you are willing to take on a bit more risk?

The next step up on the ladder is the safe withdrawal rate, a concept so popular in the financial independence community.

As a reminder, some very smart people have figured out that you can safely withdraw 4% of your investment portfolio without running out of capital.

To accomplish this, however, you need to leave your entire portfolio invested in the stock market (so that it can continue growing). In addition, there’s a big debate as to whether the 4% should be reduced to account for today’s anemic economic growth.

The point, however, is that even if you drop the SWR to 3.5%, you’d still end up with £35k a year, or double the grim prediction of £17k annuity income as set out above. Not too shabby.

But that’s not where it ends.

Risk… And Reward

The reason there is so much debate about the 4% rule is that many folks who strive for financial independence also want to get there early.

As a result, they’ve got much longer “retirement” horizons to plan for.

Often, they plan with a forty or fifty-year time horizon in mind – and prefer to err on the side of caution to avoid running out of money.

For a “normal” retiree punching out at 68 today, the retirement horizon is much, much shorter. Assuming the actuaries have done their homework, it’s about 12 years for men – and 15 for women.

Which is to say that even in absence of any growth, a £1m portfolio can generate an annual income of between £67k and £83k per year, depending on your gender.

If you are feeling particularly sprightly, you may want to plan for a twenty-year retirement. The bottom line, however, is that few of us will live to see 90. Like it or not, but statistics will see to that.

Is it a grim way of looking at things? Perhaps. But if one thing is certain in life, it’s that it will come to an end for all of us.

And in my books, there’s nothing as grim as spending your entire life working and saving up – only to be denied the fruits of your labour in retirement.

At the end of the day, we all find our perfect place on the risk-reward spectrum. Some folks will gladly take the £17k annuity for the peace of mind of never running out of money.

For those with a bit more risk appetite, there are plenty of other options on the table. Don’t let the Sunday Times, or anyone else for that matter, tell you otherwise.

Thank you for reading!

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44 thoughts on “When A Million Is Not Enough”

  1. Interesting and welcome news that I haven’t been busting my gut for 17k a year. That didn’t bode well for the average person I know who don’t even have 100k in their pension in their 40s. I think most seem to be relying on house price equity and downsizing based on my unscientific poll

    I think my only regret was not cottoning on to Isas properly. I used them but only to save for things like house deposits to up size. I saved a good emergency fund. Contributed outsized to my pension and spent alot of the rest although admittedly mostly on travelling and overpaying my mortgage so not the worst uses.

    I wish now I’d have built up my isa earlier. It could have done alot of the heavy lifting in terms of investment income for all kinds of things like paying off the mortgage and pension contributions

    1. You are spot on. The thought of labouring away for 40 years to build up a £1m portfolio, only to have to live on £17k a year will exasperate even the most disciplined saver / investor.

      No wonder folks are not saving enough for retirement!

      As to your other point – hindsight is always 20/20. Conversely, you are in a fantastic place with your retirement basically secured. Now you just work your way “backwards”, topping up your ISAs to take you from your FIRE date at some point in your 40s to the time your pension savings become available.

      Am sure many people would gladly trade places with you!

  2. Another thought provoking article BOF.

    For what its worth I really struggle to read many mainstream personal finance articles for a couple of reasons but mainly due to their lack of research or evidence around investment returns and often the narrative is still heavily based upon purchasing of annuities without any consideration of the alternatives.

    Anyhow, the main reason for the comment was to raise the issue of how we should measure the “value” of pension pots. Your example of the three pension millionaires illustrates my point somewhat as it occurs to me that a £1m pot at 48 is worth more than a £1m at 63?
    I feel like a true comparison really can only be made at the point of access to the funds.

    For the early retiree this raises an important question, one which I’ve mused over for the last few years, and haven’t really fully concluded – If you’re planning on stepping back from a main career at age say 48, how much money should you aim to have in your pension pot as a percentage of the total you require?

    It seems foolish to me to keep contributing as Chole has done right up to the LTA or indeed right up to your FI number within the pension. You need to allow for some growth over the next 20 years, which will very likely outpace inflation, and although you don’t know where the LTA will be when you’re 68 I feel as though we need to take account of it somehow. Of course then there’s the access issue.

    The best I can do at the moment is to assume a very conservative return on pension investments and project this to point of access making sure that its still within or close to the LTA. Then work on holding the remainder of your FI number in accessible accounts such as ISA’s and providing you’ve calculated a robust strategy to bridge the time gap to your pension investments then you’re good to go.

    1. Thanks Rosario.

      I find that in personal finance, it helps to break down complex concepts into easily digestible pieces. Thus, I simplify my examples to make sure I don’t lose those readers who are new to the topic and are looking to understand high-level concepts.

      Getting into too much detail can be counterproductive until folks are a bit more advanced (like you are) and can fine-tune their strategy. All of that is to say that I would love readers to know they can be in Chloe’s shoes one day – which will hopefully encourage them to get started. They can then calibrate their approach throughout the journey.

      That being said, your broader point holds. To me, balancing investments between pensions and ISAs is more of an art than a science and it’s unlikely it can be managed to perfection. Life is simply too complex.

      The approach I have taken is to beef up our pensions to the point where we now know that even with conservative return assumptions, our retirement is taken care of.

      As of this year, we have been redeploying our spare cash to real estate and ISAs. Time will tell whether we’ve optimized our journey as much as we could, but at least I know we are heading in the right general direction!

      1. Thanks BOF – Apologies if my post came across as critical, that wasn’t my intention. I agree that there’s a level that these concepts are best pitched at and your articles are rightly aimed at hitting the spot for the majority of your readers.

        I think I’m on a very similar path to you with a similar strategy regarding boxing off pensions etc, although perhaps am a couple of years younger and slightly behind on progress. I think Mrs. Rosario and I are another year or two away from securing our pensionable retirement and flicking the switch over to focus on post tax investing. We may have balanced this out a little more evenly before now but I’ve been fearful the higher rate tax relief on pensions may be targeted for some time now so I’ve heavily skewed our savings that way for the last few years.

        Do you think there’s a real possibility that you have overcontributed to your pensions?
        I think that’s certainly a very real risk with us. Given such a long time horizon I don’t see how this risk can, or should, be mitigated. My approach has been to cover the reasonable lower expected return and accept that the more likely outcome will be that I work full steam a year or two longer than ultimately required and end up exceeding my FI number or any LTA substantially. As this would be mainly as a result of better returns than expected though so would be a nice problem to have.

        1. No worries, it wasn’t taken that way. I guess what I was trying to say is that there’s plenty of time between £0 and £1m to recalibrate the approach. Most important step is to actually start building a pension pot (thankfully made easier by mandatory enrolment).

          I doubt we’ll hit the combined £2.1m LTA, adjusted for inflation. Will likely land at 75% of that number or so in the next two decades. That being said, there’s a reasonable probability we will leave the UK at some point in the next few years and so will make no new pension contributions.

          In case we do ever start nudging the LTA, there’s the option of holding bonds in the pension vehicle and stocks in our ISAs. However, that is the opposite of what you want to do, especially in an ER scenario where you want lower-risk investments in your non-pension accounts.

          It also reduces your overall returns by way of a more conservative asset allocation.

          No easy answers on this one unfortunately. However, as you rightly point out, it’s a VERY high quality problem to have.

        2. Rosario I’m possibly in a similar situation. 260k on pensions contribute 25k a year. 135k in Isas. Aged 40 I’m actually contributing slightly more to Isas now to address the balance. Going to continue to hammer the pension till 300k to 400k then reduce to basic employer match and put the money j my partners pension which is very underfunded and my isa (basic rate tax payer on her side) so we can use both allowances

          1. Thanks FBA. I have read the Monevator article several times. As BoF says I think that there’s no fixed answer to the question as its influenced by a whole host of factors – age, risk tolerance, current earnings, FI number and family situation not to mention everyone opinion of potential returns or SWR etc etc. Everyone’s answer is different.

            That’s why I raised the question here. I feel its valuable to hear as many opinions as possible from people I feel in an similar position to myself.

            Incidentally your age, pension and ISA numbers and partners income/pension situation are very similar to mine.

  3. Thanks to Rosario for their comment. It’s exactly what I need to get my head around as well. So if I have (say) £1,000,000 earlier than 68 or a smaller amount I’m comfortable with (!) then to live on that indefinitely it needs to remain invested to grow EACH YEAR on average by what I withdraw to live on AND to cover inflation. If I want to keep my pot more or less intact and not watch it go down that is. This seems to be difficult to calculate and achieve though and could be unrealistic? So with inflation at 2% this would mean having a big enough pot to be able to live off 2% i guess?

    I struggle with the idea of my pot going DOWN when planning an early retirement basically. A psychological flaw on my part?!

    1. I would say it is a flaw.

      We all know we are not going to live indefinitely. It’s good to have a margin of error, but is it really a worthy tradeoff to die with your pot still untouched?

      But even in that scenario, the “classic” SWR of 4% should achieve your goal. There’s no need to move your entire pot into risk-free bonds (which is what the £17k annuity is based on).

      Missing on equity returns over a multi-decade retirement is madness IMO.

  4. Above you are showing 8% return – there is no way that can be guaranteed or you know that will be achieved. I have a stocks are shares ISA but I’ve not idea what to invest or where to put it. I’ve been reading a few of your articles. But S&P, DJIA are very high. I’ve been badly burnt in the stock market before. So you could invest and lose most if not all your money -as I have done – so boom your pension money is gone!

    I’ve got a couple of houses on rent that I’m going to be relying for an income in retirement. This I have an element of control over. House prices are stable and can go up over inflation over time. You know how much rent you are going to get – so you know roughly how much income is going to come in.

  5. In the US a million pound lump sum will buy you an annual income of 48,000 pounds for the life of you and then continue on for the life of a surviving spouse. Its hard to believe that in the UK it only gets you 17,580. The other thing is that a million now is worth over three times as much to me as a million will be to a 25 year old upon his reaching 65. 40 years of inflation will eat away 2/3rds of the buying power. Maybe that explains the difference in annuity payouts, maybe the Times was using today’s pounds and not the future value?

    1. I actually think the 1.7% isn’t too far out. After all, all the annuity provider does is turns your £1m into bonds (which yield somewhere between 0% and 1%, depending on maturity), and tops it up to account for your life expectancy (so they can actually dip into the principal amount).

      I struggle to see how you could get an annual income of $48k in the US for $1m to be honest.

  6. Thanks BoF, great post as always.

    You’ve touched on a key point:
    On the one hand you have MMM saying that $1m is enough to sustain $40k per year and likely never run out of money- https://www.mrmoneymustache.com/2018/11/29/how-to-retire-forever-on-a-fixed-chunk-of-money/
    On the other hand you have articles like the one you mention saying that GBP1m ($1.3m) is not nearly enough.

    Both claims can be backed up, and while not a like for like comparison (ie MMM vs your average ST reader, annuitiy vs stock market etc), it’s not surprising that I’m struggling with the question of how much is enough, even just a ballpark figure.

    I realise this will never be an exact science, but such a wide range of opinions is surely one of the reasons why so many people fail to grasp the basics of financial planning.

    1. Thanks for the kind words Ian.

      As you say, it’s apples and oranges, and both points of view can be substantiated. Unfortunately, the ST has a much broader reach than MMM, and will thus do much more (financial) damage.

      The reality is that many people don’t understand finance well enough to understand how annuity providers get to the 1.7% rate (i.e. by hedging everything with bonds) vs the Trinity study approach.

  7. Yep, the Times article definitely flawed. Took no account of inflation (or that life time allowance also rises with inflation).

    For me I’m aiming for as close to LTA as possible, 25% tax free withdrawal and then leaving rest invested in mostly stocks with 4% pa withdrawal. Assume all the rules will change over next 20 years though, so trying to put a bit into ISA too in case pension goalposts moved too much.

    1. I’ve gotten to a point where my wife’s and my pension should compound into something about 75% of our combined LTA by the time we retire.

      Between that, our real estate, and our relatively modest lifestyle (even more so once kids move out), we are now focusing on the ISAs.

      No hope for any government pensions to be honest.

  8. Great to see a sensible analysis of this article. It’s frustrating that the article combines a very important point (£1m is not as unreachable as you might think) with a misleading point (focusing on annuities as the default option) with another incredibly misleading point (4% rule doesn’t really hold up anymore).

    Given that we know the huge challenges motivating young people to save, unduly pessimistic assessments of where it gets you are quite unhelpful!

    I did reach out to the journalist on twitter but no luck yet..: https://bit.ly/3fiTukm I reached the same conclusion as you on 3.5% rule vs the meagre annuity.

    1. Indeed. Let’s motivate young people to save – before telling them it’s all pointless! No wonder folks don’t want to save.

      Thanks for pinging the journalist, have retweeted the thread to give it a boost. That being said, unlikely we will hear back given how shoddily the argument was constructed.

  9. I struggle to find any press articles worth reading, perhaps I am too cynical or don’t look hard enough, but I’m rarely convinced that journalists ever truly understand the things they write about. From there the trust has already been eroded, and find myself returning to blog content like this, books or magazines for which I am all the happier for reading and hopefully better informed.

    That aside I’m also late to the investing / ISA party, one bad experience with an insurance salesman – oops I mean FA – can really put you off this stuff. Glad I turned the corner though thanks to content like this, and I’ve shared what I’ve learnt with my parents who are now able to navigate their pensions / retirement with some degree of confidence – their peace of mind will be mine also.

    I’m prepared for a rocky road now, but I do wonder how I will feel about staying invested if I approach later retirement. The pension lifetime allowance is another worry, and think this can only disincentivise young people to save into their pensions. Surely if any young person does their due-diligence they will realise there’s a very good chance they will greatly out-strip this limit, even with a fairly modest savings rate like Oliver? Seems to me like they (our government) are dangling the carrot. Still I won’t let it stop me!

    Thanks again BoF, another enjoyable read.

    1. Thanks Carl.

      Unfortunately, you are not alone in your experience. I know plenty of people getting a raw deal from their FAs. In fact, I once had a short-lived relationship with an Edward Jones (I used to live stateside) financial advisor.

      He was actually a nice guy and tried to do right, but was tough to do in the context of products peddled by his organization. My parents also had an FA who wasn’t very helpful (but thankfully not detrimental to their financial health).

      Financial media is a different story altogether. The one I find most credible is the FT, but even they are hit and miss, especially on the more complex finance topics. It’s a combination of trying to be somewhat sensational and simplistic at the same time, which is what sells.

      There’s a great discussion around risk appetitle as you approach retirement in the comments section of this post:


      It’s not easy to be 80%, 90% or even 100% equities towards retirement. Yet, in today’s zero yield work, it may be a pre-requisite.

      1. Hi. Apologies, it was one of your replies in the item linked to (above), relating to lump sum v DCA. I’m in this position currently: after consolidating various pensions including a large DB transfer, my SIPP is temporarily 40% cash. Quite the dilemma!

        Ps maybe the wisdom or otherwise of DB transfers and the changing rules around this would make an interesting article and debate? Mine took over my life for 3 months!!

        “ True. My sense is that when the upside is a few extra points of return and the downside is a significant loss of principal, most people opt for a DCA.

        Perhaps I’ll try to dig out some empirical evidence on this topic and cover off in a separate post!”

        1. Ahh, got it!

          Interestingly, I’m going to touch on this topic (lump sum vs DCA) in tomorrow’s post. Nick Magiulli of Dollars and Data has some of the best empirical evidence on this point, but there’s a twist to it beyond the theory.

          As far as DB transfers go, not sure I’m best qualified to write about one as I try to stick to personal experience on this blog and I haven’t got a DB pension. Will doodle on it though.

          1. Thanks for the update. I look forward to reading your next article in that case. And you are the best qualified person to talk about DB pensions that doesn’t charge us by the hour ??

  10. Pingback: Weekly Acta #1 - Ad Otium

  11. This is my first comment on your blog – I love your writing.

    I’m looking for some guidance. So, I’ve been contributing to my SIPP via salary sacrifice since I graduated, and I find myself in the fortunate position of having to stop my contributions.

    If I finish contributing next year (age 27), I’ll be on track to hit the cap. Assumptions – Age 70 retirement age (so I’ll access SIPP at 60), 7% real returns (optimistic, but cautious I think – given my age, I have high sensitivity to returns, so I don’t want to exceed the cap), and that the SIPP cap will grow with inflation (2%).

    Do you think it’s wise to invest in a SIPP at a young age, or should it be reserved for later in a career, where the tax savings will be greater? Of course, I have no idea if the rules will remain favourable for long. I’m wondering if I should have used other vehicles.

    Also, how are you ensuring you don’t hit the cap? This is a problem for any early retiree that I don’t think is discussed nearly enough

    1. Thanks for the kind words Sean.

      In theory, postponing pension contributions until you are in a higher tax bracket could make sense.

      In practice, however, your other point becomes much more important. Pensions represent a highly attractive tax break that the government could look to roll back any time. My sense is much better to take advantage of it now because it might not be there tomorrow.

      In addition, I find a certain logic to taking care of your old age (pensions) first before starting to work on early retirement (ISAs and taxable savings).

      Your assumptions are quite reasonable, very close to what I use in my planning. As far as making sure you don’t hit the LTA – one way is to hold lower-return, lower-risk instruments in your pension (i.e. bonds). That could push down your returns to 4-5% and keep you below the cap.

      That being said, you could also make an argument that isn’t such a bad idea to blow through the cap? Sure, you’ll pay 55% tax on it but you’ll still end up ahead financially in absolute terms.

      Either way, you are in a very enviable position – and certainly a much better one than I was in my 20s!

    2. @Sean Robert:
      A lot will happen over the next 30 to 40 years! For example, if your real returns were half of your assumption then you would only be one third of the way to the LTA at age 60! Monitoring and retaining flexibility will probably be the keys.

      However, as BoF says, you are currently in an enviable position.

  12. Reverse The Crush

    Great article, BOF! I like your point about aiming high but still landing in a good spot even if you don’t meet your target. Regarding the 4% withdrawal rule, I have noticed a few articles recently advising that 4% annually is too high now. I share the same grim but realistic view of our time on this earth. Thanks for sharing!

  13. Surely if you don’t have a mortgage at 55+ £1m should be more than enough to live of for at least 20 years. £40,000 over 20 years is £800,000, assume at least some growth over that time you will/should still end up with a pretty penny. For me personally when the times are good I would be looking to have 2-3 years of cash on hand so as not to have to sell in a downturn. Simple figures and thoughts but hey i’m a simple guy!

    1. Tough to beat simple in my books.

      To extend your point, £1m can be plenty “in eternity” depending on the view you take on the SWR.

      Withdrawing £40k from a £1m portfolio implies a 4% SWR, which actually leaves you with a high chance of ending up with a bigger portfolio than you started.

  14. Stumbled on this article from either indeedably or GFF. I’ve an active interest in the pension LTA as at the age of 48 I’m already potentially close to breaching it. I have a deferred DB scheme and get an annual CETV. The last CETV (2019) combined with my other DC scheme valuation Put me at 90% of LTA. I’m still awaiting my 2020 CETV after requesting it in September – does anything move slower than an actuary ?

    I’m considering transferring out of my DB scheme as by the time the pension is payable my son will no longer be a dependent. Through some hard work, mild frugality and investing (and a lot of luck) I’m also debt free and have some other income streams.

    I have a decently funded ISA, a mortgage free rental property and our main home is also mortgage free. I suspect things will get even trickier as the LTA only increases by CPI and who knows f it will be frozen or reduced in the future. Over the past few years pension advisers have switched their discussions from annuities to draw-down as annuities continue to be terrible value.

    I’m sure it will be tricky finding somebody to agree if I do decide to transfer out of my DB scheme and it will be painful to pay a high fee if I’ve already done a significant amount of the advisers work for them.

    1. This is a tricky one. On one hand, having a DB pension is great. On the other, there’s just a ton of added complexity to work through.

      How does a penalty work on the DB scheme? Does someone figure out the value of your scheme at the age of 55 and you are then forced to pay 55% on the excess?

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