What Is your number?
To state the obvious, if you don’t know what you need for what you want to achieve, you are unlikely to get there.
This is where your family financial planning is so vital.
Set a target: For most of us, our number is what we need to achieve to enable us to retire with some confidence and comfort in such a tumultuous world
For most of us, it is probably a number that we need to achieve to enable us to retire with some confidence and comfort in such a tumultuous world.
Initially this number may well frighten investors, but that is why we need to start as early as we can.
To give you some idea, if you could get a return (on both income and capital growth) of 5 per cent on, say, £500,000, that will give £25,000.
Not a huge amount to live on, but at least that can give you a target to work for.
Income or Capital?
Many will try to talk to you about yields and capital growth and this often serves to confuse. I prefer to look at the ‘total return’, which is the dividends and capital growth put together.
The reason for this is that you can then simply establish how long it is going to take to double your money – sensibly – and what target you should look to be achieving.
A ‘magic’ number
This is 72! In the past year a 5 per cent total return on your portfolio was not unusual and maybe higher for some at 7 per cent.
Now if we divide 72 by 7 per cent, you will get 10.28.
This in effect will tell you that your money will double every 10.28 years.
Having this as a little ‘ready reckoner’ you will then have a better idea of what your money can do for you – so, for example, a return of 5 per cent would take 14.4 years and equally 10 per cent would take 7.2 years.
Getting a start from the family?
Let’s suppose your grandparents may have left you £25,000 in their will.
If it is then invested with a total return of 7 per cent, then after 50 years you would have some £800,000 (and after 60 then £1,600,000!) – which at say a 5 per cent return could give you an income of around £40,000.
Is that too late for many of us?
Well actually most of us are living much longer, and of course the rest of your family will still be there.
It’s a simple number but hopefully it will give you more faith in finance and less fear about your family’s financial future.
I haven’t mentioned any of the tax breaks that could also help and we must look at these another week.
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