Crossing the £1 million threshold in your pension portfolio is a satisfying landmark even if it is just a round number of no actual importance. As a US investor, I crossed the $1 million line last year, and I wasn’t alone. The strong rally in equities in 2017 led to a 45% increase in investors above the $1 million balance in Fidelity pension accounts.
A recent Twitter discussion about this provoked some people to claim that a person would have had to have taken some wild risks to get there, but I certainly didn’t, and I doubt many of those across the threshold did.
I started saving into my pension in 1990. The plan wasn’t perfect, but at the time it had solid low-cost funds and a company match of 100% up to a 7% contribution. Over the years, the fund line-up has gotten better, though my employer does not match my contributions as generously. So, it took me about 23 years to hit the mark.
How to Get to £1m
Maximise Your Match
A work place pension is as close as you get to free money. Admittedly, it’s a form of compensation, so you’ve earned it. My point: If you are eligible for a match, go get it. You are starting day one with a return for your contribution. And where else are you going to get a return of 50% or 100% on day one?
Maximise your Savings
You can contribute up to £40,000 a year, or your annual salary, whichever is lower. The lifetime pension allowance is £1,030,000.
Invest in Low-Cost Core Funds
Default defined contribution workplace schemes often have low-cost ETFs making up the majority of the portfolio in order to comply with the 0.75% annual fee cap. If you choose to select your own investments with your workplace scheme, consider the eroding effect of annual fees when making your decision.
Stay Patient with Your Plan
Compounding rates of return are powerful but slow-moving forces. For them to work, you have to hold on through ups and downs. This is something that trips too many people up.
Remember the “lost decade”? Investors didn’t make much money in equities between 2000 and 2010. That decade included two horrific bear markets that led some to throw in the towel. However, both bear markets were followed by dramatic rallies that helped investors cut their losses quickly provided that they stayed in the market.
Diversify
One thing that can derail a plan is a very aggressive bet on one thing, whether that’s your company’s stock, emerging markets, or a single fund manager. The markets generally go up, but there’s no rule that any particular stock or fund manager will. You don’t need every fund, but you should have diffuse holdings in the major asset classes.
Don’t Try to Time the Market
If you plug into the 24-hour news cycle, it can be very tempting to try to time the market. When you are saturated in news, it can seem really obvious that this asset class will be a winner and that one a loser. And how dumb is it to just sit there when the market is plummeting? Avoid all these ideas.
As Jack Bogle told me during one sell-off: “Don’t do something, sit there!” Markets are very hard to predict. In 2009, everyone knew that China was going to crush the United States and you should sell U.S. stocks and buy Chinese stocks. Wrong. In 2000, everyone knew that the U.S. was superior and that diversifying into foreign markets was foolish. Wrong again. Just don’t do it.
How Was I Fortunate?
To be sure, some things broke well for me that might not work out so well in the future. I had two great bull markets to invest in. I had access to cheaper, lower-cost, and more-diversified funds than most plans had — especially in the 1990s.
Finally, my employer has matched 100% or 75% of employee investments up to 7% for most of my career. Not everyone gets those advantages. However, the typical pension plan today is light years ahead of where it was 20 years ago. Costs are much lower. Fund offerings are more diverse. Finally, portfolio tools make it easier to see your whole portfolio and understand what bets you’ve placed.
A version of this article appeared on Morningstar.com. Additional reporting to ensure it is suitable for a UK audience was done by Emma Wall.
