I am currently in the Fire Service and have another 30/35 years ahead of me. 5 years ago I began getting really interested in finance and have since read a plethora of investment books. I love John Bogles work and the idea of passively owning an index fund. I dont have the time nor skill to identify individual companies for my own portfolio so liked the idea of tracking an entire market. I opened a Vanguard S&P Total Market Index (U.S Equities 100%) Accumulation fund in September 2017 and have been depositing a small amount (£100) every month.
Recent changes to my pension scheme made me sit up and actually calculate what my pension would be worth when I retire. In todays money it'll be worth £18,450pa post tax. Assuming I live until I'm 95 that gives a worth of £553,500. My contributions are 12.9% of my gross wage (£341.50pm). This is assuming no changes have been made (its already changed twice in the 11 years I've been a Firefighter, and not for the better).
I intend on coming out of the Pension and paying 12.9% (£270) of my net wage into my Vanguard account per month, leaving me with the same monthly net income. I'll actually be paying closer to £400 due to overtime and other bonuses not being pensionable, but £270 keeps it a fair comparison. In order to match the value of my pension at age 95 I need a 7.65% annual compounded return over those 35 years. Considering the average annual compounded return is 9.7% I feel 7.65% isn't outside the realms of possibility. It should also be noted, these calculations assume I will completely divest my £553,500 when I hit retirement age. I won't be doing this, I'll be switching it to a low volatility income fund but this keeps things simple(ish).
So my question is this: Can I create some kind of means of tracking my investments (in 5 year increments) so I know my investments are on track? At first glance it seems easy, but once you delve into the nitty gritty it gets hard. Example: The current return on my Vanguard fund is 75% over the (just about) 5 years I've had it open, so on average it's increased by 15% per year. However, the compounded return on that is actually 11.85% per year. This is because shares don't generate interest which I then reinvest, instead the growth of the companies who's shares I own mathematically represent a yearly 11.85% compounded growth rate (as far as I understand it?). So is there anyway to reconcile the difference between the exponential growth of compounded interest with the value increase of an index fund so I can create projections to ensure my investments are on track?
TIA!
Moved from Share Ideas (left a link so the OP doesn't think his post has been deleted).- Chris