To be able to generate an annuity of 1.000€/month for 20 years, you must have accumulated 200.000€. How soon do you think you can get there? Easyvest analyzes several possible scenarios.
In a previous blog, we had calculated that it was necessary to invest 200.000€ in order to be able to pay yourself an annuity of 1.000€ per month for 20 years – a period at the end of which the capital would be entirely consumed. The question now is how quickly it is possible to accumulate these 200.000€.
For this blog, we choose an investment profile of 7 out of 10 at easyvest, which corresponds to a dynamic allocation of approximately 70% global equities and 30% European government bonds. This level of risk, which is the most common among easyvest clients, is suitable for long-term investment and makes it possible to capture the growth of world stock markets while reducing the risk of short-term depreciation. Each investor has different needs and we recommend that you contact one of our advisors to determine the profile that suits you.
The return on your savings will depend on your risk profile. For a 7 out of 10 profile as selected here, we estimate that you can reasonably expect an average return of 5.9% per year over the long term. Since it is not possible to predict the evolution of the stock markets, your return could deviate from this projection, with a 50% probability of obtaining a superior return over the long term.
Due to inflation, the purchasing power corresponding to 200.000€ in 10, 20 or even 40 years will be lower than today. Let us therefore assume an annual inflation of 2%, a realistic scenario over a long investment horizon. The amount to be saved will therefore be adjusted upwards in order to maintain, at the end of the investment horizon, a purchasing power equivalent to 200.000€ current euros.
Quite obviously, the longer the investment horizon, the lower the amount to be saved per month to reach 200.000€. This is reinforced by the phenomenon of compound interest. Each euro invested at the start of the period is worth much more at the end of the period, since it gives a return each year and this return is reinvested each year. There is therefore an exponential effect which makes it possible to substantially reduce the amount to be saved by extending the investment period.
According to our assumptions, the amount to be saved to reach a capital of 200.000€ varies from 230€ monthly for the investor who has 40 years ahead of him to 1.400€ monthly for one who has only 10 years left to invest. As explained in the previous paragraph, for a 4x longer horizon, the amount to save each month is not 4x but 6x lower due to compound interest.
Pension planning consists of accumulating enough money during your working life in order to generate an annuity allowing you to maintain your lifestyle once you retire. It therefore comprises two phases: accumulation before retirement and distribution throughout retirement. It is a long-term task which, if started early enough, can be relatively painless while bearing significant fruit.