Retirement calculation

mto

Is there a quick way to calculate roughly how much I would have to have in savings now in order to retire at age X assuming I expected to live to age Y on £Z per year.

For instance if I want to retire at 50 and expected to live to 80 on roughly £15k per year, would the calculation (80-50)*15000=£450k be roughly correct, ie I would need approx £450k in savings/capital at age 50 to last me till 80?

EdInvestor

One can generally work on the basis that an invested pot of 100k will generate approx 5k in income per year, so you would need around 300k to provide your income of 15k p.a. You would need less if you were willing to trade in the pot for a level annuity, but an index linked annuity would cost you much the same, possibly more with spouse benefits.

CLAPTON

for a female aged 50 it's unlikley you will get an indexed linked annuity for any better than 2.5% so ... if you want an income of (indexed linked) 15k then you will need about 15k/2.5% = £600,000

EdInvestor

You can get an idea of annuity rates here:

https://www.fsa.gov.uk/tables
Go to pension annuities

Don't forget your state pensions.

Get a forecast on how much they will add up to here:

https://www.thepensionservice.gov.uk

molerat

Is an index linked annuity really worth it. Looking at the FSA tables index linked is almost half the income of a fixed. Using historical indexing from 1994 and 2 to 3% future it will take around 23 years to reach the same figure. With good planning, using the index linked amount and stashing the excess surely you would be better off ? This is of course back of fag packet calculating, just bouncing things around in my own head.

CLAPTON

molerat wrote: »

Is an index linked annuity really worth it. Looking at the FSA tables index linked is almost half the income of a fixed. Using historical indexing from 1994 and 2 to 3% future it will take around 23 years to reach the same figure. With good planning, using the index linked amount and stashing the excess surely you would be better off ? This is of course back of fag packet calculating, just bouncing things around in my own head.

that's a very good point.

it depends a lot upon how much security and certainty you want and what other assets you have.

however 50 is a very young age to retire and one could realistically look to live for over 35 years.

and while inflation over the last 15 years has been relatively low, there were previously periods of inflation at 20% or more.... going back 35 years may show a diffferent sort of picture. a few years at that sort of rate would half your 'real' income very quickly indeed.

Linton

molerat wrote: »

Is an index linked annuity really worth it. Looking at the FSA tables index linked is almost half the income of a fixed. Using historical indexing from 1994 and 2 to 3% future it will take around 23 years to reach the same figure. With good planning, using the index linked amount and stashing the excess surely you would be better off ? This is of course back of fag packet calculating, just bouncing things around in my own head.

IMO it depends on the size of your pension pot. If its pretty small then take a fixed income. If inflation takes off catastrophically you are in the hands of the state anyway.

If you have a pension pot that's more than enough for your basic needs I think it would be prudent to have part of your annuity index linked.

I would not have my entire annuity index linked - and certainly would not go for index linking limited to 3% or 5%. Any index linking would be to provide some protection against major rapid inflation, not to deal with the (possibly) normal 2-3% which can be handled with sensible planning.

dunstonh

The longer the likely life expectancy the more important indexation will become. How much the income is compared to your other sources and if they are indexed is also a consideration. You could also consider investment backed annuities with a low annual bonus rate or go with income drawdown (which is certainly more favourable when you are younger)

MrChips

mto wrote: »

Is there a quick way to calculate roughly how much I would have to have in savings now in order to retire at age X assuming I expected to live to age Y on £Z per year.

For instance if I want to retire at 50 and expected to live to 80 on roughly £15k per year, would the calculation (80-50)*15000=£450k be roughly correct, ie I would need approx £450k in savings/capital at age 50 to last me till 80?

It's worth noting that the annuity rate will depend upon the insurers view of your life expectancy rather than your own. There are various rating factors which go into the decision (post code, size of pension, sex, health etc). However, "on average" people reaching retirement now will be assumed to live at least to 85, and probably a little longer.

The annuity rate will be adjusted from a simple life expectancy calculation (e.g. 25 years of life expectancy = 4%) by the investment returns the insurer can lock into at the time of purchase (currently about 5% pa on long term bonds), the rate of increase you want, and their expense/profit margin.