Pensions Planning: The NUMBER

AlanP_2

There has been a lot of sums involved in this, but going through the process has helped me refine my thinking. The aim had been to give me some peace of mind.

This is the most important thing imo. The thinking and analysis is more important than the answer down to the 5th decimal point 

Anonymous101

PJM_62 said:

Can I recommend the Meaningful Money website/podcast/videos .

I got all my pension knowledge from there.

Pete explains it all so clearly.

I'd say the same about the Monevator website.

Meaningful Money is great especially for beginners to intermediate, I don't feel it goes into much beyond that. Monevator is also suitable for beginners but goes further into the detail for more advanced concepts.

peterg1965

I have been in and around this forum for about 15-16 years, learnt lots (rarely post) and have been working on my retirement plans since about 2007, when i really decided to take a keen interest in pensions.  My final retirement date has fluctuated a lot and has been dictated by paying down the mortgage following a house move to a larger property that occurred quite late on in my (our) working lives.  The consequence of this is taking a Mortgage into retirement, which is fully costed in the overall retirement plans.

My NUMBER is quite high, but fully achievable by my targeted retirement date of Apr 27, when i will be 61. The number is £108,000 pa (in 2027) , with an overall indexation of about 2% year from then on. This will be a reduction of about 42% of overall income from working. This will effectively mean being able to comfortably afford the mortgage (redemption in 2033) and to continue exactly the same lifestyle as now. The income will be a mix of DB pensions 50%, SIPP Drawdown 33% and drawdown from savings + some other small sources of income 17%, this is the split in 2027.  It slowly changes over 5 years to: 50% DB, 24% SP and 26% SIPP Drawdown in 2032 when we will have both State Pensions in payment.

I am going to be quite contrarian (and very risk averse) when it comes to my SIPP Drawdown pot, which should be at about £500k in 2027.  I intend to keep it in cash/money market funds, SIPP fixed rate deposit accounts, so long as i get an average of 3% return pa (I cant see BoE base rate being below 2-3% in the medium term), my SIPP will last until well in my 90s. I could change this strategy of course, but that is the current plan.

QrizB

Unless my maths are off 33% of £108k is £36k, which is 7.2% of your £500k SIPP.

That's quite an optimistic drawdown rate.

peterg1965

QrizB said:

Unless my maths are off 33% of £108k is £36k, which is 7.2% of your £500k SIPP.

That's quite an optimistic drawdown rate.

Correct,  My (current) Drawdown plan for the £500k SIPP is:

Year 1 £36k
Year 2. £37k
Year 3 £30k (reduced as Wives SP kicks in)
Year 4 £30.9k 
Year 5 £31.8k
Year 6 £24k (reduced as my SP starts)
Year 7 £24.7k
Year 8 £25.5k
Year 9 £26.2k
Year 10  £27k 
Year 11 onwards £20k

That means that, without any interest I would have used £293K in the first 10 years and the pot would run dry at Year 21 when I would be 82.  

However, I have done simple year by year spreadsheet on this using a fixed; 2% 3% and 4% interest throughout and the Drawdown pot would last for 26, 31 and 40+ years respectively.  Using a more  complex month by month calculation the durations are even longer.

michaels

I think assuming 2% real growth with moneymarket funds is optimistic, I would model that as minus 2% and instead build an index linked gilts ladder which should yield a real 0.5% ish.

peterg1965

michaels said:

I think assuming 2% real growth with moneymarket funds is optimistic, I would model that as minus 2% and instead build an index linked gilts ladder which should yield a real 0.5% ish.

Not sure I understand what you are saying here. Surely in a rising interest rate environment, with BoE base rate at 5.25%, likely to rise a little more, and long term rates highly unlikely to return to the lows of 2008-2022, money market funds are set to perform reasonably well in the short to medium term. Yes, it will likely be less than inflation in the next year or so, but then likely to match or be higher than CPI in the medium term.

Bobajobbob

Adding my 2 cents to this thread.

I'm still in the planning stage so not sure of my exact number yet. I hope we have reached a stage where we have enough and it just a question of ascertaining how much we can extract from investments safely each year rather than worrying about whether we have sufficient funds to survive. Given my age I am thinking not so much about retiring but more "not working" or not working full time anymore. It would be good to have the time to think about it and the freedom to choose what to do based on choice/preference rather than obligation/need.

I just hit half a century and with two kids close to the end of private education costs will be high for a few more years before dropping off considerably (hopefully). The plan is to give up full time work soon and have the freedom to work, or not, part time going forward. As a family with two adults earning and managing, to a certain extent, budgets and spending independently it has been harder than anticipated to keep track of current spending patterns. There is a lot of discretionary spending and costs related to children that can/will be reduced going forward. Being mortgage free and earning relatively well we haven't had to worry about budgeting for a long time so it is is an interesting exercise now to get a handle of exactly what we are spending and what is really necessary.

I'm in the process of organising and simplifying investments to make the transition from accumulation to drawdown easier to manage. We have a combination of DC pensions, ISAs, GIA and cash spread around too much for my liking so my current project is to optimise as much as possible. After a decade of using a wealth manager and learning from that experience I'm currently migrating away in order to significantly reduce annual costs. GIAs and ISAs will be dramatically simplified down to a few key passive funds with low annual management costs. We will then use these investments to see us through and beyond pension availability. Tax optimisation will be interesting in this phase and I'm still trying to figure out the best way to draw from all of the pots in order to minimise taxes. There are lots of resources out there but not many that assist with retirement prior to pension age and help model drawing from a multitude of sources.

MarriedWithKids89

I can estimate how much we'll need to subsist in retirement (food, utilities, insurances, car running costs, etc) based on current expenditure. I can also work out how much we want to spend on luxuries (holidays, week ends away, day trips, meals out, take aways, etc.). However, it is the unexpected expenses that I am not so certain about, e.g. new windows, new boiler, white goods, new furniture, building/vehicle repairs, etc. These are expenses we will inevitably have - but will have little/no control over when/how much. Therefore, excluding vehicle purchases (single 3yo hatchback that we'll probably keep for at least 5 years), I have budgeted about £5000/year on average to cover these expenses. Does this seem reasonable?   

MallyGirl

I would have thought this is variable from household to household but you can model something. You don't know when they are coming but they will come at some point.
White goods no longer last like they used to so you can probably assume you will need to replace each one twice(?) during retirement - take the cost of one of each that you use x 2.
You might get away with one boiler replacement if yours is fairly new at retirement.
Windows have a wide spread - ours are Victorian sashes so the replacement would be much more than a new upvc unit but on the other hand we can renovate quite a lot before replacement is required since they are made of wood.
Building repairs - roof / chimneys could be a one off big hit but not regular.
Vehicles - depends on how many you run and what they are.
Furniture - are you the type that changes your sofa to match new decor or do you keep the old one going till the springs give out? I can't see us changing any other furniture unless we move house - apart from maybe a new mattress or 2.
Come up with a total and then divide by a guess on your longevity (maybe 30 years past retirement) to get an annual budget