Pensions Planning: The NUMBER

Madrick

Updating my spreadsheet 

I am single, now living alone as brood have left the nest
 almost 63 with own home (sadly not own teeth)
Still working at home full time on an average wage circa £35k
Pay 25% into workplace pension through salary sacrifice 


Have a pension pot circa £250k
ISA and savings circa £60k

Have pension from Royal Mail of £2,400 pa less tax

When I do retire, I intend to pay £2880 annually into a pension to withdraw the £3.6k

***********************
On my spreadsheet 

I have used a very modest growth of 1.5% to my own pension pot 

I have factored in a 2.5% annual increase to the State Pension (when I eventually get it) 

I have factored in a 2.5% annual increase to my little Royal Mail pension, (although this year I believe is going to be 6.7%)

I have then factored in a 3% annual increase to the £20k after tax pa required amount to live on, to allow for inflation
(Topped up with cash from the ISA if necessary until the State Pension kicks in) 

With those numbers, it should last 22 years

If I increase the pension Pot growth to 2.5% it will out live me.... 

Do those percentages seem OK for those that are financial gurus? 

Would you say that with my current pension pot, ISA cash and modest needs, I have enough to take the plunge? 
 

SouthCoastBoy

You don't appear to have mentioned inflation? Are the growth figures in excess of inflation? Has your required number taken inflation into account?

Madrick

SouthCoastBoy said:

You don't appear to have mentioned inflation? Are the growth figures in excess of inflation? Has your required number taken inflation into account?

I have factored in 3% growth  to my required annual number of £20k
Which I thought was for inflation

Would you say make this slightly higher

How about the growth of the main £250k pot? I am only allowing a 1.5% annual growth, but know it will be significantly more than that. 

The figures that I have used across the board for growth, in my head, are to counterbalance inflation, so the main Pot and pension stay static at today's value and gradually decrease as I remove circa £1k per month of capital from the pot.
If it grows at a rate higher than inflation all well and good. 

BarclayBB

First ever post! Have been in the wings, reading avidly from the start this thread and the ‘ how much to live on’ one. Both great. Before looking at MSE, two things got me thinking about ‘The Number’ or even retirement as an idea. Had these not occurred, I would probably have carried on without even thinking about retiring early! One was chatting to a retiree who’d come to a leaving party. He said, apropos of not much ‘ Wish I’d thought of retiring earlier. I didn’t realise I had enough’. The other was talking to a new friend. She and her husband planned a retirement date and, within reach of that, he sadly and suddenly passed away. She said to me ‘ Work out your figures and as soon as you can afford it, retire!’ Best advice ever. Five years later and here I am!

The two MSE threads have helped enormously- just to get more comfortable that it was doable. Both supportive threads, people dipping in and out. It feels like fireside chats about a big thing that people don’t ordinarily discuss in person but I’m sure a lot of people would like to. And especially great to hear from posters who have since retired and relate their practical experiences. The other really helpful site I went to on someone’s recommendation ( on MSE) was The Guiide to Happy Retirement Designer.

So, to the Number. I’m knocking 60. Partner retired already. I’ve kept detailed expense spreadsheets for the last 5 years. They’ve gone up a bit over that time but, last year, it was £24,300 for the two of us. No kids or pets. One car. That is all daily costs, except holidays which, for us, are the true discretionary spend. We plan to spend big on that for the first few years. I have just retired and will see how things go. Got some DB and DC which will help until state pension age.

Thanks to all who regularly chip in to these invaluable threads.

michaels

Madrick said:

SouthCoastBoy said:

You don't appear to have mentioned inflation? Are the growth figures in excess of inflation? Has your required number taken inflation into account?

I have factored in 3% growth  to my required annual number of £20k
Which I thought was for inflation

Would you say make this slightly higher

How about the growth of the main £250k pot? I am only allowing a 1.5% annual growth, but know it will be significantly more than that. 

The figures that I have used across the board for growth, in my head, are to counterbalance inflation, so the main Pot and pension stay static at today's value and gradually decrease as I remove circa £1k per month of capital from the pot.
If it grows at a rate higher than inflation all well and good. 

We are a tiny bit off topic for this thread but I advocate doing retirement modelling in today money terms so for example I expect money held as cash to lose about 0.5% a year on average, bonds to gain about 0.5% and shares about 2%.  This means that I can visualise the amount of money in each future year as it is based on today's spending power so I don't have to be constantly thinking 'that 30k the model is showing me in 2045 is the equivalent of 20k in today's money'.

Note also that returns can fluctuate a lot hence 'sequence of return risk' which means that something that should work 'on average' might not work if there are poor market returns or high inflation in the early years of retirement.

LL_USS

I suppose it is a bit easier to estimate if we have a DB defined benefit pension element. I have been able to keep my outgoings as approx 2,500/m (not including mortgage) for the last couple of years, i.e. 30,000/year. Less spending for kids but more spending on myself in retirement so this figure in today's money as net income at retirement would be wonderful (say each month basic food 500, hols and entertainment 500, bill 1k, 500 for other things like giving grand children some pocket money :-). This means a DB of 23k/year, bridging with ISAs till full state pension to get 11.5K/year. After tax it comes down to 2,500/m net. That would be great :-). I just have to work for that target now.

hugheskevi

LL_USS said:

This means a DB of 23k/year, bridging with ISAs till full state pension to get 11.5K/year. After tax it comes down to 2,500/m net. That would be great :-). I just have to work for that target now.

Why bridge with ISAs rather than more tax-efficient DC pension?

LL_USS

hugheskevi said:

LL_USS said:

This means a DB of 23k/year, bridging with ISAs till full state pension to get 11.5K/year. After tax it comes down to 2,500/m net. That would be great :-). I just have to work for that target now.

Why bridge with ISAs rather than more tax-efficient DC pension?

You're right. DC contribution is more tax efficient yet I still want to have a bit of LISAs, a bit of ISAs due to the need to take money at different times earlier than retirement. Currently I still have more in the DC pension pot than in ISAs but I may have to stack more in ISAs to allow some big purchases in the next few years (and if not buying then I'll keep them longer).  For the bridging purpose I can draw on a combination of DC and ISAs.

Milltir

hugheskevi said:

LL_USS said:

This means a DB of 23k/year, bridging with ISAs till full state pension to get 11.5K/year. After tax it comes down to 2,500/m net. That would be great :-). I just have to work for that target now.

Why bridge with ISAs rather than more tax-efficient DC pension?

Isn't the preferred order of use of retirement savings cash/investments outside of ISAs, then ISAs, then DC pension? DC pension not included in one's estate. No expert - just asking...

hugheskevi

Milltir said:

hugheskevi said:

LL_USS said:

This means a DB of 23k/year, bridging with ISAs till full state pension to get 11.5K/year. After tax it comes down to 2,500/m net. That would be great :-). I just have to work for that target now.

Why bridge with ISAs rather than more tax-efficient DC pension?

Isn't the preferred order of use of retirement savings cash/investments outside of ISAs, then ISAs, then DC pension? DC pension not included in one's estate. No expert - just asking...

A quite reasonable order, setting aside things like retaining an emergency fund and perhaps a separate cash buffer if that is part of a plan to manage investment risk (although that could be held in any vehicle).

However, the preceding question is what is the optimal asset allocation to reach minimum pension age with. ISAs provide access and flexibility whereas pensions provide valuable tax relief but no access.

As minimum pension age approaches, the value of access and flexibility of ISAs declines (although perhaps not to zero, as pensions have the drawback of higher rates of tax should you need to withdraw a particularly large amount), and the drawback of no access to a pension drops away. Therefore why would you want to reach minimum pension age with lots of ISA saving when it could be in a pension instead and have benefited from tax relief. So when planning for funding between minimum pension age and State Pension age, DC pension is the obvious tool, with ISAs for any period prior to minimum pension age.

Note that for these purposes LISAs are more akin to pensions, as they benefit from the government contribution.