Pensions Planning: The NUMBER

michaels

LL_USS said:

I would work out the "little number" as how much I will need after tax to live on.

I wouldn't compare with our current average/ median income as that number is for the general population. In retirement there is no NI, less tax overall, and (hopefully) no mortgage, no dependent.

That is my current planning but is it really true that I don't mind becoming relatively quite poor as I get older?  Imagine being on average income on retirement at 55 and then finding you were only on 57% of average income by 75.  Do you imagine yourself sliding down the income percentiles into the bottom 20%?

kimwp

michaels said:

LL_USS said:

I would work out the "little number" as how much I will need after tax to live on.

I wouldn't compare with our current average/ median income as that number is for the general population. In retirement there is no NI, less tax overall, and (hopefully) no mortgage, no dependent.

That is my current planning but is it really true that I don't mind becoming relatively quite poor as I get older?  Imagine being on average income on retirement at 55 and then finding you were only on 57% of average income by 75.  Do you imagine yourself sliding down the income percentiles into the bottom 20%?

It really is relative to your outgoings. If you are paying a mortgage and putting kids through uni at 55, you might feel relatively wealthy at 57% of income without those outgoings.

LL_USS

@michaels as @kimwp says, the issue here is we will have a lot less outgoings in retirement (think about average mortage payment of £750/m, about £150/m for national insurance for average income, and yes costs for kids, commuting for work.... Think how much those can add up and take away the chunk of your current income.
Like state pension, DB pension is also meant to increase each year in line with inflation. It may not be enough increase, but not as gloomy as a sliding scale.

For DC pension then yes there needs to be a sensible plan for drawing down and investing.

michaels

But I am not comparing income pre retirement with post retirement, I am talking about relative income post retirement. 

It is easy to look at older people who are say only living on half of average income and think they seem relatively poor but it is quite likely they retired 25 years before on above average income but their earnings have only kept up with inflation not with average earnings.  In absolute terms they can purchases what they could on the day they retired, it is just that relative to society that is now judged to be insufficient/poverty.

Pat38493

michaels said:

But I am not comparing income pre retirement with post retirement, I am talking about relative income post retirement. 

It is easy to look at older people who are say only living on half of average income and think they seem relatively poor but it is quite likely they retired 25 years before on above average income but their earnings have only kept up with inflation not with average earnings.  In absolute terms they can purchases what they could on the day they retired, it is just that relative to society that is now judged to be insufficient/poverty.

In quite a few of the recent years it's been the other way around - earnings hasn't even kept up with inflation.

I am basing all my plans on known spend requirements as I don't have any way to predict what future earnings will do.

SouthCoastBoy

It really depends what type of pension you have, if it is db index linked then no issue. 

kev2009

robatwork said:

I've just been through the L&G retirement planner. Its numbers (for a couple) strike me as a bit excessive 



How do retirees think this stacks up in the real world?

Hi, Where did you see this? I was going to look what it said for a single person but i couldn't find it on legal and generals site.

Thanks

Kev

Superdude0499

You need to work through their retirement planner

DT2001

michaels said:

So there are two numbers
1) the little number - how much a year in real terms one would want to live on in retirement
2) the big number - what size of pot might be needed to provide the index linked small number for as long as a reasonable guess at longevity

I am becoming more nervous about the little number and whether an assumption of wanting to keep a certain real terms income is appropriate or whether instead the target should be a fixed proportion of average income.  Consider someone retiring on real terms 33k (or whatever current median income is).  If wages grow at 2% in real terms per annum then after 20-30 years this 'median' real income could end up being below the poverty line and the retiree rather than being moderately well off has become a 'poor pensioner'

So I guess my questions are:
1) For our little number, should we actually target an income relative to average earnings rather than a real terms amount?
2) How to model what big number pot would be needed for this sort of strategy?

1) What figure will you use for increasing average earnings?

2) What withdrawal rate are you going to use?

Statistically with a low SWR you will end up with potentially an ability to draw more as your pot grows.

Personally as long as we can do what we want to I do not mind if I drop down the household income percentiles.

kempiejon

What I did was to keep a spreadsheet of all my spending for a couple of years. That gave a good baseline to work from. I can dip test it occasionally. Yes I'll spend less on commuting and nice trousers and shiny shoes but more on hobbies, holidays and socialising. Working from home has shown how much home energy costs have been impacted by being at home much more.

That's what's been called the little number. I know that.

My income could come from investments, DB and DC pensions, annuity, state pension and part time work. Which queers the idea of a big number of one lump sum at the commencement of retirement that will do it all. 

I am lucky as I know what the state pensions will be, I know what the DB pension will be. I can check annuity rates.
I have been measuring my returns for a couple of decades so I can make an educated guess how much I can withdraw from that pot.

The question then becomes how long do you need the money for. Now, if I knew for sure I was gong to shuffle off the day after my 85th birthday planning would be easy but then there's a 1 in 10 chance I'll see 97.