Pensions Planning: The NUMBER

michaels

Secret2ndAccount said:

Bear in mind that using an average figure and assuming growth is constant is quite an oversimplification. Equities could drop 40% and take 10 years to recover. The average works fine if you leave the equities untouched for 20 years. Not so much if you are spending down the amount of equities during the fall and recovery.
To answer your question, in 1999, the average salary in the UK was 17,803. 25 years later, median earnings were 37,430. For finger-in-the-air purposes, that's 3%. 

By matching average earnings you should be able to continue to afford the same things year after year. However, your neighbour might get promoted and switch from a Ford to a BMW. 3% won't get you that, so pick your number accordingly. This chart suggests that the average 60 year old is earning the same as an average 30 year old which I found quite surprising. The figure takes into account both hours worked and hourly rate, so maybe the 60 yr old is working less hours.

If you want to match the growth from say 29 to 49, you will need to beat inflation by 2%, so a growth of maybe 4.5% nominal? That way you could afford to keep buying the latest new thing whenever it came out, at least to the extent that you can now. 

I don't think the top chart is adjusted for inflation so pretty meaningless?

Secret2ndAccount

michaels said: 

I don't think the top chart is adjusted for inflation so pretty meaningless?

The top chart is a chart of inflation: Wage Inflation. If your income merely tracked CPIH you could be reassured that you could continue to afford the food and lodging that you used to buy 20 years ago. Meanwhile your neighbour, tracking the top chart would have an iPhone, Netflix and air conditioning. Over the duration of a retirement, you can fall behind if you only track price inflation. Perhaps use CPIH for your baseline needs, then wages for your discretionary spend. Or accept that your discretionary spend will decrease vs the population over time, which is how many people expect their plan to progress anyway.
State Pensioners receive the higher of price inflation and wage inflation each year.

pterri

Secret2ndAccount said:

michaels said: 

I don't think the top chart is adjusted for inflation so pretty meaningless?

The top chart is a chart of inflation: Wage Inflation. If your income merely tracked CPIH you could be reassured that you could continue to afford the food and lodging that you used to buy 20 years ago. Meanwhile your neighbour, tracking the top chart would have an iPhone, Netflix and air conditioning. Over the duration of a retirement, you can fall behind if you only track price inflation. Perhaps use CPIH for your baseline needs, then wages for your discretionary spend. Or accept that your discretionary spend will decrease vs the population over time, which is how many people expect their plan to progress anyway.
State Pensioners receive the higher of price inflation and wage inflation each year.

Yep, my DB for a base and my SIPP/ISA pot managed carefully for extras…

michaels

Secret2ndAccount said:

michaels said: 

I don't think the top chart is adjusted for inflation so pretty meaningless?

The top chart is a chart of inflation: Wage Inflation. If your income merely tracked CPIH you could be reassured that you could continue to afford the food and lodging that you used to buy 20 years ago. Meanwhile your neighbour, tracking the top chart would have an iPhone, Netflix and air conditioning. Over the duration of a retirement, you can fall behind if you only track price inflation. Perhaps use CPIH for your baseline needs, then wages for your discretionary spend. Or accept that your discretionary spend will decrease vs the population over time, which is how many people expect their plan to progress anyway.
State Pensioners receive the higher of price inflation and wage inflation each year.

This very long thread is based on the the premise is that there is a real terms amount per year for life that someone would want to allow them to retire.  Not sure if challenging that concept after 280 pages is that helpful - perhaps this discussion needs its own thread? 

Also whilst in theory there are numerous products that support getting a real terms return I am not aware of any that offer to match average wages increase inflation and all the SWR type models are again about amounts that are maintained in real terms not that keep up with wage inflation.

Secret2ndAccount

michaels said:

This very long thread is based on the the premise is that there is a real terms amount per year for life that someone would want to allow them to retire.  Not sure if challenging that concept after 280 pages is that helpful - perhaps this discussion needs its own thread? 

Also whilst in theory there are numerous products that support getting a real terms return I am not aware of any that offer to match average wages increase inflation and all the SWR type models are again about amounts that are maintained in real terms not that keep up with wage inflation.

I disagree with your entire post. That’s not true. You said this thread is very long. I agree with that. I disagree with everything else you said.

The first post, on page 1, asked only about your number. Presumably that was in today’s money at the time. No mention was made of inflation. Indeed, when pterri came back 279 pages later to update us, they again gave us a snapshot number. So any discussion of inflation (which I welcome) has been part of the 278 pages of meandering in between. My post was in response to a question about personal rates of inflation – not just CPI. So I think putting some numbers up there for people to incorporate in their thinking was entirely relevant. Indeed, the questioner to whom I was responding was using CPI+1 for their living costs, which is pretty much where I got to with my suggestions.

I wasn’t challenging the concept of the thread, but I think it’s absolutely okay for anyone to do that if they put forward a reasonable argument for their point of view.

I can think of at least two products that can be used to protect against wage inflation: the State Pension, and equities. Everyone’s inflation rate will be different, and not constant. Just because we can’t buy an off-the-shelf product to match it, doesn’t mean we should bury our head in the sand, and pretend it’s not happening. I use 3% for annual inflation in my modelling. If that means a bigger starting pot is needed in order to ensure success, well that’s what planning is for…

gmje

I agree 2/3rds salary is a good guide. but I  would like to say dont do what I  did wrong. I retired 2 years early and lived off some savings. what I  should have investigated was taking my tax free lump sum and possibly my small pension while I  had no taxable income to live on. Once state pension kicked in pension was all taxable

gmje

Gatser said:

We appear to be roughly on the same lines HOUSEBOATDREAM.

I had great plans until I was "politically removed" from my job after 20 years.
However, thanks to my spreadsheet and calculated NUMBER, I have worked out how to get back on course.....eventually.

Interesting to hear your plans.
I am 52 and hope to start working less time at 55.

Tax is certainly an important factor in the whole equation.
I am trying to get the balance right between Pension & Savings (ISA's) so that income can be split between OH & myself and make full use of our individual tax allowances.

I realise in my NUMBER calculation, I have been prudent in my estimate of future bills, food costs etc but its always best to have some "fat" in the figures....just in case interest rates stay at 0.25%! :rotfl:

Dont forget a savings pot for unexpected......since i retired ive had new roof,new carpets and an expensive new bed. All essentials.hopefully one offs

SimonSeys

Thanks all.   I make CPI and CPIH to be around 2.4% over the same period. So wages growth of around 0.5% above that meaning my 1.0% above CPI is prudent. 

Fully get the volatility point.  At the moment I am 100% equities in my SIPP and Isa, but combined they’re roughly one quarter of my DB pension ‘pot’, so given I’m 48 I’m comfortable with that for now.   But not sure when I’ll switch or what to.  Probably some sort of gilt ladder to cover ten years, but leaving the rest in equities 

SimonSeys

Secret2ndAccount said:

michaels said:

This very long thread is based on the the premise is that there is a real terms amount per year for life that someone would want to allow them to retire.  Not sure if challenging that concept after 280 pages is that helpful - perhaps this discussion needs its own thread? 

Also whilst in theory there are numerous products that support getting a real terms return I am not aware of any that offer to match average wages increase inflation and all the SWR type models are again about amounts that are maintained in real terms not that keep up with wage inflation.

I disagree with your entire post. That’s not true. You said this thread is very long. I agree with that. I disagree with everything else you said.

The first post, on page 1, asked only about your number. Presumably that was in today’s money at the time. No mention was made of inflation. Indeed, when pterri came back 279 pages later to update us, they again gave us a snapshot number. So any discussion of inflation (which I welcome) has been part of the 278 pages of meandering in between. My post was in response to a question about personal rates of inflation – not just CPI. So I think putting some numbers up there for people to incorporate in their thinking was entirely relevant. Indeed, the questioner to whom I was responding was using CPI+1 for their living costs, which is pretty much where I got to with my suggestions.

I wasn’t challenging the concept of the thread, but I think it’s absolutely okay for anyone to do that if they put forward a reasonable argument for their point of view.

I can think of at least two products that can be used to protect against wage inflation: the State Pension, and equities. Everyone’s inflation rate will be different, and not constant. Just because we can’t buy an off-the-shelf product to match it, doesn’t mean we should bury our head in the sand, and pretend it’s not happening. I use 3% for annual inflation in my modelling. If that means a bigger starting pot is needed in order to ensure success, well that’s what planning is for…

I agree with Secret. 

I know what my number is today, ish. 

I don’t know what my number will be in 10 years time.
  I think it will be more than number updated by CPI(H).
 I’m currently planning on CPI+1% pa.

SimonSeys

Thank you very by the way Secret.  Genuinely really helpful to see what you’ve assumed and why.