Pensions Planning: The NUMBER

kempiejon

https://forums.moneysavingexpert.com/discussion/comment/82040802#Comment_82040802

Ah, if that's what you understood I'm clearly not a good communicator. No I didn't mean to imply £20k when I said I could extract money from the SIPP without paying tax.

hugo15

Looking to calculate my number and when I might be able to go, or at least cut my hours down. Got a couple of questions that I need some guidance on please.

1. If I assume inflation and investment returns net each other off and model at today's prices, am I missing something? Currently in a DB scheme with the bulk of my pension in a deferred DC scheme.
2. Is there a list of things I need to think about when calculating my number? I've got a long list after reading through pages of this thread and reviewing my expenditure but want to make sure I've not missed anything.
3. I'm assuming the DB forecasts I have are all in today's terms and exclude inflation?

LHW99

AFAIK DB schemes revalue annually at a rate fixed by the rules of the scheme.

For DC pensions modelling at todays prices isn't a bad way to go, although there's always the stockmarket ups & downs to consider.

michaels

https://forums.moneysavingexpert.com/discussion/comment/82090024#Comment_82090024

I used to be a big fan if this approach or even assuming a x% annual real terms investment growth (I used 2%)

Where this no longer works is because of the freezing of income tax thresholds which has a material impact within a decade or so. It would be nice to think this can not continue for ever but the current freeze is scheduled to last 10 years.

For example if you are on 37.7k nett (50k gross) in 2021, in real terms if the 50k increases with CPI, the post tax amount falls to 36k, a real terms fall in income of 4.5% over the 10 years.

Pat38493

https://forums.moneysavingexpert.com/discussion/comment/82090024#Comment_82090024

1. This is a reasonable starting point but it's probably quite a conservative approach. There are more advanced modelling tools available. A typical recommendation from a financial adviser would be to assume average growth of 2% above inflation in your modelling, but also stress test against early financial crashes early in your retirement. There are also some fancy tools that can model your plan against hundreds of historical scenarios but many of them are only available to financial advisers.
   If you look up "Sequence of Return risk" this is something you need to be aware of when modelling using flat rates or assuming that growth = inflation.
2. In my opinion the best way is to spend a year or two collecting all your real spend data and classifying using an online tool (for example YNAB or WPS Money) and then you can understand your true spending. A typical mistake is that you need to consider how you will budget for any large non regular items like buying a new car, paying for kids wedding or whatever. Look up PLSA retirement living standards for some interesting analysis, but be aware that many people will challenge the numbers they have come up with.
3. You should check this with your DB administrators - I have seen situations where if you ask for a DB forecast for what your DB pension will be if you retire 10 years from now, they will give you an inflated number assuming e.g. 2.5% per year inflation, so it's a good idea to double check this. If you are comparing this number to your current spending today there could be a mismatch. DB pensions tend to be scheme specific. If possible get the scheme rules and try to calculate what it should be yourself and check that the estimates you are getting are in the same ball park.

Moonwolf

https://forums.moneysavingexpert.com/discussion/comment/82090024#Comment_82090024

I used three methods and compared them.

1. What I was living on before I retired (take home) and then subtract work costs like commuting and additional pension payments.
2. Bottom up - find a budget planner online and fill it in. One for pension planning or one like this https://www.moneysavingexpert.com/banking/budget-planning/ or just build your own spreadsheet but look at other planners to make sure you have everything. Will you drive more, have more holidays, spend more on hobbies. Do you have specific plans for spending your time that you will cost. On the other hand, we eat out on a weekday now and always find a discount which wasn’t available at the weekend. Make sure you allow for things like refreshing tech. I allow £50 a month for a phone over 2 years and £50 a month for a computer over 5 years - both are a little over egged. It helps if you know in detail where your money goes now.
3. Check in retirement living standards, look at the details and decide if it applies to you - again these are over egged, not least because they are created by a pensions industry that wants you to put more into your pensions.

I then compared them and worked out why they were different, then went around again until I ended up with something I felt very confident with.

michaels

https://forums.moneysavingexpert.com/discussion/comment/82090405#Comment_82090405

I also use the mse tool as a baseline and put in a nominal monthly or annual amount for big lumpy spends, not just phone and pc but TV, white good, kitchen and bathroom refurb, general household repairs (the new roof) and car replacement so our actual typical annual spend is well below this notional annual amount except in the years where we get a new car or spend big on the house.

kimwp

https://forums.moneysavingexpert.com/discussion/comment/82090024#Comment_82090024

I was assuming no real growth and the numbers dramatically changed when i started using 3% and 4% as conservative and real returns (though I'm 15 years off, so small percentage changes are different). I believe these are commonly used by financial advisors, though I'll probably go more conservative the closer I get to dial in some mitigation for sequencing risk.

mrklaw

I planning estimated real values (roughly minus 3% for inflation)

my issue starts to be tracking actuals once I’ve planned. Your balances don’t arrive in neat ‘real money’ amounts it’s just a balance each year

I’ve toyed with having my plan balance updated by inflation eg 3% which then generates an estimated nominal balance - then I enter my actual balance and it gives me a deviation. Maybe it’s enough as a sense check if I’m on track? But the numbers very quickly stop making sense.

maybe simpler for me to revise my budget annually and estimate a personal inflation rate. Not sure really

kempiejon

Chatting in the pub the other week I commented that I was surprised that year on year my net worth is up. I extract an income from my investments so that's nice problem to have. I mused that in a market downturn that number can easily move dramatically in the opposite direction as I'm equity heavy but I am minded to extract a bit more income if the problem persists and buy some treats or IL gilts.