Pensions Planning: The NUMBER

Gatser

Richard68 wrote: »

I'm 43 years old and i have a Army pension of just 8 years, plus a Tesco's pension of 3 years not much. So where do i begin to get myself ready for retirement.

Richard
Most of us started like you...with little knowledge, but keeness to learn and better ourselves as a result.
You probably need to talk to a few IFA's, but I would suggest that you do not commit to any of their proposals until you learn more.
Some IFA's are fantastic, others Rubbish! The trick is knowing which is which!

Basic questions to ask yourself to start with:
1. How much do you have in Savings & Pensions now?
2. How much (and when) do you want/need to spend in "retirement"? (This is your NUMBER!)
3. How much will you need in savings/pensions to fund your NUMBER? (2)
4. How much do you need to save (alongside investment returns) to get from (1) to (3)

Put all this down on a spreadsheet to see if it "adds up"
It will help you see what is achievable and if you need to save more to get to your desired retirement income

Good Luck.... Oh....and KEEP ASKING QUESTIONS.:T

Rainmaker_uk

Gatser wrote: »

That's only 5.3%
What about repair costs?
That does not seem a great return on investment, but perhaps I am missing something?
I think I would want around 7%+ .... with any property value increase as cream on the cake...:T

It is fine for me - rent covers the mortgage so the mortgage is paid by tenants. 5.3% is a pretty good return especially when you consider the capital repayment and capital appreciation (although may be a few more years for this to go up again..)

The benefit is more to do with the fact that apart from the initial capital purchase injection the rest is made up of other peoples money. The tenant's money pays the bank's money and I am left with an asset with both a capital value and £9000 pa future rental return (today figures) for very little outlay. For example to earn 7% from a £170k ISA investment I would need to actually have £170k or have invested a large sum in a relatively sucessful ISA - to do the same with the investment property I need have only invested circa 10% plus ongoing costs. The rest of the captial is other people's money.

Yes there will be costs for repairs but these are generally fairly low and I have a fund to cover void periods and repairs so fingers crossed should be ok... This fund will also cover interest rate rises (the great unknown)

It would be nice to get an even higher return but considering when this was bought I think it's working out ok. For the next one I will be looking for a real deal - possibly a repo.

Loughton_Monkey

Richard68 wrote: »

I'm 43 years old and i have a Army pension of just 8 years, plus a Tesco's pension of 3 years not much. So where do i begin to get myself ready for retirement.

Firstly, read this whole thread to get a 'flavour' of all the aspects involved. Recognition of the issue is the first hurdle, that you have probably already jumped.

You can get a very rough estimate in today's values, by this simple approach. [Not totally accurate but better than nothing].

1. Write down the current State Pension you think you will get in today's values.
2. Add on the current estimate of your Army Pension (I assume it is a FInal Salary?).
3. Calculate the size of your Tesco Pension pot. Calculate 6% of this (which will approximate to the current value of the annual amount that will supply).

These three figures will probably come out at a much lower figure than you think you will need to maintain yourself in retirement. So now look at your current net earnings. Start off by saying you will live on 90% of that figure. So now take the remaining 10%. Add on 25% (for the tax relief), multiply by 12 (for the annual figure saved in a pension). Then multiply by the number of years to retirement.

That will give you the rough size of the pension pot that might build up (today's values). Again, multiply it by 6% for the annual pension.

Is this enough? I strongly suspect not. But now it's easy, then, to assume living on 80% of net income - which doubles your pension....

Somewhere, hopefully, is a 'happy medium' which represents what you feel is the optimum balance between (a) living on less than your income, and (b) taking a drop in lifestyle at retirement.

Of course a far more 'robust' estimate could be calculated using a spreadsheet, but the above approach will start to give you a 'ballpark' size of your challenge.

As a sideline, I would suggest that if you can find what you believe to be the 'optimum', then I would strongly suggest keeping good accounts and trying as hard as you can to achieve the goals you have set for yourself.

Rainmaker_uk

You got me thinking so I have done some sums (may be wrong...)

Assumptions:
Assuming no capital growth in the house value
Inflation at 2.5%
25 years time period
ISA growth at 6% pa consistently for 25 years


House value = £170k or £315k in 25 years
15% capital outlay on mortgage = £25,500
10% costs = £900 pa = £22,500

£70k capital outlay as a lump sum in a 6% pa ISA = £312k or circa 170k in todays money.

So to even match the property without capital appreciation and without costs you would need £45k more initial capital and need 6% pa growth year on year.

To match the property without capital appreciation but with 10% pa costs the difference would be £22k (although this does not take in to account the pro rata over 25 years)


Taking Capital Appreciation in to consideration:

Were we to take historical data that shows that house prices double every 7 to 10 years then and take a conservative 2 x growth over the 25 years then we would be looking at a real value of £510k (minus inflation at 2.5% pa) = £270k in todays values. Therefore providing an additional £100k in capital value (in real terms).

5.3% return on this would be £14,310 which if we were to take it as a % of todays value would be 8.4%

Like I said I am no expert at figures and this is all pretty new to me so would appreciate your thoughts.

Gatser

Rainmaker_uk wrote: »

You got me thinking so I have done some sums (may be wrong...)

Assumptions:
Assuming no capital growth in the house value
Inflation at 2.5%
25 years time period
ISA growth at 6% pa consistently for 25 years


House value = £170k or £315k in 25 years
15% capital outlay on mortgage = £25,500
10% costs = £900 pa = £22,500

£70k capital outlay as a lump sum in a 6% pa ISA = £312k or circa 170k in todays money.

So to even match the property without capital appreciation and without costs you would need £45k more initial capital and need 6% pa growth year on year.

To match the property without capital appreciation but with 10% pa costs the difference would be £22k (although this does not take in to account the pro rata over 25 years)


Taking Capital Appreciation in to consideration:

Were we to take historical data that shows that house prices double every 7 to 10 years then and take a conservative 2 x growth over the 25 years then we would be looking at a real value of £510k (minus inflation at 2.5% pa) = £270k in todays values. Therefore providing an additional £100k in capital value (in real terms).

5.3% return on this would be £14,310 which if we were to take it as a % of todays value would be 8.4%

Like I said I am no expert at figures and this is all pretty new to me so would appreciate your thoughts.

What is the examiners question here please?
Just to check your calculations?
Are you seeking to use property value as part of your retirement income?

Gatser

Gatser wrote: »

The NUMBER is how much income you need to "live comfortably"
So What's your number?
Very important for pensions planning, to know what you are aiming for.

My Number? (for a couple)
I calculated: £22,000
based on
Food £5,000
Car/transport £5,000
Bills/Utilities £4,500
Holidays/Leisure £4,500
Clothing/Cash/Xmas/Other £2,000
Repairs/replacements £1,000

One year on ....a different government....always a good time to review your NUMBER.

I am sticking with £22k then anything we achieve as income over that can pay for a few treats....extra holidays etc.

Inflation has not pushed up our NUMBER over the last 12 months, but I foresee a different scenario in 2011.

What are your thoughts for 2011?

How has your NUMBER changed since Xmas 2009?

RenovationMan

My number is £40k a year and I wish to retire at age 65. At that age, I am currently forecasted with an income of £8268 from my private pension, £24167 from my company pension and I intend downsizing from my current house, which is worth £450k in todays prices to a stone cottage valued at around £250k (again, todays prices), netting me £200k which could earn £7728 in an annuity.

I therefore have £40163 in retirement income accounted for, provided I continue to work with my current company until age 65 (I have a career average pension) and I pay off my mortgage before selling the house. A tall order, but its good to know that my retirement finances are within my hands and achievable.

I will also have state and SP2 pensions to add to the above, so the target should be achievable when I hit age 67 (or whatever the age will be when they finally let me retire!!)

peterg1965

RenovationMan wrote: »

My number is £40k a year and I wish to retire at age 65. At that age, I am currently forecasted with an income of £8268 from my private pension, £24167 from my company pension and I intend downsizing from my current house, which is worth £450k in todays prices to a stone cottage valued at around £250k (again, todays prices), netting me £200k which could earn £7728 in an annuity.

I therefore have £40163 in retirement income accounted for, provided I continue to work with my current company until age 65 (I have a career average pension) and I pay off my mortgage before selling the house. A tall order, but its good to know that my retirement finances are within my hands and achievable.

I will also have state and SP2 pensions to add to the above, so the target should be achievable when I hit age 67 (or whatever the age will be when they finally let me retire!!)

Sounds like a good position to be. Downsizing house, however, tends to release less capital than you originally plan. Take into account Stamp duty/conveyancing/moving costs/Estate Agents fees, as a minimum and that will begin to eat into your captital.

The other point I would make is that for a lump sum of £200K, the last thing I would be doing at 65 is to buy an annuity, particularly with your other pensions making your position very comfortable. I would invest the £200K and drawdown an income from it. Giving to an insurance company in return for an annuity (at a poor rate) is akin to throwing most of it away. Although, I do recognise that every individual is different and that 'a one size fits all' approach isn't always appropriate.

Marine_life

RenovationMan wrote: »

My number is £40k a year and I wish to retire at age 65. At that age, I am currently forecasted with an income of £8268 from my private pension, £24167 from my company pension and I intend downsizing from my current house, which is worth £450k in todays prices to a stone cottage valued at around £250k (again, todays prices), netting me £200k which could earn £7728 in an annuity.

I therefore have £40163 in retirement income accounted for, provided I continue to work with my current company until age 65 (I have a career average pension) and I pay off my mortgage before selling the house. A tall order, but its good to know that my retirement finances are within my hands and achievable.

I will also have state and SP2 pensions to add to the above, so the target should be achievable when I hit age 67 (or whatever the age will be when they finally let me retire!!)

So how close are you - i.e. are you 34 years old or 61?

Gatser

RenovationMan wrote: »

My number is £40k a year and I wish to retire at age 65.

Around £40k must be an "ideal pension income" as it avoids paying higher rate tax in retirement.
What a shame to think that all that hard saved cash is now suffering a 40% tax charge.