Pensions Planning: The NUMBER

chris_m

Marine_life wrote: »

....and therein is my point i.e. its impossible to generalize that someone needs two-thirds of their current salary. Really the only way to know what you will spend in retirement is to sit down and plan a detailed budget which reflects where you are today plus / minus the changes that retirement will make.

Very true - I have a forecasting spreadsheet which I used to determine whether or not (and when) I could potentially afford to retire. It was helped by my employer proving a very good pension modelling tool so I could include the correct pension amount. I forecasted all my income and expenditure right out to my 85th birthday, including various rates of increase for inflation, and added an increase in discretional spending of about 50% on what I have been spending. It all came out with a positive balance at my 85th birthday so I quit in September.

Without that forecast, I wouldn't have had a clue and would probably have still assumed that I'd be working until 65.

Looking at my gross income alone, my income appeared to be around 1/3 of my previous income - but, taking into account no tax, NI nor any further sharesave contributions my actual takehome income is actually around half so much better. Once I've moved to my retirement house, my need will be pretty simple so I'll be able to cope just fine.

Actually, I discovered a slight faux pas in my spreadsheet the other day. I'd doubled household expenditure to cover the period between buying the new place and selling the old, but I'd omitted to halve it again when the old place is sold :embarasse - so things look even more rosy than I'd thought

Wentthedaywell?

atush wrote: »

but will you really need more? If you are no longer paying a mtg? No longer paying for NI? They should come to more than heating and the odd pint down the pub? would your income exceed your PA, ie will you pay any income tax?

So go on and work our your 'number'?

My issue currently is that I'm oversaving - two thirds of my salary goes on the usual, plus AVC deductions. I also try to save a bit of my take home money. Frankly, that is too much if I want a full social life and proper holidays. I'm living this Scroogey life just for my last couple of years to bump up my savings. Once I retire, I'll not save (much) and will be spending my income, and sometimes my savings, to fully enjoy my free time.

My index linked pension should give me 25% more money than my current take home pay, plus I'll have the SP 6 years later. I'm looking at the possibility of flexible retirement, working 2 days a week which would give be 40% of my current income for as long as I can stick it (I suspect not for long).

So I'm fortunate that I should be better off retired, definitely if flexibly, because I'll not be saving. A couple of years of parsimony, though Dullsville, has been good practice in cutting back.

Wentthedaywell?

Marine_life wrote: »

The biggest decision you will need to make is how much "buffer" you will need to lead a comfortable retirement where you don't have to worry about (1) Whether the money will run out (2) Whether you have enough to pay for the unexpected.

As an aside, actually in my experience (of a year living in Australia) is that their living expenses, particularly for food, are generally higher than those in Europe.

Yes, the buffer is the biggie, and hard to estimate as health issues, care fees etc, hopefully a long way in to the future, are imponderables. I'll have an index linked pension that should give me more than my current take home pay (as explained in my previous post).

I've been concentrating savings. Totally arbitrary, and working backwards from what I can save in the limited time, I want 5 years' take home money as savings. In addition, I want another £20,000 to get a new small car and pay for a course. I'll not get an inheritance and I'm single so it's all down to me, but I'll get a lump sum on retirement so with a bit of belt tightening I'm hoping to achieve this.

Thank heavens my pension was sorted for me without any of my input when I was young and daft. I wish I've saved more consistantly though my working life rather than this last minute spurt though.

Funnily enough, I was speaking to an Aussie yesterday and he said exactly what you did, Marine Life - more expensive and less choice, and property isn't cheap either.

gadgetmind

We've already got 3 x annual "essentials" in place as a cash buffer, and I intend to maintain that, ideally index linked or above.

As for less income after retirement, I work net for everything. We don't have a mortgage (only than teeny one which is effectively for daughter) so my monthly take home is the sum that I'm looking to maintain. I then compare this to the after tax income that our pensions and investments can generate.

chiefie

One worry for me is that once you are retired there is little you can do to deal with government tinkering, e.g asking pensioners to pay NI before their SPA, allowing local councils to have above inflation increases (believe me this is coming!) etc.

saver861

gadgetmind wrote: »

As for less income after retirement, I work net for everything.

I think its only sensible to work net in everything. I think that is where the two thirds rule gets confuddled.

I think the general synopsis is correct though - retirement is in three phases. People spend more in early retirement, less in middle and more in later retirement.

There are many who say they will spend it all and the 'last cheque will bounce'. I'm intending to be in that bracket - I'm just not sure how to work out the equation!!

gadgetmind

chiefie wrote: »

allowing local councils to have above inflation increases

I have no memory of a < or = inflation rise in council tax. They seem to have *zero* control over their cost base, which is no way to run any kind of organisation.

rpc

gadgetmind wrote: »

I have no memory of a < or = inflation rise in council tax. They seem to have *zero* control over their cost base, which is no way to run any kind of organisation.

Come to Scotland where council tax has been frozen for years, the effect being that councils are now making cuts even the bluest Tory would cringe at.


I have 20-30 years to go and, while I think I know what our number is, I shudder to think how much mucking about governments are going to do in that time.

gadgetmind

rpc wrote: »

Come to Scotland where council tax has been frozen for years

Sounds great, and I'd be inclined to endure some cuts if that's what's required to deliver this, but I'd cringe if they stopped emptying the bins, policing the streets, and fixing the potholes.

YellowStarling

Happy New Year all, I'm 26 and have been researching, planning and configuring my retirement security in earnest for the last 6 months now, and have found this thread to be one of the most interesting reference points, so thank you.

Taking every expenditure I can think of into account (utility bills; home and buildings insurances; dental costs; charity donations; holidays; phones; fuel (reduced from no work commute); car insurances, road taxes, services and MOTs (OH and I would want to retain two cars rather than reduce to one as we would both want to be independent of one another); gifts; disposable income for hobbies (increased in retirement), social, eating out, clothing and savings for repairs, maintenance, one-off purchases, etc.), I have arrived at a joint (for OH and I) 'number' of £30k per annum in 2016's money, of which £16k would be my sole input.

I aim to retire at 60 (2049), wherein the number above would need to be £93k and £49k respectively, based on the first assumption of the following set I've used in my model (Excel). Based on assumptions 6 and 8, I reckon these numbers will then be a whopping £253k and £135k respectively in my final year. In total, I expect to require £4.81m jointly in retirement expenditure, of which I will provide £2.57m.

Assumptions used:
1. Average of 3.5% inflation rate 2016 - 2079
2. Average yearly increase in pension contributions/salary of 2.25% 2016-2049
3. Several one-off increases in contributions through student loan repayments finishing at 34 (2023) (+6% reallocated to pension contributions) and mortgage repayments finishing at 52 (2041) (+20% reallocated to pension contributions) - these are also important factors in reducing the need for these to be covered in retirement 'expenditure' - double whammy!
4. Average yearly net growth of pension investments of 4% 2016-2079
5. Target retirement age of 60 (2049)
6. Life expectancy to be 90 years of age (26 now)
7. I have included State Pension support from 68 (2057) as it currently stands for my gender-age population, and have allowed a slightly below-inflation growth of 2.75% on 2015's full allowance of £155 per week (assuming I will be eligible for full amount - have not contracted out during my relatively short working life)
8. Rather less scientifically, for ease (at this point) I have assumed that there will be negligible difference in the size of the reductions on expenditure (as I grow older) on things like travel (holidays), transport (sell the cars), hobbies/social, etc. and the correlated increases in heating/electricity costs from staying in more and eventual health and care costs instead - leaving my 'number' as a flat one for the 30 years of my retirement

Based on existing pension contribution levels and amounts, (plus the future additional reallocations mentioned above), the above models a pension pot of £910k should be achievable, which, based on assumption 1 above, would be worth c.£292k in 2016's money.

I also plan to use existing savings and investments to fund a BTL (at today's prices and markets near where I live, this would provide a 7% yield) at age 35 (2024), whose mortgage repayments should complete at age 60 too (based on 25-year term for BTL mortgage). This would give me the flexibility to support my pension drawdown in retirement through increased rent yield (as no mortgage repayments) or sell the asset at the point being a landlord becomes a drag (if it hasn't always been!).

Overall, when I've modeled the above, after tax, the £910k pension pot from 60 and state pension contributions from 68 should leave me the equivalent of £5.4k short in 2049 (rising to £14.6k in 2079 at 3.5% average inflation) of having enough to meet my planned £2.57m expenditure requirement over 2049-2079.

This additional £5.4k (only £1.7k in 2016's money based on my inflation assumption) could be, I am aiming, bridged by either/combination of semi-retirement (i.e. working a couple of days per week), BTL returns (both increasingly unlikely as I age) or a combination of downsizing to release equity, selling the BTL property as mentioned above, reducing outgoings (perhaps travel, etc.) or from my other savings and investments that I have purposely excluded from my model (as a result of the combination of using part of them to fund my BTL at 35 and the remainder as my safety margin). Having said this, without factoring in this additional support and its compounding effects, I would run out of cash maintaining my £16k sole expenditure somewhere between age 84 and 85, so would need to delay my retirement to 62 to cover myself to 90. On balance, I believe I can bridge this shortfall each year from 2049 to maintain my plan to retire at 60, though could extend it slightly as required nearer the time.

I would certainly welcome any sense-checks on the above from the wiser out there, especially my assumptions 1,2 and 4.

Of course, this thread and my planning over the last 6 months do leave me more comfortable about my decision to chuck such a hefty portion of my salary away into pensions and investments each month, but nobody can absolutely model everything - mine currently does not factor in any children, but we both know we would like them.

Thanks for reading.