Over 55s hoping to enjoy a 'golden retirement' are facing poverty

wymondham

Harry_Powell wrote: »

So you're 40 and have paid off your mortgage, neglecting your retirement. Had you instead taken a more balanced approach of paying into your mortgage over the full 25 year term while also putting money into a pension you would reach retirement age in a much better financial position than this bonkers 'crash diet MFW' approach where you blitz the mortgage and neglect everything else.

If you and I started work at the same time and retired the same time and you blitzed your mortgage and started a pension at 40, and I left my mortgage to run it's course and started a pension at age 20. I'd have 20 years of investment and growth.

When we both turned 65 and retired, we would both be mortgage free and we would both receive the same state pension. The difference would be that I would have a much larger personal pension - unless of course you decided to blitz your pension, but you'd have to put much more money into it than I have to and the net effect would be that you scrimped and saved to blitz your mortgage and get it paid off and you then scrimped and saved to fill up your neglected pension pot and over the same period I would have quietly paid into both (and had a better lifestyle) and ended up in exactly the same position as you.

The reality is that after reaching age 40 and becoming mortgage free after a period of scrimping and saving and doing without, it's highly unlikely you would want to embark on another 20 years of scrimping to fill a pension. Indeed, what a crappy life you would have had to have the same net result as someone who pottered along and simply paid into both.

Note quite, and you've made lots of assumptions in your summary of my life ... I have had a basic pension from when I started work at 18, but like most of that age it's nowhere near enough to have a realistic retirement. I decided to work on the mortgage as this is a debt which I wanted to clear and rates were pretty high (well, 'normal' back then!) - I did'nt scrimp and save like mad, just got rid of bad endowments and sold shares which were on a nose dive and did'nt waste money. You have a choice to pay and how much to pay on your pension, not quite so with a mortgage so I wanted to have this greater flexibility in later life. I now pay a considerable amount to a pension, which I can change or even stop altogether if circumstances alter...

How many mortgage interest payments have I now saved that I would have paid doing this your way??

Everone does this their own way, sure there are many advantages to paying a considerable pension earlier than later, but I decided the mortgage should go first... I dont see anything bonkers in doing this at all...

Harry_Powell

PasturesNew wrote: »

I can't see that!!! However much would one have to save to get that? That's about 1.5x median salary for a full-time worker.

With £6k + £4k out of the equation, it'd take an ISA income of £30k/year, at 5% interest (say), that'd mean having squirrelled away £600k. So far, in my entire life, I've earnt/actually had in my hand under half of this vast amount.

I got my first ISA in my late 40s, ONLY after I'd sold my house ... never had any money before, never had enough left over for savings.

Given that we are now allowed to save upto £10k in an ISA and this will only increase over time, it's not inconceivable for someone to be able to salt away enough to provide a £30k income, especially if you're prepared to take income from the capital as well as the interest. If you consider that you're liekly to want more cash in your 60's and early 70's than you would in you late 70's onward, you could taper down the capital accordingly.

I was 24 when I started my first ISA. I'm not allowed to receive my state pension until age 68, which gives the capital in that ISA 44 years to grow, and it's already gained over 10% since I've had it.

Harry_Powell

wymondham wrote: »

I did'nt scrimp and save like mad, just got rid of bad endowments and sold shares which were on a nose dive and did'nt waste money.

It's never a good idea to sell shares and endowments after the market has taken a nosedive. You simply miss out on the recovery. It's closing the door after the horse has bolted. Buy high, sell low.

I have noticed this a lot with people who condemn pensions - they have a crappy investment strategy, they see a crash and think only of the money their existing investments have lost and not the opportunity to buy shares cheaply, they take no interest in their investments and they put £200pm month away for the whole of their lives and expect it to fund a £40k per year lifestyle.

No wonder they have such a poor view of pensions!

silvercar

I have noticed this a lot with people who condemn pensions - they have a crappy investment strategy, they see a crash and think only of the money their existing investments have lost and not the opportunity to buy shares cheaply,

You can apply the same logic to houses. NO point selling out at a low point as that just crystalizes the loss. The crash also represents a buying opportunity.

silvercar

wymondham wrote: »

Everone does this their own way, sure there are many advantages to paying a considerable pension earlier than later, but I decided the mortgage should go first... I dont see anything bonkers in doing this at all...

The point is that investing in the pension earlier means your money has longer to grow. Getting rid of the mortgage first is a low risk strategy in terms of never running the risk of losing your home, but if your serious about investing for your pension you will have money earmarked for both.

wymondham

silvercar wrote: »

......if your serious about investing for your pension you will have money earmarked for both.

Very true and I wholeheartedly agree with you, but my point is how many younger generation in this day and age can contribute to both a mortgage and a (realistic) pension ?

Thrugelmir

Saving is a lifestyle choice.

silvercar

wymondham wrote: »

Very true and I wholeheartedly agree with you, but my point is how many younger generation in this day and age can contribute to both a mortgage and a (realistic) pension ?

My point was that, rather than zealously try and get rid of your mortgage in 5-7 years, it would be better to make pension payments from the start and pay off your mortgage in 10-15 years. Costs are the same but you will benefit by a greater pension.

Harry_Powell

wymondham wrote: »

Very true and I wholeheartedly agree with you, but my point is how many younger generation in this day and age can contribute to both a mortgage and a (realistic) pension ?

Now we get to the nub of the issue. What is being discussed isn't a choice between paying a mortgage or having a pension, it's OVERPAYING a mortgage or having a pension.

Fair enough if money is so tight that a person can barely afford the necessities never mind contribute to investments; I'm finding this at the moment after just having purchased a house. However, I'm assured by family and friends that it does get easier after a couple of years. It's at that point where a person makes his financial decision of whether to use extra disposable income to OVERPAY a mortgage or to put it into a retirement plan.

My position is that the person should leave his mortgage to run it's course and to put the extra money into a pension plan. This will result in a retirement where you're mortgage free and have a pension. Whereas just overpaying on a mortgage gets you mortgage free and either a diminished pension, a similar pension that has taken much more invested capital to fund, or no pension at all.

Remember, people rarely stay in their first house so you can easily imagine a scenario where someone overpays on their first house and gets close to paying it off, then moves to a second house, overpays on this one and then moves to a third, then overpays on that one and moves to their fourth, yadda yadda. At the end of this, they might be mortgage free in a substantial house but have no money in a pension and no time to invest it. They're then relying on downsizing to fund their retirement. All of their wealth is now invested in a single illiquid asset class.

wymondham

Thanks chaps. I'd be really interested to see what percentage of 20 somethings have a pension - I think it would be quite low?? (I remember being that age thinking I'd be dead by the time I was 40 due to old age!!).