Early-retirement wannabe

hugheskevi

Following Marine_life's lead in updating this thread around his birthday, here is an update from me as my 37th birthday is almost upon me...now got about 7-8 years of work left according to my spreadsheets Thought I'd set out the thinking behind how I've structured my pension saving...the update is rather technical, but might be of interest to those taking a close interest in planning.

The last 5 years of our (my wife and I, no kids) saving have seen most focus on pensions, but that is going to start to change soon. My wife and I now have accrued a combined annual pension of a bit over £30,000 annual income from DB pensions payable from age 60. We also will have State Pensions, and currently have around £130,000 in personal pensions which has not been added to for several years now, and in future will only have small additions due to Annual Allowance issues. Although the amounts are biased in my favour, I don't expect there to be any risk for either myself or my wife to fail to use Personal Allowance or to slip into higher rate tax from drawing pensions in the future. Sadly both my wife's and my DB pensions are closing soon, but will be replaced by a less generous but still DB pension. Fortunately we can both continue to enhance the existing DB pension via additional voluntary (DB) contributions.

A perplexing question I constantly ask is how much to target, in what terms, and what level of uncertainty is tolerable. Currently we spend about £27,000 p/a on things which we will still be spending money on in retirement (so excluding mortgage). The DB pension is CPI-linked both until retirement and once in payment (there is a salary link which could increase its value, but I assume it will only escalate in line with CPI and anything above that will be an unexpected bonus). But if I simply used the real value, my future income relative to average earnings would fall considerably compared to my expenditure relative to average earnings today.

I decided to take a rather cautious approach, and escalate my target income by average earnings until age 70, using OBR average earnings assumptions, which have a rather optimistic level of 4.75% annual growth in the long-run. After age 70 I escalate the target by RPI, again in line with OBR assumptions, and again rather a bit at the high end of expectations at 3.2%.

I think that is plenty of caution, so am very happy that if I meet those income targets from a combination of State and DB income from State Pension age I will have plenty of income post State Pension age, with minimal investment risk. Indeed, I am very likely to have too much, but that is where uncertainty comes in - once I leave work and go travelling for a few years, in the event I needed to return to work my chances of getting a decent paid job at the age of 50 or so after many years not working are going to be poor. Hence I want to be risk-averse in my target income levels.

Also, we can both take the DB income from age 50, albeit with about a 40% reduction based on current rates. Given neither of us will have any other significant taxable income (we will be living from capital) and that the period in life when I will be most stretched financially will be the lead in to getting my DC pensions, it appears very desirable to save more into the DB pension now and then take the actuarial reduction to get it at age 50, thus benefiting from higher rate relief and paying no tax on a decent chunk of it when drawn (this also avoids any possible Lifetime Allowance issues, due to the silly way HMRC calculate DB pension value). Due to Annual Allowance issues we are now both limited in the amount extra we can save, but we are both continuing to buy extra.

The DC pensions will bridge the gap between minimum pension age (which I await HMRC details about how that will change, and any protections which may be put in place...my likely State Pension age less 10 years is 58) and State Pension coming into payment. The most likely scenario is that as soon as I get to minimum pension age I will withdraw enough DC income to just avoid getting to higher rate tax each year, exhausting the DC pots after about 6 years or so based on my projections. As soon as they are exhausted, the second DB pensions (smaller than the primary ones, but not insignificant, but they will not have minimum pension age protection) can be commenced, although this would depend on how much non-pension capital I have and the actuarial reduction rate at the time.

Pensions is only a part of the plan of course, but this got so long I figured the short/medium term parts of the plan and non-pension aspects could wait for another day

kidmugsy

hugheskevi wrote: »

The last 5 years of our (my wife and I, no kids) saving have seen most focus on pensions

I have the impression that the great majority of the planners of very early retirement that I read on the web fall into the category "no kids".

JasonPr

hugheskevi wrote: »

Pensions is only a part of the plan of course, but this got so long I figured the short/medium term parts of the plan and non-pension aspects could wait for another day

Very interesting post. I'd definitely like to hear more!

AlanP_2

kidmugsy wrote: »

I have the impression that the great majority of the planners of very early retirement that I read on the web fall into the category "no kids".

I wonder why :rotfl:

The guy I work next to often refers to "his money pits" coming over at the weekend.

mark55man

I prefer to refer to them as my little cost centres
(Taken from the FT (Ms MoneyPenny's column))

C-dog

Surely they can't cost THAT much (spoken from soon to be dad for the first time)

kidmugsy

C-dog wrote: »

Surely they can't cost THAT much (spoken from soon to be dad for the first time)

Heh! You have no idea.

mgdavid

C-dog wrote: »

Surely they can't cost THAT much (spoken from soon to be dad for the first time)

Ha! I'm a petrolhead and motor-racer, as is my eldest son. We do two-driver endurance races together. It costs me 'as much as you can spare' and then some, as he has a young family and little spare cash. Younger son took up rugby at 10 and played to county level until he went off to uni, that cost a pretty big commitment in time and travel costs too. And I wouldn't have it any other way.
PS - despite the above they do say boys are cheaper than girls!

greenglide

PS - despite the above they do say boys are cheaper than girls!

Well we have one of each (both now left university) and found them equally expensive.

Maybe two boys or two girls would have cheaper but somehow I doubt it!

AlanP_2

3 for the price of 2 in our case - I wish.

Children ARE EXPENSIVE in pure money terms even if you don't go over the top.

Monthly food bill, holidays (limited by school terms), clothes and activities are just the start.

Fortunately life isn't just about money though.

Good luck C-dog.