Early-retirement wannabe

michaels

hugheskevi wrote: »

Indeed, but the question what is what amount will be equivalent to £28K now, it isn't as simple as it seems.

The difference is between today's money terms and today's earnings terms - there is a significant difference between the measures over extended time periods. Planning for a number in today's money terms over a long period will mean a significant deterioration in the purchasing power of that amount relative to average earnings over time.

Traditionally planning was simple due to final salary schemes - you automatically ended up with half or two thirds of whatever your earnings at retirement may be. Taking the example here, 28K in today's price terms is pretty much 100% of average earnings currently, but will only be about 57% of average earnings in 25 years time. In constant earnings terms, that £28K in today's price terms will have the purchasing power of about £16,000 at age 68 (in constant earnings terms).

Or to put it another way, that £28K in today's terms will roughly be what you would expect a full-time minimum wage earner to receive when the OP is aged 68. The question is whether someone planning a lifestyle based on current average earnings now will be happy to live on an a minimum-wage level lifestyle in the future.

Constant price terms and constant earnings terms both have their place, it is important to appreciate which is appropriate to use for different planning assumptions. Personally my household after-tax number based on current expenditure is slightly under £28K (aged 40). I plan to have a household income of £52,000 (in today's price terms) at age 68, which is £28K today in constant earnings terms at age 68.

Good to see that someone is optimistic that real wages will start growing again - if you just look at the last 10 years then that seems a pretty optimistic assumption.

hugheskevi

Good to see that someone is optimistic that real wages will start growing again - if you just look at the last 10 years then that seems a pretty optimistic assumption.

A bit over a 4% decline in real terms over last 10 years (to Oct 2017, last published data), but in the context of the last 200 years, it is a pretty normal assumption.

For long term planning, ie at least 5+ years, I'd consider any assumption other than real earnings growth as unusual.

stoozie1

hugheskevi wrote: »

Planning for a number in today's money terms over a long period will mean a significant deterioration in the purchasing power of that amount relative to average earnings over time.

Your point is well argued, I'm just missing something.

If my annual costs over the last 5 years are not rising above inflation, and the DB pensions are index-linked, and my DC contributions contain an inflation-linking allowance, why would I not be right to assume this is safe?

IanSt

stoozie1 wrote: »

Your point is well argued, I'm just missing something.

If my annual costs over the last 5 years are not rising above inflation, and the DB pensions are index-linked, and my DC contributions contain an inflation-linking allowance, why would I not be right to assume this is safe?

I think they may have been worried that 'lifestyle creep' could have an impact.

'Lifestyle creep' the ability to continuously find new ways to spend the additional money that a pay increase bring in. E.g. do you find that you're buying new cars every few years instead of running them into the ground as you used to, or taking multiple holidays abroad instead of just the one, etc, etc?

In your case the final salary pensions will certainly mitigate this, but you may want to up the final DC target if you feel that you could be prone to this as otherwise you may find that you have to give up some of the new ways you've found to spend your money over the next 15 years.

hugheskevi

If my annual costs over the last 5 years are not rising above inflation, and the DB pensions are index-linked, and my DC contributions contain an inflation-linking allowance, why would I not be right to assume this is safe?

Over the last 5 years earnings have increased by 10.7% whilst prices have increased by 7.4%, so there hasn't been much difference between them. This has been an exceptional period, and in more normal times you would expect the gap between the two to be more like 13 percentage points than 3 percentage points.

Some products will be more inclined to increase in line with earnings. These would be where labour is a large part of the product, for example restaurant prices. The more of those products you plan to consume, the more concerned you would be about planning an income in constant earnings terms. Also, your 'basket of goods' will change over time. You probably have zero demand for caring services now, but late in life that may change, and that is a product where labour is a significant input. Although by the time you need non-trivial amounts of care, a lot of other expenses will have dropped away.

A constant price terms plan will enable you to live on the same quality basket of goods as today, but in the long-term you may want more than that. For example, someone planning in the 1980s would have little thought of computers, internet costs, television subscriptions and such-like in their basket of goods. A plan to keep purchasing power in line with change in average earnings ensures that quality of life will be preserved in terms of lifestyle to those with comparable income levels so protects against that, at least to an extent.

It is perhaps most important for those planning very early retirement. To take an extreme example, assume someone is planning to retire at age 45 and undertakes detailed spending analysis in the 5 years prior to age 45 and concludes they can retire, based on constant price terms. Their friends, who are likely to be of a similar age, will continue to work until about 60-65 or so, and so their incomes rise in line with earnings (probably slightly higher than average earnings, as average earnings is affected by the compositional effect of high earners dropping out of the labour market and being replaced by lower waged younger cohorts, which doesn't happen at individual level). If the person who retired at age 45 is happy with their lifestyle in constant price terms, then all is fine. That might be someone who wants a quiet retirement, lots of walks in the countryside, etc. If however they aspire to the lifestyle of their friends, they will be increasingly disappointed. And if they see their retirement as being full of meals out with friends, they might end up being disappointed. Their friends are more likely to be able to afford more holidays, access to better and new technology and so on. So for some, this would not be an issue, for others it would.

You can see the effect in pensioner poverty rates. Historically pensioner incomes have tended to increase in line with prices once in payment. For most of the period between 1979 and 1997 State Pension increased in line with prices once in payment, as did DB pension income (or even by less than inflation, depending on scheme rules). Poverty levels are measured by whether a pensioner's income is less than 60% of median household income. As household incomes increased by more than prices, pensioner household incomes were eroded relative to all household incomes even if they were increasing in line with prices, so that someone who may have retired on a reasonable income at age 60 was below the poverty line (or relative low income as it is more technically described) by the time they were in their 80s, and so pensioner poverty is highly correlated with age.

The answer is likely to be different for every individual, based on their personal preferences so I don't think there is a 'right' answer about the best approach to use. I think it is dangerous to plan in constant price terms over a long period as a default approach, rather than as a conscious decision based on careful thought about their individual circumstances. Personally, I plan on my number (based on my current expenditure patterns, excluding things like mortgage, pension savings, etc which I won't have after retirement) increasing in line with forecast average earnings growth to age 70, and then by CPI. I considered lot of variants, and I think this is a reasonable and cautious approach which is unlikely to leave me disappointed. Having said that, I do expect to probably have too much in retirement, which is inefficient, but not a bad problem to have.

westv

More rumours of changes at work this year which might, or might not, lead to redundancy.
If I were to be released I'd end up with total cash (including what I already have) of £110,000. A large portion (£79k) of that is due to pay off mortgage balance in 2020 when fix ends. As my wife is going to carry on working for the next several years I believe I'd need around 18k a year until 2020.
If it comes to it I can't decide whether I should:-

Take the 18k purely from the cash until 2020 and let the pension pot (currently around £310k) grow. Come 2020 reappraise.

Take 18k income straight away from pension pot and cash

I'd need to take some from the pot anyway in 2020 to fully cover mortgage lump sum.

gadgetmind

Whether you draw on the pension might be a tax-based decision as it makes sense to use your personal allowance whenever you can.

Terron

hugheskevi wrote: »

someone planning in the 1980s would have little thought of computers

Some of us might have I bought my first in 1980 (a TRS-80) and was on my third by the end of the decafe.

gadgetmind

Terron wrote: »

Some of us might have I bought my first in 1980 (a TRS-80) and was on my third by the end of the decafe.

I bought my 1st home computer in 1978 at age 15 and GOK how many others by the end of the 80s as I did a degree in Computer Science a few years later and then started my own software company while at university.

Of course, nowadays, computers are so cheap that they are effectively free.

k6chris

gadgetmind wrote: »

I bought my 1st home computer in 1978.

Science Of Cambridge MK14, with 256 bytes of memory - I win :rotfl:

https://en.wikipedia.org/wiki/MK14