Retirement Planning

nookey_bear

Hi

I wanted to run my retirement planning process past you all and get some constructive feedback. I know that some of you have already retired and reading your posts, the majority of you had worked out when you could retire based on expected expenditure, savings (and income from those savings) and pension funds. I also gather many of you used spreadsheet-based projection models of various descriptions. I have to admit I am a great fan of spreadsheets and so have devised my own detailed s/sheet to project forward to retirement age and beyond.

Some basic info on me and OH (as I know you regulars love detail) –

I am 38, OH is 36. 3 kids, aged 7, 6 & 4. Household income post–tax around 38k per year. OH works p/t for NHS, standard retirement age is 60, has good Final Salary pension. I work f/t, retirement age 65, have pension with current employee and another pension into which I have recently incorporated several smaller pensions from previous employment. We both would like to retire as early as possible, with plans to pay off mortgage before I hit 55, and to continue saving for kids (uni fees, weddings, help with house deposits etc) and our own retirement pot.

So this is how I have set my spreadsheet up –

1. 1 column per year, up to me at 90 and OH at 88
2. Column then split into 3 blocks – expenditure, savings, income (& pensions)
3. Expenditure – I have tracked expenditure over the last 3-4 yrs so have a very good handle on where our money goes and have therefore split spend up into the relevant categories (food, utilities, fuel, insurance, socialising etc) On the spreadsheet, I have projected each category forward up to aged 90, taking into account assumed circumstances (ie kids leaving home mid 20’s and so food bill dropping by x%, dropping to one car once retired etc). I have also factored in inflation (using 3% pa for starters but giving me the option of changing this to see impact of higher/lower %)
4. Income – again, projected income forward up to our standard retirement ages, assuming that our salaries will increase by 1.5% pa (again, I have the option to amend this % to see various scenarios)
5. Pensions – I have a good handle on what my projected pensions will give me when I’m 65, and likewise with OH when she turns 60. I have factored in State Pension when we both hit 67 (which I understand will be our Standard Pension Age by then – this will probably change with time anyway!!)
6. Savings – I have a savings plan in place at the moment (split between emergency pot, short term Cash ISA’s, long term Stocks & Shares ISA’s, kid savings, new car fund, holiday fund etc) As well as knowing how much I plan to tuck away each year, I also have a projection of what the likely return on the long term savings will give me once retired (again, based on a conservative x% return which can be altered easily)

So for each year, I have a projection of total expenditure, including savings, plus household income (or pension income), which then tells me if we will have a comfortable year, or tight year, or a year where we need to reduce expenditure or savings (or increase income!) I have even set this summary up in graph form (yes, v sad I know but it helps me see the pinch years and also how our income will change as we move from our working to retirement life)

Obviously as each year passes, I will update that years expenditure, income, savings etc which will then enable me to review the overall plan and make any tweaks if required. Assumptions are another area that I am aware of (I have assumed 3% inflation for starters, using the 3yr RPI rolling average to smooth out peaks and troughs) So this is by no means a rigid plan – it will change as time moves on and as our own situation alters.

There are a few areas that I still need to work on (tax impact once retired, have I calculated the State Pension amount correctly once retired etc) but maybe I will address those matters later in this thread.

The main thing is that we can see very clearly if we want to retire say 5 years earlier than planned and the impact on our (projected) financial position – at least then we can make a valued and justified decision based on that.

I am quite excited now this is set up, as I can now sit and tweak away to bring our retirement ages down. I am certainly a realist (in that the figures wont be tweaked just to give me the answer I want) but I can now afford to start making (tentative) plans for our first Caribbean cruise post-retirement!

Hopefully you all managed to stay with this to the end!! Any constructive comments are very welcome, non-constructive ones will be ignored (life’s too short…!!)

Ta muchly :beer:

Loughton_Monkey

Sounds like you are perfectly along the right lines. Exactly what I did, and it helped me to retire age 56.

Comments:

1. Do a 'sensitivity analysis' by homing in on a particular 'number' [I used the year in which our net worth would reduce to zero]. Change each main assumption seperately and see the effect of deviations from your assumptions. Ensure that each assumption is reasonably 'conservative'. [Technical note: I found putting all the assumptions on a single worksheet to make things a lot easier and clearer]

2. Once you have an entire model with which you are 'happy', then capture these assumptions as your 'pole position'. Then use the results by taking the next year/2 years and break the same figures down to monthly and use these as a sort of 'budget'. I use 'Quicken' to manage my finances, but it is not essential. The main point is that you are then constantly 'learning' and this is very powerful in helping you with an annual review of your main model.

3. I can confirm (after 5 years in retirement) that the amount you need to live on in retirement should be the absolute focus of your planning. Many people seem to approach it from the wrong angle - such as concentrating on 'how much' to put into pensions.... 'what interest rates can I assume...'. Whilst these factors are important, they are not 'central', since to a large extent they can be managed. [What I mean by this is that provided your lifestyle spending, plus other spending, is comfortably below income, then mathematically there is a date at which that same lifestyle spending can be 'sustained' after earned income dries up. Yes, your 'investment policy' both before and after retirement can influence this slightly, but the key driver is your spending needs in retirement.]

4. As a corollary to the above, it is worth wearing 'two hats'. The one 'hat' is that of understanding, managing, and predicting expenditure - before and after retirement. The other 'hat' is that of managing where the surplus goes. This is where your unique mix of pensions, ISA's, long bonds, instant savings rates etc. and their tax/cash flow implications can make a difference. Aim for the 'correct' mix (for you) of assets as at retirement. Remember that pension contributions can still be effective after retirement, as can the new flexible drawdown rules if you tune things correctly.

I must say that the years of planning is useful and gives you the confidence to retire without regret. I still maintain my 'original' plan - more or less - and continue to budget around exactly the same figures. Good and bad years, but overall, over the 5 years, I have successfully managed to 'squirrel away' into 6 figures of 'surplus' - something I plan to dip into for some extra-special treat!

nookey_bear

Loughton

Cheers for your reply and thoughts. Good idea about having all your assumptions on one page, might try that.

In response to your comments by numbered paragraph -

2. I do a monthly finance check on my spend/save situation and then compare that to the annual picture, so I can see if I’m on track or not. I take into account any ‘abnormal’ spends ie new washing machine, large car repair bill, but actually I ‘budget’ for these abnormal spends anyway so they should be factored in at some level.

3. I found that trying to determine what our spending needs in retirement should be is quite tricky. Aside from making an assumption on inflation rate, there are many other factors to consider. For example, I know we spend about £100/week on food – questions like if the kids move out when they’re in their mid 20’s will our spend reduce? Maybe a little but then we might entertain more, and of course we will get weekend visits from the kids so I have decided not to reduce food spend that much, maybe 20-25%. Eating out/socialising might increase when we retire but we don’t know by how much – I know how much we roughly spend at the moment, so I have assumed that ‘level’ will continue into retirement. I have looked at each number in detail, but I guess overall it’s the annual spend figure I will focus on, compared to earned income and then retirement income.

4. I agree that the mix is important. At the moment I see my savings as a certain amount of butter that I need to decide onto which pieces of bread to spread it, and how thinly or thickly depending on the type of bread it is. As time goes on (ie mortgage paid off, salary changes/bonuses) that pot of butter will change and so will my spreading decisions.

I might need to tap your old (no disrepect, perhaps that should read experienced?!) grey matter with a few areas I need to work on if thats ok?

Loughton_Monkey

I noticed that after a certain age - (about early 40's) - when, lucky for me, my income was starting to rise substantially, my spending went up a bit, but 'plateaud' at a level where I was quite happy and felt no need to spend more for spending's sake. I also noticed that the 'mix' of spending was different every year - no particular trend - but it just seems that it was automatic not to buy an expensive new car if you have just splashed out on a mega-holiday - and vice versa.

So in the end, I planned on spending the same amount (inflation proofed of course) in retirement. This has turned out to be 'spot on', even though my 'mix' is totally at variance with what I had assumed. Last year, for example, we splashed out £10K on doing up our 'tired' bathroom. Had our usual 'good' holiday but naturally didn't dream of any other 'major' expenditure that year. This year, no such expense, and so splashing out on an extra holiday for our anniversary....

I suspect the key to it is 'attitude'. Those, like me, who have a 'very good' lifestyle but automatically spend less than income will find they can do the same after retirement without blowing the budget. There are others [and I know several of them] who work to the maxim 'Have money. Must spend it.'. This type of person inevitably comes to grief.

Happy to share my experience if you PM me.

nookey_bear

As I continually tweak my retirement planning spreadsheet, I have noticed that I need to refine my pension part of it. Whilst I know what my various pension funds are forecasting to provide me, I am a little confused as to how to actually use this forecast. Hopefully someone slightly more knowledgeable than me can advise on the following –

1. State Pension – I realise the rules will probably alter many times before I hit 67 but for now I am basing my entitlement on what is in place now. I get a annual forecast which states that I will get £155.85 per week as of my retirement date, in todays rates, and then states that this figure will increase each year with either growth in average earnings, growth in prices, or 2.5% (whichever is the highest) So am I right to simply take this figure and add 2.5% for each year up to my retirement age? Once retired, does this figure still increase by 2.5% per year?

2. Work pensions – I receive annual statements for my 3 funds (one current and 2 from previous jobs) -
- Current fund (defined contribution scheme). I put in 6% of salary, employer 8%. Total value £4375, it then tells me that my estimated pension in todays prices when I retire will be between £5,000 to £6,000, depending on return % & earnings increase rate. So do I use this figure as my starting point when I retire or, as with the state pension question, do I have to apply an inflationary increase per year from now to retirement age? I suspect I use the £5/6000 figure from retirement age but I wanted to double-check. I think the ‘todays prices’ confuses me as I never really grasp what that means (I learn a little more every day!)
- 1st previous fund (combination of protected and non-protected rights). No current contributions made. Total value £13874, estimated value of payments paid into plan in todays prices £35700, which then gives an estimated yearly pension of £1329. Again, I assume as it mentions todays prices, this is the figure I need to use from retirement, and then increase each year into retirement by ie 2.5%?
- 2nd previous fund (final salary pension). My estimated pension is just under £2,000 per year, so I assume I use this figure from retirement. The statement then says this figure will be increased by 2.5% per year

Lots of details I know but I guess the main question is from the pension figure given, do I use that from retirement age or do I apply a inflationary factor?

3. Lastly, I haven’t factored any tax considerations into my calculations. I know that my wife and I will have a defined tax allowance amount, after which any income (pensions, savings etc) will be taxed. Can anyone tell me what this current tax allowance amount is, and any tips from those already retired how they have factored this outgoings into their calculations?

Any assistance gratefully received!!

Ta muchly

Techno

Hi Nookey Bear
Been thinking about doing this myself so shall watch your thread with interest. Unlike you I am not very good with spreadsheets but intend to get better if it means retiring early. :A
Re the tax comment - Not sure what the tax situation is exactly but I believe once you get over a certain amount you start to lose your larger 'older persons' tax allowance therefore we are trying to utilise our ISas to their full extent as when R day comes, none of the income from these will need to be declared (unless the rules change)

nookey_bear

Techno wrote: »

Hi Nookey Bear
Been thinking about doing this myself so shall watch your thread with interest. Unlike you I am not very good with spreadsheets but intend to get better if it means retiring early. :A
Re the tax comment - Not sure what the tax situation is exactly but I believe once you get over a certain amount you start to lose your larger 'older persons' tax allowance therefore we are trying to utilise our ISas to their full extent as when R day comes, none of the income from these will need to be declared (unless the rules change)

Cheers for your tax comments. We too are tying to max out our ISA entitlement to keep the nasty taxman away as much as possible!

I looked for an online planning tool but none seemed to meet my needs, so I started with a blank spreadsheet and it just grew from there. I know roughly how much I spent on what, and I obviously knew our household income, so that formed the base of my spreadsheet. I plan to update the annual spend each year, along with income, savings etc so I build up good honest data for which I can project into the future. BEWARE - it does get very addictive constantly reviewing and tweaking the figures but if it means I can retire earlier than planned, then it will be time well spent. Now if I can the pension side of things sorted, then the jigsaw will be complete

Loughton_Monkey

nookey_bear wrote: »

Any assistance gratefully received!!

Pension funds can be estimated.

Your model should contain some sort of inflation assumption. I tended to use 3% (but as we know it is running higher than that currently).

State Pension: As we all know, they have pulled a fast one and we will all get CPI inflation generally. So for the sake of estimating, I would just assume the pension goes up with 'inflation' (CPI). [When I did my model, inflation tended to mean RPI. I have a 'spending fade' assumption in my model. It was meant to work out the effect of me spending, say, 1% less per year as I get older. It is now a bit more relevant to put a negative figure here - to reflect that spending will increase each year in 'real' terms because CPI probably understates it.]

Money Purchase Pensions: You can effectively include 'Serps' pensions in this category. Here, you simply calculate assumed 'equity growth' (which should be one of your assumptions. I used inflation +2%) based upon current value. Factor in any new contributions between now and retirement. At retirement, assume an Annuity Rate:

https://secure.alexanderforbes.co.uk/vortex/

This should be accurate enough for estimation. Factor in the 25% tax free lump sum if taken.

Final Salary Schemes: Here, you can generally take the actual pension last quoted, and then look at scheme rules for what inflation provision is provided. In my case it was RPI (max 5%) for my main one. Yours seems to be 2.5% flat? Usually, the same degree of escalation applies both before and after vesting.

Tax Allowances: Just look here:

http://www.hmrc.gov.uk/rates/it.htm

Hope this helps

Marine_life

You will know from my "early retirement wannabe" thread that I am well into this stuff.

You sound horribly well organized compared to me!

The only comment i would make is do not be too analytical because as you get older you just don't know how you will feel i.e. at the moment you are planning based on your 38 year old self and seeing that self in retirement. But how will your health develop? How is that factored into your planning?

I have pretty good private medical insurance and I can tell you over the last few years I am glad that I have! It strikes me that keeping everything ticking over is important and I will continue to spend on private medical in retirement.

nookey_bear

loughton - thanks, I always get myself a tad confused when trying to interpret annual pension statements. They supply a figure in today's terms and I never really know if I need to factor inflation in. I guess I need to slightly revise my spreadsheet to include a conservative inflationary factor.

Marine Life -almost obsessivley organised I'm afraid, but I have the time and the inclination to look at the detail so I might as well do it now. Of course, personal health is a critical factor and musnt be overlooked. I run twice a week, eat healthily and generally take good care of myself so for now health is not an issue - but from personal experience I know how quickly this can change so I have provisions in place. I realise that whatever 'plan' I have needs to be 100% flexible and I am working on a number of 'what if' scenarios but the main thing is with this plan, I have a very accurate projection into the future that will help me plan towards the first evening at the end of my first work-free day, sipping a very large JD & coke!

Loughton_Monkey

nookey_bear wrote: »

I realise that whatever 'plan' I have needs to be 100% flexible and I am working on a number of 'what if' scenarios but the main thing is with this plan, I have a very accurate projection into the future that will help me plan towards the first evening at the end of my first work-free day, sipping a very large JD & coke!

Thoroughly recommend the thought!

That plan may not be 'accurate' in detail, but by doing it in detail, I found huge confidence in mine overall and it's an excellent tool to inform you 'when to go'.

If you are like me, the 'joy' of withdrawing from a 'lifetime' [well it seems it] of extreme hard work, stress, politics, inflexible hours.... just cannot be described! I still don't know which aspect is best. The pursuit of hobbies? The long hot holidays? Those two very large G&T's every day when 'the sun has gone down over the yardarm'? The ability to have that yardarm as high or as low as you want....

Good luck