Retirement Planning

nookey_bear

Getting my wotsits in a twist on one aspect of my retirement financial forecast so would be grateful for a little guidance.

I have a detailed spreadsheet where I take each of my spend categories (food, fuel, utilities, leisure etc) and based on current spend, plus making assumptions about lifestyle and family situation changes (ie kids leaving home, dropping down to one car once retired etc) I project them into retirement (using assumed inflation rates). So this in effect gives me a very good idea as to my forecasted expenditure in real money terms once retired.

I then have a section for income, and this is where the confusion starts. I have 4 pensions to hopefully draw from - 1 final salary, 2 money purchase, plus state pension (in its latest form which will undoubtedly change) I also include my wife’s final salary pension, plus her state pension.

I get annual statements for all pensions. The final salary and state pension forecasts are fine, as I understand they provide me with a current pension value ie if I retired today, I would get £xxx. So to make them fit into my retirement spreadsheet, I apply a conservative inflationary factor which then gives me a real terms figure ie what will I get when I turn 67.

The other pension statements show me a forecasted pension in today’s prices, and therein lays the confusion. As I show my retirement expenditure in real terms by applying inflation, I want to make sure all my pension forecasts are inflated accordingly. My question is therefore - am I right to apply an assumed inflation rate to these forecasts, so I am left with a value in real money terms as opposed to todays prices? TBH I always get confused by what is meant by ‘todays prices’ and the more I look at it, the more confused I get.

To put my question into some real figures, one of my latest statements says that ‘based on an estimated value of the payments paid into my plan expressed in todays prices of £35700, that should provide me with an estimated annual pension of £1329. So come my retirement date, I have always thought that I need to ‘inflate’ £1329 by a chosen rate (say 2.5%) to provide the figure I need ie (1.025% x £1329) x 28yrs = £2588.

Can someone tell me if I am doing the right (or wrong) thing?

Rich1976

nookey_bear wrote: »

Getting my wotsits in a twist on one aspect of my retirement financial forecast so would be grateful for a little guidance.

I have a detailed spreadsheet where I take each of my spend categories (food, fuel, utilities, leisure etc) and based on current spend, plus making assumptions about lifestyle and family situation changes (ie kids leaving home, dropping down to one car once retired etc) I project them into retirement (using assumed inflation rates). So this in effect gives me a very good idea as to my forecasted expenditure in real money terms once retired.

I then have a section for income, and this is where the confusion starts. I have 4 pensions to hopefully draw from - 1 final salary, 2 money purchase, plus state pension (in its latest form which will undoubtedly change) I also include my wife’s final salary pension, plus her state pension.

I get annual statements for all pensions. The final salary and state pension forecasts are fine, as I understand they provide me with a current pension value ie if I retired today, I would get £xxx. So to make them fit into my retirement spreadsheet, I apply a conservative inflationary factor which then gives me a real terms figure ie what will I get when I turn 67.

The other pension statements show me a forecasted pension in today’s prices, and therein lays the confusion. As I show my retirement expenditure in real terms by applying inflation, I want to make sure all my pension forecasts are inflated accordingly. My question is therefore - am I right to apply an assumed inflation rate to these forecasts, so I am left with a value in real money terms as opposed to todays prices? TBH I always get confused by what is meant by ‘todays prices’ and the more I look at it, the more confused I get.

To put my question into some real figures, one of my latest statements says that ‘based on an estimated value of the payments paid into my plan expressed in todays prices of £35700, that should provide me with an estimated annual pension of £1329. So come my retirement date, I have always thought that I need to ‘inflate’ £1329 by a chosen rate (say 2.5%) to provide the figure I need ie (1.025% x £1329) x 28yrs = £2588.

Can someone tell me if I am doing the right (or wrong) thing?

Hi

Firstly can I say what fascinating reading this thread is. I really do admire your enthusiasm and as someone who is not too much younger than yourself, I am also taking a keen interest in building up as much as I can ( not easy with the constant increase in bills) so that I can retire when I want to and not when the government tells me I can, or work until I drop like most people will of my age ( especially as i'm one of only 5 people at work out of 30 people who pay into a pension )

Your last paragraph about the pension in todays terms. From what I have always understood, in 'todays terms' this means that the Pension company has already factored in inflation usually at 2.5% each year until your chosen retirement age. This means that the figure is not the value of the pension pot when you retire but the equivalent of what it would be worth in todays money if inflation was 2.5% each year. Of course nobody knows how accurate this is as inflation goes up and down. But I use the 'todays figures' as a guide so when it tells me my penion will pay out 4k a year for exmaple in todays money, I know that won't be enough as I can't live on 4k a year in today's money.

I hope that makes sense - I know in my mind what I have been trying to say!

nookey_bear

Rich1976 wrote: »

Hi

Firstly can I say what fascinating reading this thread is. I really do admire your enthusiasm and as someone who is not too much younger than yourself, I am also taking a keen interest in building up as much as I can ( not easy with the constant increase in bills) so that I can retire when I want to and not when the government tells me I can, or work until I drop like most people will of my age ( especially as i'm one of only 5 people at work out of 30 people who pay into a pension )

Your last paragraph about the pension in todays terms. From what I have always understood, in 'todays terms' this means that the Pension company has already factored in inflation usually at 2.5% each year until your chosen retirement age. This means that the figure is not the value of the pension pot when you retire but the equivalent of what it would be worth in todays money if inflation was 2.5% each year. Of course nobody knows how accurate this is as inflation goes up and down. But I use the 'todays figures' as a guide so when it tells me my penion will pay out 4k a year for exmaple in todays money, I know that won't be enough as I can't live on 4k a year in today's money.

I hope that makes sense - I know in my mind what I have been trying to say!

Thanks for your words of encouragement. I've only really been looking at the figures in detail over for about 6mths or so, but already we have made some decisions about how we allocate our income over the next 25 odd years - a mix of overpaying on mortgage, saving for kids future, saving for our retirement nest egg etc. It can get very addictive if youre not carefull! The best bit is playing around with different scenarios and seeing how our financial plan looks if we eg retire 5 yrs earlier than 'planned' My OH and I still have at least 20 years of work left so still plenty of time to go but glad I have taken the time to get a plan going now. Would be interested in finding out how you have gone about setting your plans up, to compare it to my method.

Think I understand the todays terms bit now, so thanks for your reply. But the way I have my plan set up is to inflate all my expenditure items (so for example for food, if we spend £5600 in 2011,then in 2038 that equivalent inflated figure (using 3%) is £9300), and then make sure my pension income is based on the same terms - ie not todays figure but a real terms figure in 27 years time. I guess I would still need to take my current fund value and inflate by 2.5% pa to get this figure

bilbo51

nookey_bear wrote: »

...so for example for food, if we spend £5600 in 2011,then in 2038 that equivalent inflated figure (using 3%) is £9300...

You might also want to factor in that in 2038 you could hope that your children might be buying you some meals rather than the other way round

nookey_bear

bilbo51 wrote: »

You might also want to factor in that in 2038 you could hope that your children might be buying you some meals rather than the other way round

too right! hopefully they'll be doing a lot more than just buying us meals :beer:

Rich1976

nookey_bear wrote: »

Thanks for your words of encouragement. I've only really been looking at the figures in detail over for about 6mths or so, but already we have made some decisions about how we allocate our income over the next 25 odd years - a mix of overpaying on mortgage, saving for kids future, saving for our retirement nest egg etc. It can get very addictive if youre not carefull! The best bit is playing around with different scenarios and seeing how our financial plan looks if we eg retire 5 yrs earlier than 'planned' My OH and I still have at least 20 years of work left so still plenty of time to go but glad I have taken the time to get a plan going now. Would be interested in finding out how you have gone about setting your plans up, to compare it to my method.

Think I understand the todays terms bit now, so thanks for your reply. But the way I have my plan set up is to inflate all my expenditure items (so for example for food, if we spend £5600 in 2011,then in 2038 that equivalent inflated figure (using 3%) is £9300), and then make sure my pension income is based on the same terms - ie not todays figure but a real terms figure in 27 years time. I guess I would still need to take my current fund value and inflate by 2.5% pa to get this figure

to start with, I have always paid into a pension. My Dad made me get one when I was 19 and started work for the first time and I paid in £20pm. As soon as I joined an employer who offered a scheme I joined that as well, and still carried on with my own plan. Then as I got made redundant 3 times in 5 years I had a collection of various plans from about 3 different insurers and my own and because I was fed up with the service and performance from Norwich Union, Legal and General etc I transferred the lot to Hargreaves Lansdown 4 years ago and now my fund is about £28000 which I don't consider too bad for about 15 years worth of contributions on a well below average salary.

To spread the risk I also pay into a Standard Life pension at £100 pm as I believe you're only protected up to50k with any one provider and my worry is that a few good years of growth with HL will take me over the limit. I also pay into an ISA with HL at currently £85 a month.

The trouble though is that my current employer who I have been with 4 years doesn't offer a plan into which they pay into so any contributions has to come from me and as I only earn around 20k a year £200 pm is a big chunk of my take home pay ( but when you see the pension forecasts from the statements etc - what other choice do I have) and believe me, it is not easy when my OH only earns 16k so I am having to subsidise her occasionally for car repairs etc. I also pay most of the mortgage (£350 against her £250 ) and any repairs to the house. Fortunately we dont have kids and have no intention of doing so. It is tempting to stop contributions altogether - however this would be foolish. We have both said though that once the mortgage is paid off in 13 years time we will direct all of the money originally for the mortgage repayments into the Pension/ISA or both. At present she pays into her company scheme but it is only about 3% employee contribution and 5% employer.

Provided we can do this and provided there are no set backs according to the calculator on H-L.co.uk and based on both our current pension fund values and contributions ( assuming they increase by 2.5% each year) we should be looking at a total fund bewtween us of about 22k at 65.

What none of us know of course is if this is accurate. we could get to retirement and discover the fund won't provide as much income as expected or the stock market nose dives.

The other thing I would be interested in your views on is what plans do you have for your retirement? This is a conversation I frequently have with OH and people at work - just what would we do all day? There is only so much house work, gardening ( urgh!), holidays etc you can do. Part of me thinks I may cope ok with retirement for 6 months but then may climb the walls out of boredom. we do have interests etc but nothing curently which would take up an extra 40 hours a week. the OH says she may want to continue doing something P/T either paid or voluntary and she may have a point. But if I think like that now what's the point of throwing as much as possible into my pension/ISA now and having a reduced life ( so to speak) when I may not ever want to retire 'full time'. If i was continuting to earn on a p/t basis then that would plug the gap hopefully.

But another part of me thinks 'why would I not want to retire and surely it is better to save as much as possible and make that choice later on in life and when i get there hope that there are lots of other interests i want to pursue?'

Scary and very confusing don't you think?

jem16

Rich1976 wrote: »

To spread the risk I also pay into a Standard Life pension at £100 pm as I believe you're only protected up to50k with any one provider and my worry is that a few good years of growth with HL will take me over the limit. I also pay into an ISA with HL at currently £85 a month.

Pensions are covered for 90% under long term insurance.

http://www.fscs.org.uk/what-we-cover/eligibility-rules/compensation-limits/insurance-limits/

Rich1976

jem16 wrote: »

Pensions are covered for 90% under long term insurance.

http://www.fscs.org.uk/what-we-cover/eligibility-rules/compensation-limits/insurance-limits/

is that the same for Sipps though as according to the HL website you are only covered upto 50k for investments?

nookey_bear

Rich1976 wrote: »

to start with, I have always paid into a pension. My Dad made me get one when I was 19 and started work for the first time and I paid in £20pm. As soon as I joined an employer who offered a scheme I joined that as well, and still carried on with my own plan. Then as I got made redundant 3 times in 5 years I had a collection of various plans from about 3 different insurers and my own and because I was fed up with the service and performance from Norwich Union, Legal and General etc I transferred the lot to Hargreaves Lansdown 4 years ago and now my fund is about £28000 which I don't consider too bad for about 15 years worth of contributions on a well below average salary.

To spread the risk I also pay into a Standard Life pension at £100 pm as I believe you're only protected up to50k with any one provider and my worry is that a few good years of growth with HL will take me over the limit. I also pay into an ISA with HL at currently £85 a month.

The trouble though is that my current employer who I have been with 4 years doesn't offer a plan into which they pay into so any contributions has to come from me and as I only earn around 20k a year £200 pm is a big chunk of my take home pay ( but when you see the pension forecasts from the statements etc - what other choice do I have) and believe me, it is not easy when my OH only earns 16k so I am having to subsidise her occasionally for car repairs etc. I also pay most of the mortgage (£350 against her £250 ) and any repairs to the house. Fortunately we dont have kids and have no intention of doing so. It is tempting to stop contributions altogether - however this would be foolish. We have both said though that once the mortgage is paid off in 13 years time we will direct all of the money originally for the mortgage repayments into the Pension/ISA or both. At present she pays into her company scheme but it is only about 3% employee contribution and 5% employer.

Provided we can do this and provided there are no set backs according to the calculator on H-L.co.uk and based on both our current pension fund values and contributions ( assuming they increase by 2.5% each year) we should be looking at a total fund bewtween us of about 22k at 65.

What none of us know of course is if this is accurate. we could get to retirement and discover the fund won't provide as much income as expected or the stock market nose dives.

The other thing I would be interested in your views on is what plans do you have for your retirement? This is a conversation I frequently have with OH and people at work - just what would we do all day? There is only so much house work, gardening ( urgh!), holidays etc you can do. Part of me thinks I may cope ok with retirement for 6 months but then may climb the walls out of boredom. we do have interests etc but nothing curently which would take up an extra 40 hours a week. the OH says she may want to continue doing something P/T either paid or voluntary and she may have a point. But if I think like that now what's the point of throwing as much as possible into my pension/ISA now and having a reduced life ( so to speak) when I may not ever want to retire 'full time'. If i was continuting to earn on a p/t basis then that would plug the gap hopefully.

But another part of me thinks 'why would I not want to retire and surely it is better to save as much as possible and make that choice later on in life and when i get there hope that there are lots of other interests i want to pursue?'

Scary and very confusing don't you think?

Plans for retirement? – haven’t got that far yet! I’m all for planning but don’t forget to live for the here and now otherwise before you know it, it would have passed you by. At the moment, I am happy working out how (and when) I will retire rather than what I will do with my time. I guess there are the obvious pursuits - family (grandchildren hopefully) & friends, staying fit and healthy, travelling (many parts of UK I have yet to visit), new hobbies etc. Whatever I do, it will involve keeping both my mind and body active. I have seen first hand the effect of someone retiring and deciding to do absolutely nothing, and its not a path I plan to take myself.

Scary and confusing? - possibly, depends how you view it I guess. Its certainly alot to think about but I would rather be where I am now as a 38yr old considering my plans as opposed to someone who is a matter of years away from retirement. We both have time on our hands, that is probably the most valuable thing....

Rob_192

Rich1976 wrote: »

The other thing I would be interested in your views on is what plans do you have for your retirement? This is a conversation I frequently have with OH and people at work - just what would we do all day? There is only so much house work, gardening ( urgh!), holidays etc you can do. Part of me thinks I may cope ok with retirement for 6 months but then may climb the walls out of boredom. we do have interests etc but nothing curently which would take up an extra 40 hours a week. the OH says she may want to continue doing something P/T either paid or voluntary and she may have a point. But if I think like that now what's the point of throwing as much as possible into my pension/ISA now and having a reduced life ( so to speak) when I may not ever want to retire 'full time'. If i was continuting to earn on a p/t basis then that would plug the gap hopefully.

But another part of me thinks 'why would I not want to retire and surely it is better to save as much as possible and make that choice later on in life and when i get there hope that there are lots of other interests i want to pursue?'

Scary and very confusing don't you think?

Rich

Another thing to bear in mind, is what state of health you will be in at retirement age - I know of many people who tell me they will just keep working after retirement age (whatever that might be!), but will their health permit this?

I have just turned 47 and thankfully I'm in excelent health, but I know several friends and relatives who are not much older than me who are already in a poor state of health and have little chance of continueing in work to age 65, yet alone into their 70's.

I think we all take this very much for granted, but it's not a given and I for one would rather not take the risk of ill health as I get older.

Rob