Are my pension planning assumptions correct???

efrieze

HI all - I don't know if this has been asked a million times before - sorry if it has.

I am 33 years old and have so far managed to build up pension pot currently worth around £160k. My employer contributes 15% of my salary (and has done since I started working at 21) and I salary sacrifice another 5%.

I want to consider retiring at 55 (my DH is 5 years older) and so I have done a simple (ish) spreadsheet that assumes I contibute 20% of my salary every year, the pension funds goes up in value by 3% per year overall (including the contributions throughout the year) and my salary goes up by 3% per year. This would give me a fund of just over £1m at 55 from which I could take my 25% lump sum £261k and then get 5% pa of the remainder of the pot. I have then assumed that inflation is 3% pa to equate to net present value of the annual income, bringing it to c £29k in real terms. Not THAT huge considering a pension pot of over £1m. Are all these assumptions correct?

This is just for me - my DH also has a pension but started contributing later than I did so his fund is smaller and he is older.

Thanks for any direction on this. I haven't worked out what my costs would be in order to work out whether I could actually retire on this income.

Aegis

efrieze wrote: »

HI all - I don't know if this has been asked a million times before - sorry if it has.

I am 33 years old and have so far managed to build up pension pot currently worth around £160k. My employer contributes 15% of my salary (and has done since I started working at 21) and I salary sacrifice another 5%.

I want to consider retiring at 55 (my DH is 5 years older) and so I have done a simple (ish) spreadsheet that assumes I contibute 20% of my salary every year, the pension funds goes up in value by 3% per year overall (including the contributions throughout the year) and my salary goes up by 3% per year. This would give me a fund of just over £1m at 55 from which I could take my 25% lump sum £261k and then get 5% pa of the remainder of the pot. I have then assumed that inflation is 3% pa to equate to net present value of the annual income, bringing it to c £29k in real terms. Not THAT huge considering a pension pot of over £1m. Are all these assumptions correct?

This is just for me - my DH also has a pension but started contributing later than I did so his fund is smaller and he is older.

Thanks for any direction on this. I haven't worked out what my costs would be in order to work out whether I could actually retire on this income.

The issue you might be having is that you've assumed that over the next 22 years your pension portfolio only manages to keep pace with inflation rather than growing in real terms.

efrieze

Do you mean that you think that one's pension is likely to go up more than inflation over the years? I guess that is liekly but I wanted to be prudent in my assumptions? Too prudent though? My pension has gone up 50% in last 2 years (after addition of regular contributions) but they were quite unusual times.

Aegis

I don't think it would be unreasonable to assume that you can get some real growth over that sort of investment period, as long as you keep it fairly conservative. 2% ahead of inflation year on year would probably still be keeping the calculation very cautious, but I imagine it will change your results somewhat!

efrieze

Thanks - I will plug 5% growth into the numbers and see what happens to the final pot.

westy22

Do you mean that you think that one's pension is likely to go up more than inflation over the years?

I certainly hope so otherwise we will all have been wasting our time on these forums! I think that you can be fairly confident of getting 5%-7% pa over the next 20 years provided you don't pay too much in investment charges which could have the effect of 2%-3% pa drag. Then again, I am a 'glass half-full' type of person.

uk1

Congratulations on achieiving such a healthy pot so young and for starting the planning process.

The argument that your growth only equalling inflation is possibly cautious is right - but I'd stick with the cautious approach if I were you. But there's a difference between assumptions for planning and those that you are relying on.

It is better to over-aim than to find you have less. This cautiousness may have to make up for other current unknowns. For example it is my instinct that the rates of income tax for all - particularly the average person - will have to slowly increase to pay for the current sins - and in particular the enormous public pension funding time bomb. So perhaps your planning should have several assumptions. For example now, interest rates are below inflation.

As you are building your spreadsheet you should also consider including all other realiseable pension planned assets including ISAs, second homes etc. I have a fairly complex and complete spreadsheet, and the cautious approach - your first instinct has enabled me to full achieve my pension aspirations.

CLAPTON

as I recall the FTSE100 index was once 7000; it isn't anymore
so yes, a zero real growth assumption is a pretty good starting point
the outlook for the next 5-10 years doesn't look too inspiring either

uk1

The good thing about zero real growth assumptions (as a starting point ....) is that each year efrieze can plug in the uptodate actual value of his fund spreadsheet. No harm done, but caution continuously and fully observed.

property.advert

CLAPTON wrote: »

as I recall the FTSE100 index was once 7000; it isn't anymore
so yes, a zero real growth assumption is a pretty good starting point
the outlook for the next 5-10 years doesn't look too inspiring either

Errrr ... dividends ?

OK, the FTSE is down over that period but if the index remains static which you seem to think is a good starting point, then your argument also assumes that dividends merely match inflation.

I counter that this model is overly pessimistic as with no growth and no real dividend, there is no incentive to invest given the lack of a risk premium. To balance the argument, there must, over time, be some real growth.

gadgetmind

Dear OP, your spreadsheet sounds much like mine.

A few comments.
1) I have growth at 6% and inflation at 3.5%. Who's right? Who's wrong? Who knows?
2) Your employer is very generous, and your contribution very small. Maybe start paying more in now in case things change?
3) Drawing 5%pa from age 55 is ambitious and will seriously erode your capital more than you might want. However, you only need to do this for the 11 years between 55 and 66, so you should be OK.
4) Have you figured in income from your PCLS (aka lump sum)? This can add more income and it can be done pretty tax efficiently.

Anyway, 33 is early days, and well done on both your current pension pot and on having done a spreadsheet to see where you're heading. It makes a refreshing change from the "can't save, won't save" attitude that is often seen hereabouts.