Age 38, very little retirement savings, but want to retire early

Lois_and_CK

My husband and I have been in significant debt until recently, so we have very little in the way of retirement provision. This is our biggest financial regret and a tough lesson learnt. Now that we're debt free, our goal is to save hard for our retirement and also pay off the mortgage.

This might be laughably optimistic, but we'd like to retire early if at all possible - late fifties would be nice. (Earlier would be better )

This is our situation:

• We're both 38. State pension age is 67 and state pension forecasts are: me - £6,358 per year; husband: £8,799 per year
• No children and no plans for any.
• Mortgage has £157,000 outstanding and 20 years term remaining (age 58).
• No plans to move house in the future, although we might downsize when we retire and release around £50k (in today's money) towards retirement.
• We have saved an emergency fund since becoming debt free, so are ready to start retirement saving immediately.
• Current pensions:
  • me - current company pension ~£6,000 with £230 p/m contribution from employer;
  • husband - current company pension ~£1,000 with £200 p/m - half contribution from employer, half from husband;
  • husband also has another old company pension that has around £1,000 in it;
  • we each have old stakeholder personal pensions that have around £2,000 each in them (these are with Virgin - I've seen opinion on here is that they're useless)
• Ideal budget for retirement is ~£21,000 per year for the two of us, in today's money.
• We have £1,300 p/m 'spare' for retirement saving and maybe mortgage overpayments. (We have other ongoing savings for replacement cars, holidays, household repairs, etc. so this £1,300 can all be allocated to mortgage overpayment/retirement). When we've paid off the mortgage this will free up another ~£900 p/m.

I'd welcome any opinions on whether we're kidding ourselves with dreams of early retirement, and how others would approach this, e.g. opening personal pensions as well as work pensions, consolidating all the old small pensions, ISAs, overpaying mortgage, etc.

Thank you
L & CK

de1amo

how much equity have you got in your present home?

Lois_and_CK

Hi de1amo

It was valued 2 years ago at £300k. Assuming a drop in the market, I'd estimate it's now worth around £270k based on other properties in the area for sale, so LTV around 60% I think.

JoeCrystal

Well, just focusing solely on making pension to retire at income of £21,000 pa based on your pension scheme and the likely amounts required to do it. I am going to assume that you will aim for equal amount of income. So about £10,500 pa each which is going to be quite expensive to fund. While you are late in comparison, you still got sometime to retire so that is quite helpful. May I suggest that you should match employer's contribution to maximum, that will help you to catch up. Will be using this calculator to figure it out The earliest you can start a pension is 55 so we use that age for now.

Assuming that pension grows at 7% per year (hopefully), it would require the following amount to generate the income of £10,500. I am excluding state pension as it is.

At 55, £1072 per month contribution
At 60, £673 per month contribution
At 65, £432 per month contribution
At 67, £363 per month contribution

In your husband's case,

At 55, £1098 per month contribution
At 60, £694 per month contribution
At 65, £451 per month contribution
At 67, £381 per month contribution

The fact is if you decide to opt for annuity at 55, it will be much less than at 65 since you will be living longer than a 65 years old let say. So it require larger fund to get same amount of income.

Nevertheless, this is just pension scheme on it own though so do not consider it in isolation.

Cheers

Joe

Linton

Try the HL pension calculator

When I put your numbers in, treating the pair of you as 1 person it seemed to show that with your £1300/month and your employers' contribution increasing with inflation you are in the right ballpark for retiring in your late 50's.

However, suggest you check things yourself.

property.advert

JoeCrystal wrote: »

...The fact is if you decide to opt for annuity at 55...

Or don't give your money to an insurance company in perpetuity and forget the annuity.

hugheskevi

So you have a total £15,157 p/a from combined State Pension. You want to get that up to £21,000 p/a so another £5,843 of pension from age 67 needed.

Then you require £21,000 of income each year between target retirement date, let's say 58, and age 67.

And you also need £107,000 extra for housing (£157,000 mortgage less £50,000 released somewhere down the line, net £107,000.)

Using the calculator, with the current £430 monthly contributions and combined £12,000 pot you would get an income from age 58 of £4,600 and a lump sum of £41,000.

So for the period 58-67, further capital of £107,000 (9 years *£21,000 less £4,600 pension income less lump sum of £41,000) is required.

The combined capital to fund early retirement and pay off mortgage is £214,000 saved over a 20 year period, and your saving capacity is £26,400 per year. There is another £1,200 p/a of post 67 income to get too, but that won't cost much, about £50-£75pm or so into a pension maybe.

Looks realistic - the above is rather simplistic as it ignores interest on mortgage and returns on saving, and any income escalation post retirement, but it all seems comfortable enough at first glance.

I'd welcome any opinions on whether we're kidding ourselves with dreams of early retirement, and how others would approach this, e.g. opening personal pensions as well as work pensions, consolidating all the old small pensions, ISAs, overpaying mortgage, etc.

The maths seem to stack up, but my main concern would be what you say about debt. Do you have the discipline to formulate a savings plan and actually stick to it - you don't seem to have saved much previously outside of house equity?

The gain from consolidating such small pensions will be trivial, but I'd consider doing it anyway just out of good practice.

Have you robustly calculated your target of £21,000 - that is pivotal to everything?

The key to saving more is spending less - concentrate as much on reducing expenditure as you do on considering how to allocate saving.

Definitely contribute enough to pensions to maximise employer contributions. And probably extra to provide an income to get income up to £21,000 form age 67 as pensions are best for income provision.

Use S+S ISAs to provide capital for the period 58-67.

In terms of priority order, I'd say (and others will have different ideas here - there is no right answer):

• Pension contributions to maximise employer contributions
• Additional pension contributions up to amount needed to get £21,000 income from age 67 including State Pension if have access to salary sacrifice, or are higher rate taxpayer
• S+S ISA contributions
• Mortgage overpayments
• Pension contributions up to amount needed to get £21,000 income from age 67 including State Pension if not got salary sacrifice or higher rate tax-payer

property.advert

JoeCrystal wrote: »

...Assuming that pension grows at 7% per year (hopefully), it would require the following amount to generate the income of £10,500. I am excluding state pension as it is....

But surely the most stable and predictable element is the state pension ?

At 2.5% inflation over the interim 29 years, the multiplier is just over 2 (1.025^29=2.05) so the estimated 15k pension is worth around 7k today. That leaves around 14k required.

Also, if the current forecast is based on current contributions then that forecast should be extended to reflect the maximum 30 years (or very near) due to the length of the intervening time period. Such would reduce this 14k somewhat.

Lastly, as annuity rates will be nowhere near 7% at the earlier ages, if someone drew down less than 7% (assumed growth) then the fund would still grow, meaning a larger fund for a larger annuity due to an older age (ignoring perceived wisdom of moving out of equities as retirement approaches).

All of this would seriously alter the required monthly investments.

But, £21,000 a year is not necessarily the goal to aim for. Investing as much as possible, taking as much advantage of employer contributions and salary sacrifice will either make £21k a year come sooner or provide more than £21k by the minimum retirement age.

property.advert

hugheskevi wrote: »

So you have a total £15,157 p/a from combined State Pension. You want to get that up to £21,000 p/a so another £5,843 of pension from age 67 needed.

No, the £21k is in today's money and the pension estimate is in 29 years time.

You need to factor in inflation.

hugheskevi

No, the £21k is in today's money and the pension estimate is in 29 years time.

The pension estimates look to be in today's money - £122 and £169 p/w respectively, taking into account Basic State Pension and Additional Pension that looks reasonable.

I think the numbers quoted are the forecast amount in today's money assuming current work patterns and salaries continue to State Pension age.

A couple of issues there - the earnings uprating of Basic State Pension would tend to see the amount increase in today's prices over time, on the other hand, the plan to have a single rate of £140 for everyone could reduce the amount (but only by a bit, as one gains, the other loses).

Lois_and_CK

Thank you everyone who has taken the time to reply, much appreciated.

JoeCrystal wrote: »

Assuming that pension grows at 7% per year (hopefully), it would require the following amount to generate the income of £10,500. I am excluding state pension as it is.

At 55, £1072 per month contribution
At 60, £673 per month contribution
At 65, £432 per month contribution
At 67, £363 per month contribution

In your husband's case,

At 55, £1098 per month contribution
At 60, £694 per month contribution
At 65, £451 per month contribution
At 67, £381 per month contribution

Thanks Joe.

Just to make sure I'm understanding this correctly, if we were to increase our current company pension contributions we could retire at age 55 by contributing a total of £2,170 (£1072 + £1098) each month?

So in my case, at the moment my employer contributes £230, and CK's employer contributes £100 + CK's contribution of £100, therefore we'd need to add onto that another £1,740 to get the £2,170 total needed? But I can take off tax and NI from that £1,740 I assume, if the money's going direct from salary to company pensions?

For me, the £230 is the maximum employer contribution - I don't contribute at all at the moment. For CK, his employer will match his payments up to a limit (not sure what it is off the top of my head without rooting out the paperwork). Might it be worth me taking some of our £1,300 retirement budget and starting to contribute to my company pension in order to benefit from the tax and NI relief?