long-term planning - pension pot/retirement income ratio

geekboy

Hi folks.

I'm 28, and I'm planning roughly how much should be saving for my retirement. I've seen the rules-of-thumb like "divide your age by two and that's the annual percentage to save", but I'm building models to project my pension savings growth, so I can get a better estimate of how much I need to save tailored to my circumstances and the expected trajectory of my career. The models also give me a way to adapt my strategy to changing personal and economic circumstances, and compare performance with predictions.

Let's assume that the sum of my pension investments is £1.5m at retirement, aged 68 (about £460k in todays money, at 3% inflation). How would you suggest I go about conservatively calculating what income that will get me? Clearly, it'll be a hazy guess since it's 40 years in the future, but an educated guess is better than a random one.

I Googled for a current annuity rate calculator, and found one that provides an illustration of an RPI-linked annuity: http://www.sbjbc.co.uk/calc.asp?SchemeId=2

This indicates that if I were 65 and retiring now, I'd get an RPI-linked income of 5.07% of the annuity lump sim, if investment growth is 6% (seems conservative and prudent). This percentage is constant in this calculator, regardless of annuity lump sum.

This suggests that 5% might be a sensible number to use for estimating the index-linked retirement income I'd get from a pension pot in forty years' time. Would you agree?

Thanks for any help and opinions you can provide!

cheers,
geekboy

dunstonh

5% gross is a good figure to use. You are not going to get it right as there are too many variables which change. So, using 5% is fine and just keep it under review.

Also, you should note that your state retirement age is going to be 68 and not 65. So any funding you do should keep that in mind. If you do want to finish earlier that state retirement age you will need to fund the gap.