Retirement - making the most of savings

unitedjmd

I'm thinking of retiring in a years time and currently sorting my finances. I've calculated that I'll have about £200k to put into savings but ideally I want to withdraw any interest on this amount on a monthly basis to live off alongside my monthly pension amount.

What would people recommend I do with this amount to maximise any income from it?

Appreciate any comments. Thanks.

dunstonh

I've calculated that I'll have about £200k to put into savings but ideally I want to withdraw any interest on this amount on a monthly basis to live off alongside my monthly pension amount.

How old are you?

Taking the interest off savings to live on carries shortfall risk and inflation risk that can in the end require you to eat capital and create a spiral which results in lower interest paid, so more capital used to compensate until you end up at zero.

Typically a spread of investments and savings should be used but also pensions (the pension wrapper can be useful to give a net effective income of around 8-9% guaranteed for life. This may help reduce the erosion of capital in other areas.

Eco_Miser

Firstly, don't get hung up about monthly interest - see Martin's explanation in the section "Do you live off savings interest?" on this page.
To maximize your income, you need to risk your capital, and there will be advocates for all levels of risk with suggestions for you to choose from.

unitedjmd

dunstonh wrote: »

How old are you?

Taking the interest off savings to live on carries shortfall risk and inflation risk that can in the end require you to eat capital and create a spiral which results in lower interest paid, so more capital used to compensate until you end up at zero.

Typically a spread of investments and savings should be used but also pensions (the pension wrapper can be useful to give a net effective income of around 8-9% guaranteed for life. This may help reduce the erosion of capital in other areas.

I'll be 60/61 when I retire.

What type of investments would you recommend? I basically don't want to risk the capital but want to use it to 'top up' my monthly pension.

srcandas

unitedjmd wrote: »

I'm thinking of retiring in a years time and currently sorting my finances. I've calculated that I'll have about £200k to put into savings but ideally I want to withdraw any interest on this amount on a monthly basis to live off alongside my monthly pension amount.

What would people recommend I do with this amount to maximise any income from it?

Appreciate any comments. Thanks.

I'm 4 years off yet but having discovered as I get more time what great fun investing is I will look for a self managed balanced portfolio of funds and shares, with a 10% high risk element.

Do you or could you enjoy investing?

If the answer is no I would look for a balance of cash deposit and low cost income earning funds that are somewhat conservative. Thus low maintenance

Putting it in a pension as Dunston says might be a way of getting your pound of flesh out of the government. But a little late as a strategy I'd have thought and like Glock I can't see 9% but Dunston is a smart cookie :beer:

CLAPTON

unitedjmd wrote: »

I'll be 60/61 when I retire.

What type of investments would you recommend? I basically don't want to risk the capital but want to use it to 'top up' my monthly pension.

Your government has decided, fully supported by all the other main parties, that your capital should decline in value by at least 2% per year.
In practice it has been much more than that; so over say 10 years your 200,000 will have the purchasing power of say 120,000 to 140,000.
You may call that risk free but many would take a different view.

atush

I agree with all the above, you can't really get enough bank interest on savings these days, int he current financial climate, to meet inflation much less beat it. So your capital will in effect, be falling each year as it loses ground to inflation. This is a RISK that is guaranteed to happen unlike the investment risk you are so afraid of.

By all means, keep a large chunk of this money in cash deposits but do consider investing some of the money in corporate bonds and income equity funds. This way you capital ill hae the chance to grow and keep you ahead of inflation.

dunstonh

I basically don't want to risk the capital but want to use it to 'top up' my monthly pension.

There is no risk free option when it comes to drawing an income. Just different types of risk. If we look at savings, you will draw the interest. So, the £200k will always say £200k on your statement. However, in 10 years time it will have the spending power of around £120k. Plus, the interest will have reduced spending power. 20 years down the road it will have the spending power of around £72k. So, in real terms, yo would have turned £200k into £72k. And that assumes you never make any other withdrawals. Typically what happens is that people do make withdrawals as the interest ceases to be enough and that then creates a spiral of withdrawals because of low interest as already mentioned above.

I can't see 9% but Dunston is a smart cookie

£3600 in a pension costs you £2880 (if basic rate taxpayer). Ignoring growth you can take back 25% which is £900. So, your net effective outlay is £1980. Annuity rate of 6% at 65 is £162pa. £162 pa against £1980 is 8.18% p.a.

£3600 pa is not a lot but do it each year and it can build up. If you have high blood pressure, high cholesterol or any prescribed medications or medical conditions you can get a better annuity rate.

If you are still working then you can pay in more and if you are higher rate taxpayer it is even better. £2160 is net cost after tax relief £900 back tax free. making net effective cost £1260. annuity rate of 6% still gives you £162. However, against £1260 that gives you an effective rate of 12.85% p.a.

The extra income the pension provides can reduce the income you need on your savings and investments allowing you to reduce shortfall risk, inflation risk and investment risk.

unitedjmd

Thanks for the comments all, appreciate it.

I can see everyone's point around inflation eating away at the funds and that is probably something I hadn't fully considered. Where am I best going to read / investigate income equity funds or corporate bonds further? Should I be looking for independent financial advice at this point?

srcandas

dunstonh wrote: »

£3600 in a pension costs you £2880 (if basic rate taxpayer). Ignoring growth you can take back 25% which is £900. So, your net effective outlay is £1980. Annuity rate of 6% at 65 is £162pa. £162 pa against £1980 is 8.18% p.a.

Which was my point that it is a bit late for that strategy. We are looking at £200,000. But of course every little helps

I'd avoid IFAs until you have investigated your risk levels. An IFA is only going to ask the questions - you have to answer them - and possibly produce a spreadsheet model of your possible future life.

One thing is that as you have the £200,000 in cash there is no rush. Shove it somewhere nice and secure. Then when you have retired dedicate some time.

The one thing I learnt when going through this decision process is everyone wants to rush you. I even had someone here who thought being out of the markets for a few weeks was a potential disaster. Hopefully you'll live for another 25 years minimum. Plenty of time :beer:

gadgetmind

My usual recommendation is the book "Smarter Investing" by Tim Hale.

He makes the case of passive investing, but even if you prefer active management, the book will show why you need to be looking at a portfolio of shares and bonds and how these can be used to generate retirement income.

Other options to consider are Purchased Life Annuities or an Investment Bonds, but I personally prefer the simplicity of equities to generate dividends and bonds to pay interest.

Note that you also need to consider tax, which is another reason that dividends are so good.