Pension Planning - Is there a better way?

grey_gym_sock

dunstonh wrote: »

A 25 year term will probably only see you invested heavily in equities for about 17 years or so. You will start de-risking from that point and returns will fall for the later years.

for such early retirement, isn't it counter-productive to de-risk? why not draw a income from a fully invested portfolio?

marathonic

grey_gym_sock wrote: »

for early retirement, the cost of a level annuity isn't that useful, as it will decline in value.

Very good point... Looking at the same website, it states that an annuity increasing by RPI each year would cost £254 per £1,000 - which I believe means an annuity of 3.34% as opposed to 4.19%.

grey_gym_sock wrote: »

drawdown is likely to be better. however, drawing 4% from a portfolio mostly in equities sounds sustainable to me.

I also agree here, and this is where the difficulty comes.

I'd like to remain invested in equities given the expected long-term out-performance in comparison to other asset classes and the length of retirement if one were to retire at 55.

If we assume 2% dividends and 2% capital drawdown, the fund should last your entire lifetime. However, it would be a lot easier to budget for things if you continue to draw down a monetary amount as opposed to a percentage (you don't want your income to go up 20% one year and down 20% another - following the stockmarket).

With this in mind, it's arguable that you shouldn't draw down 4% of your fund at 55 if that 4% is just about enough to cover your living expenses - my point being that, if it takes 4% drawdown to meet your living expenses, can you really afford to do so when equities could drop 30% in, for example, your second year of retirement? If this were to happen, your 4% drawdown suddenly becomes 5.7% of the initial fund value. Perhaps, where your fund is just-about sufficient to buy an annuity that meets your living expenses, you should go ahead and buy the annuity.

Maybe you should only consider drawdown if you can follow a more tiered approach. What I'm thinking here is that, with an annuity linked to RPI of 3.34% on offer from the insurance companies, maybe you should only retire when your fund reaches a point where your living expenses can be met with a drawdown of, for example, 3%.

Then, you could re-evaluate every few years and increase the percentage if circumstances allow it. I'm planning on using an 9% drawdown rate after my 110th birthday

Of course, your fund value could be high enough to allow a different approach altogether - if, for example, growth rates vastly out-perform expectations. If you could easily survive on 2% of your fund, there isn't much point in doing so - you're better to enjoy yourself because, even if markets drop 30%, you're still very comfortable.

marathonic

kidmugsy wrote: »

Whereas you want to work on for about 25 years and retire for, what, 30 years? You'd need to be lucky.

I'm starting at 30 with a pot of £40,000. Perhaps that's still ambitious - but my point is to use your ACTUAL expected assumptions for future growth as opposed to overly-pessimistic assumptions.

Then, if your actual expected assumptions don't transpire, just add years to your retirement age.

InsertWittyName

Very interesting thread, with some every good points made.

I'm pretty much sold on the fact, and what most people seem to be saying is, plan for the worst possible situation and then you can only be pleasantly surprised.

marathonic

InsertWittyName wrote: »

Very interesting thread, with some every good points made.

I'm pretty much sold on the fact, and what most people seem to be saying is, plan for the worst possible situation and then you can only be pleasantly surprised.

From a state pension perspective, the assumption that it will be non-existent is extremely pessimistic, but possible.

Most people try to have overly pessimistic assumptions with regards to growth rates and future annuities and base their contribution levels on those assumptions. The theory behind this is that, the more pessimistic your assumptions, the more likely you are to achieve your targets - and it does have it's merits (very good ones at that).

My plan is to use assumptions that I feel are optimistic but very achievable. Then, if I use these assumptions to target a young retirement age, the retirement age as opposed to the contribution levels can be adjusted if required - or some combination of both.

The more optimistic assumptions decrease the contributions required but the reduced retirement age, when compared to most peoples retirement plans, more than makes up for this in the form of an increase to contributions required.

If one were to put the above plans into action and the assumptions did come to fruition, you could end up in a position where the state pension is your 'fun money' to, for example, take the grandchildren to Disneyland

dunstonh

for such early retirement, isn't it counter-productive to de-risk? why not draw a income from a fully invested portfolio?

The OP mentioned annuity purchase. So, yes, it is important to de-risk with annuity purchase planned.

Personally, I would use drawdown but that is a personal decision.

atush

I have to say, this is a very impressive OP. And a lot of really great points.

But I agree with DH that the new auto enrollment is to keep pensioners off benefits like Pension credit, not to reduce or remove the State pension. Alos, I feel (even if you have 40K already) that expecting to retire in 25 years at 55, may be 5 years too soon. First of all, you are likely to be in better health than 55 yr olds today as medicine and LE increases. Then you have the (I assume ) continued existence of a State pension which you would in all likely hood be getting 15 years after that around age 70. So, you would need to fund 15 years (of your most active and adventurous) retirement. That will need funding from savings as well as pensions.

And I also note as did others above, there is no mention of a spouse (will you have one) or dependents (are you sure you will never have any children).

I must admit at your age we just bunged money into a pension and didn't make as detailed plans as you are. But even if we had we would have been derailed by the unexpected birth of Twins 5 years later that has delayed retirement by 5 years at least as raising them to 18 and putting them thru University w/o debt has and is costing us a (not small) fortune.

gadgetmind

grey_gym_sock wrote: »

drawdown is likely to be better. however, drawing 4% from a portfolio mostly in equities sounds sustainable to me.

There are plenty of charts in "Smarter Investing" of different portfolios and various levels of drawdown. ISTR that adding some bonds actually helps as you can benefit from rebalancing.

kidmugsy

marathonic wrote: »

Then, if your actual expected assumptions don't transpire, just add years to your retirement age.

That, I'll grant you, is the sensible defence against your investments not proving lucky.

Sobraon

OP might consider FIREcalc .. it's US based but gives a different take on planning ( select Not Retired? tab).