When to retire......

Thrugelmir

CLAPTON wrote: »

sadly 47 years of compound inflation makes a huge difference too.

No savings equals no income.

Better to earn interest than pay it.

I've maintained provision for pension for most of my working life. As haven't had the benefit of defined benefit scheme.

N1AK

marathonic wrote: »

Hopefully, when financial education becomes compulsory in second level education, this problem will sort itself out. However, in the meantime, there is more than five decades worth of future retirees who didn't go through such education.

It can hardly hurt. As you say the issue isn't that people know what they are doing it is exactly that they don't. No one has ever told me very much at all about planning for old age; I consider myself 'informed', certainly more so than average, but it's still a little closer to a dark art than I like.

I like many just pay in the contribution required to get the maximum from my employers scheme. Is that really enough? I don't think so but I'd rather keep additional money outside of a pension at least to the tax benefits work more to my favour.

Humans are incredibly bad at making long term decisions that require short term sacrifice without having already reached the point of discomfort.

marathonic

A lot of people look for excuses to avoid paying into pensions. The main one is a removal of flexibility in that you’re not able to access the money for 30+ years (which, interestingly, I see as an advantage).

Another is that the contributions you make now are worth very little due to inflation when you retire. The people making this excuse just don’t understand the maths of it.

Your pension is likely to grow at a certain percentage in excess of inflation – if we assume a 6.5% growth rate after charges and inflation of 2.5% over the long-term, you can consider this as 4% growth in real terms.

Therefore, instead of looking at it as 6.5% growth that is being ate away with inflation, you could look at it as 4% growth with no inflation.

At 4% growth after charges and inflation, £100 will be worth over £460 in 40 years time (in today’s money). That £100 will cost the taxpayer £80.

That £460 is enough to reasonably expect to be able to withdraw an income of £18.40 every year in retirement.

In other words, by contributing a one-off £80 net to your pension at 25 and it growing at 4% after inflation and charges, you should receive an income of £18.40 EVERY YEAR in retirement.

Now let’s assume your company does salary sacrifice and contributes their national insurance savings back to your scheme (as mine does), a gross contribution of £100 costs a little under £60 (so you could use the same figure for a higher rate tax payer without salary sacrifice).

The £60 one off seems a good deal for £18.40 per year in retirement. Personally, I’ve dropped my contributions recently to a bit over £120 per month net. Therefore, I could look at every months contribution adding £36.80 to my annual income in retirement (of course, it’ll reduce over the years because each contribution has less time to grow than the previous).

marathonic

Another thing, because most people leave retirement planning too late, they have to work as long as possible and can only realistically aim to retire when they reach state pension age.

In other words, people don’t want to contribute to a pension, giving the government the ability to make changes that may change the projected growth of their pension contributions. However, they are happy that their planning is such that the government has total control over what age they actually retire at – which will only increase as years go by.

Also, by confining yourself to retirement only upon your reaching of state pension age, it is imperative that you gradually switch to lower risk, and lower return, assets in the 10 years before retirement.

If someone is properly prepared for retirement, they should have a pension pot such that their lump sum is high enough to provide the equivalent of the state pension every year up until they reach state pension age. At a state pension rate of £7,488 per year, a desired retirement age of 55 and a state pension age of 68, you’d want your lump sum to be at least (£7,488 * (68 – 55)) = £97,344.

This would imply a total pot of £389,376 and £292,032 left to draw down. At a drawdown rate of 4%, that gives a total income of £19,169 (£7,488 from lump sum or state pension and £11,681). This, in my opinion, would be a very good income in retirement.

In my opinion, if a person wants to be well prepared, they should be aiming to retire at 55 but be flexible enough to retire anytime between that and 65. By doing this, you could avoid switching to low risk assets in the 10 years before retirement. Instead, you could plan to retire at 55 if stock markets are high at that time and, otherwise, continue to work and contribute to your pension until such times that the stock market is high enough.

N1AK

Two really great posts there thanks Marathonic. Very clearly explained and with some good rule of thumb calculations (something I've struggled with). Thanks for taking the time to write it.

Is the 55 retirement figure based on anything in particular or just personal preference? I've heard everything from people saying you should plan for younger or that 55 is too young to expect to retire if you're going to be doing in as late as for example 2040. I would, for example have expected that the yearly income would be lower if you were claiming it from 55 if life expectancy continues to increase; though you may have already accounted for that.

marathonic

N1AK wrote: »

Two really great posts there thanks Marathonic. Very clearly explained and with some good rule of thumb calculations (something I've struggled with). Thanks for taking the time to write it.

Is the 55 retirement figure based on anything in particular or just personal preference? I've heard everything from people saying you should plan for younger or that 55 is too young to expect to retire if you're going to be doing in as late as for example 2040. I would, for example have expected that the yearly income would be lower if you were claiming it from 55 if life expectancy continues to increase; though you may have already accounted for that.

The main reason I chose 55 is that that is the general age that you are allowed to take your lump sum and associated benefits from a private pension.

You are correct that the 4% withdrawal rate may be too high for someone at 55.

My retirement planning uses a 4% withdrawal rate and a retirement age of 55. However, in a similar manner to working longer if the stock markets are low when I reach 55, I intend to work longer if I deem a 4% withdrawal rate to be too high at age 55 - perhaps, only working part time at that point.

You could calculate your figures off a 3.5% withdrawal rate but, in my opinion, there is as high a risk of ending up with too much money in retirement (only when compared to your disposable income pre-retirement as you can never have too much money ).

If you work off a 4% withdrawal rate, retirement age of 55 and a 4% return after charges and inflation, you may end up having to work longer due to a lower growth rate than expected. However, you could equally see yourself with being able to drop or cease pension contributions entirely after the age of 50 if growth ends up higher than expected.

Basically, you can choose more pessimistic than expected growth rates or withdrawal rates or higher than expected inflation in order to build in a buffer to your retirement plans. However, in my opinion, why make too many sacrifices now for the buffer when your buffer could simply be working a little longer (but a lot less than the average person)?

N1AK

I was just interested in hearing your reason; you seem to have a good understanding of your position so thought it could, and imo was, worth knowing.

I like the idea of modelling for 4% growth (sans fees and inflation) as that makes working out what your final pot will be in a meaningful form. I don't like the answer it gives me though on that basis my pot would be ~£210k by 55 which isn't going to set the world on fire. That said, it's useful to know because now I can make decisions based on a realistic appraisal on my pension provision.

- - -
As to the original subject. I honestly don't know what retirement age is right. I enjoy working so am not keen to plan to give it up entirely as soon as possible. If scope to work 2-3 days a week in later life increased then I could see me moving to partially retired in my 50s before finally retiring 10-20 years later.

marathonic

N1AK wrote: »

I could see me moving to partially retired in my 50s before finally retiring 10-20 years later.

To be honest, this plan suits a lot of people more anyway. If you move from working 5 days a week to none, you could get bored very easily with limited options to reenter the workforce.

At least if you move to 3 days a week, you would have a better understanding of when you are ready to retire. Also, from speaking with older people in my company, coming to work tends to be less of a chore when you're not doing it for financial reasons.

Harry_Boyle

marathonic wrote: »

To be honest, this plan suits a lot of people more anyway. If you move from working 5 days a week to none, you could get bored very easily with limited options to reenter the workforce.

At least if you move to 3 days a week, you would have a better understanding of when you are ready to retire. Also, from speaking with older people in my company, coming to work tends to be less of a chore when you're not doing it for financial reasons.

Completely agree. Also, a gradual retirement allows people to adjust to having more free time and to replace work with interesting pasttimes or voluntary work rather than suddenly stopping an then going into a physical and mental decline because they don't know what to do with themselves, sitting in front of the TV.

PaulF81

marathonic wrote: »

A lot of people look for excuses to avoid paying into pensions. The main one is a removal of flexibility in that you’re not able to access the money for 30+ years (which, interestingly, I see as an advantage).

Another is that the contributions you make now are worth very little due to inflation when you retire. The people making this excuse just don’t understand the maths of it.

Your pension is likely to grow at a certain percentage in excess of inflation – if we assume a 6.5% growth rate after charges and inflation of 2.5% over the long-term, you can consider this as 4% growth in real terms.

Therefore, instead of looking at it as 6.5% growth that is being ate away with inflation, you could look at it as 4% growth with no inflation.

At 4% growth after charges and inflation, £100 will be worth over £460 in 40 years time (in today’s money). That £100 will cost the taxpayer £80.

That £460 is enough to reasonably expect to be able to withdraw an income of £18.40 every year in retirement.

In other words, by contributing a one-off £80 net to your pension at 25 and it growing at 4% after inflation and charges, you should receive an income of £18.40 EVERY YEAR in retirement.

Now let’s assume your company does salary sacrifice and contributes their national insurance savings back to your scheme (as mine does), a gross contribution of £100 costs a little under £60 (so you could use the same figure for a higher rate tax payer without salary sacrifice).

The £60 one off seems a good deal for £18.40 per year in retirement. Personally, I’ve dropped my contributions recently to a bit over £120 per month net. Therefore, I could look at every months contribution adding £36.80 to my annual income in retirement (of course, it’ll reduce over the years because each contribution has less time to grow than the previous).

Where is the guarantee that you are going to earn 6.5% in perpetuity?