Pension calculation help to get me to 25k pa

jamesd

Now, Loughton Monkey made excellent points. There are compromises to be made here. You get to pick your own, including the balance between retirement age, retirement income and certainty or variability of income. I recommend that you read the book The Millionaire Next Door. It explains how common millionaires in the US really got that way and it's more about reasonable spending than massive incomes, while those with massive incomes and lavish spending can really be poor not rich, stuck on a treadmill of excessive spending and having to work.

There's a shorthand way to think of that: every twenty Pounds spent today is you having one \pound less to live on in retirement, or having to delay to accumulate that twenty Pounds in some other way. Not spending the Pound can be much easier than accumulating the twenty Pounds later.

If you are getting basic rate tax relief only, no salary sacrifice NI benefit, no higher rate income tax relief, then pension contributions for your wife are a good deal. If you're getting higher rate tax relief or salary sacrifice NI savings then it's probably going to be better to use contributions in your own name initially, then switch to contributions from her after you're no longer getting those. This way you can get the higher reliefs now and she can get the pot for income tax personal allowance saving later.

It isn't necessary to abandon your desire to change job. One of the key things to know about investing is the power of compound growth. If you pay in more now, you only have to do that for a few years to get a big gain later. So you can compromise with high commitment to paying into pensions and reduced spending now to get you an earlier chance to change job.

I started putting serious money away for the second time - after spending it the first time on a very worthwhile thing - around 2005/6. By 2012 I'd reached my contingency minimum income level - enough to live on for life if I had to, around £12,000 a year - and I'm now working on my minimum target retirement income - around £18,000 a year - and very generous safety margins that almost double those targets. I don't want to be forced back to work if things go badly...

It_Aches

jamesd wrote: »

Now, Loughton Monkey made excellent points. There are compromises to be made here. You get to pick your own, including the balance between retirement age, retirement income and certainty or variability of income. It explains how common millionaires in the US really got that way and it's more about reasonable spending than massive incomes, while those with massive incomes and lavish spending can really be poor not rich, stuck on a treadmill of excessive spending and having to work.

There's a shorthand way to think of that: every twenty Pounds spent today is you having one \pound less to live on in retirement, or having to delay to accumulate that twenty Pounds in some other way. Not spending the Pound can be much easier than accumulating the twenty Pounds later.

If you are getting basic rate tax relief only, no salary sacrifice NI benefit, no higher rate income tax relief, then pension contributions for your wife are a good deal. If you're getting higher rate tax relief or salary sacrifice NI savings then it's probably going to be better to use contributions in your own name initially, then switch to contributions from her after you're no longer getting those. This way you can get the higher reliefs now and she can get the pot for income tax personal allowance saving later.

It isn't necessary to abandon your desire to change job. One of the key things to know about investing is the power of compound growth. If you pay in more now, you only have to do that for a few years to get a big gain later. So you can compromise with high commitment to paying into pensions and reduced spending now to get you an earlier chance to change job.

I started putting serious money away for the second time - after spending it the first time on a very worthwhile thing - around 2005/6. By 2012 I'd reached my contingency minimum income level - enough to live on for life if I had to, around £12,000 a year - and I'm not working on my minimum target retirement income - around £18,000 a year - and very generous safety margins that almost double those targets. I don't want to be forced back to work if things go badly...

jamesd - when I posted my first message I can only have dreamt of such a detailed and thoughtful response - I have been reading each post in detail - and I actually I intend to print them out and digest further - I shall most definitely return once I've had the opportunity to understand everything you have posted - but in the meantime I just wanted to thank you and assure you that your posts have been read, will be read again and are very much appreciated...please stand by...

jamesd

You might also find it interesting to look for the past discussions between FatherAbraham and myself. We have different approaches to the same general goals and your personal blend may be different from that either of us would use. Hopefully each of us is providing some useful different views and resources for the other - I know he's provided some interesting resources for me.

Do try to remember it's a long game and not get overwhelmed by all the things that you could read here and elsewhere. You've already started, take your time...

A little more on the annuity side, something around 90% of all pension lifetime annuities sold are level, not inflation linked. They have the advantage of paying out more at the start and people also tend to have gradually lower spending in retirement, until a possible substantial increase if they need residential care in their final few years. Combinations of products and buying annuities at different ages can be quite useful, in part because annuity payout rates start to increase quite significantly above age 75 and substantially from 80 up as death rates increase.

jamesmorgan

As your wife doesn't currently have a pension I would assume that you need a pension that pays at least 50% pension to her on your death. Also assuming a pension that increases by RPI then the approx amounts you need saved if you buy an annuity are as follows

Retire at 55 - £900K
Retire at 60 - £800K
Retire at 65 - £700K

As you can see, retiring early greatly increases the amount of money you need saved. The other point to note is that once you both reach state retirement age your state pension would pay approx £15K (assuming you both qualify for a full state pension). This means that once you hit state retirement age you only need £10K from your private pension. This is a lot more achievable and would require funds of approx:

55 - £360K
60 - £320K
65 - £280K

The challenge then becomes one of building up the shortfall from £10K to £25K until you reach state retirement age. The simplest method is to build up funds within an ISA (the other method is to use a pension in flexible drawdown, but you need to be taking at least £20K in an annuity before you can do this). So if you retire at 60 and assuming your state retirement age is 67 you will need approx 7*£15K=£105K in your ISA (taking a cautious approach and ignoring any growth during drawdown).

So very roughly, to retire at 60 with an income of £25K, you need approx £320K in your pension fund and £105K in your ISA.

PS. I started creating this post first thing this morning. By the time I finished it I notice that there have been lots of further posts, so apologies if this has now been superceded

It_Aches

jamesd wrote: »

i'll continue using the original annuity rates and target pot sizes but the historic growth rates. Just remember that you can't trust the projected income this time, it's the same £25,000 throughout in spite of what the calculator says:

Age 65: Pot £782,128. Over the required pot size of £566,432 with 4.4% annuity rate so no more contributions needed. At 4.4% annuity rate income would be £34,413.
Age 60: Pot £591,531. Add £170 a month to get to pot size of £643,591 and hit the target at an annuity rate of 3.9%.
Age 55: Pot 447,380. Add £1465 a month to get to pot size of £711,305 and hit the target with 3.5% annuity rate.

So, adjusting to historic returns rather than the ones used in the calculator gets these changes in contributions:

Age 65: £251 a month drops to nothing and over target already.
Age 60: £960 a month drops to £170 a month.
Age 55: £2,340 a month drops to £1,465 a month.
.

jamesd, a huge thanks to you for your input to this. Whilst I shall always err on the side of caution (or pessimism as my wife says) your figures here do suggest that my pot to date (plus the assumed downsizing contribution) puts me in a more favourable position to achieve the target than my own figures suggested - based on your assumptions for future growth etc. So, I am not quite throwing a party but there is more cause for optimism than I was left with earlier - which is always nice. In that scenario a £170/mnth contribution going forward until 60 should obviously not present any problems - and even the £1465 until 55 is currently achievable with employer contribution and and tax relief.

Very very interesting - having failed to figure out 'multi quote' I shall comment on your other posts separately, they get even more interesting...

It_Aches

jamesd wrote: »

So, what about income levels? Something between 5% and 6% is reasonable for rough planning if you're content to drain all of the capital if you live a very long life, to say age 110. I'll use 6% for age 65, 5.5% for age 60 and 5% for age 55 just to get started, then cover a more sophisticated approach in a later post. Here's how those calculations go, using the HL calculator to work out what to pay in to get the target pot size I give:

Age 65: 6% for £25,000 income requires £25,000 / 0.06 = £416,666 pot. Already going to get there with the current pot size and historic returns, no more needed.
Age 60: 5.5% for income requires £25,000 / 0.055 = £454,545 pot. Already there with historic returns, no more needed.
Age 55: 5% for income requites £25,000 / 0.05 = £500,000 pot. Add £300 a month to get to this.

At this point you can see some of why drawdown is attractive compared to current annuity rates and why it's even more attractive at younger ages. It's relatively easy to get to the point of retiring at 55.

But what about investment risk?

The answer to that is:

1. Use a generous safety margin. For very rough planning I tend to add 50-100% to targets. If the worst case - a big market drop just after retirement - doesn't happen you get the extra income to use, if it does, you still hit your target.
2. Keep a cash reserve of one to five years of investment income in savings or very low risk investments plus a year in savings. This is your cushion against having to draw on capital during a market downturn as well as against things like changes in the law. A recent US paper found a significant increase in drawdown success rate from just one year in cash.
3. Be willing to adjust your income. In practice we tend not to have rigid targets but instead have minimum , good to have and nice to have sorts of ranges. If you want to retire earlier, you can decide that you will accept some drop in income if the bad cases happen to get that early retirement chance. Or you can retire later and get higher safety margins if you prefer that. Your choice, pick whichever you like.

My first comment to this is that obviously income drawdown does appear very attractive based on these figures - accepting of course the pros and cons you set out and the fact there is no safety margin set out in these figures as you later explain.

So with that caveat in mind...this shows that my current pot (plus downsizing) has already got me very far down the road toward my target if I took this option...and that if I wished to be hugely optimistic for once then according to the above figures then the target by age 60 could already be achievable with no further contribution - and even by 55 then only a £300/mnth contributon would be needed! (dont worry I'm not suggesting I will follow this but it certainly cheers me to see how my work and contributions *to date* COULD stand me in a good stead).

Just wondering what a 100% safety margin does to those figures...would that simply mean that the £300/mnth contribution would become £600 or a more fundamental re-calc is required?

bugslet

Multi quote, click on the 'pink/orange ballons' and you can multiquote up to 3 people when you click 'post reply'.

It_Aches

jamesd wrote: »

So, Firecalc. Take a look and see the graph of the different outcomes for three people who just retire at different times with the same pot size?...........

Now, as always with risk I've looked at the bad cases. The charts and numbers also show the good and normal cases. You get a higher income if those happen. With the annuity route you don't, you lock yourself into something close to the bad case income level.

Don't go over the top with Firecalc, it is US data after all. But it is a good tool to show you that averages are not sufficient for risk management. You need to be aware of and consider variation of returns if you want to do a really decent planning job.

And for now I'll stop there on this track. Plenty to think about and perhaps explore.

I did all the suggested exercises with Firecalc - many thanks for introducing me to this tool - this is something completely new to me and I will manipulate much more going forward - I see immense value in it and the types of modeling that are possible - another real eye opener.

It_Aches

jamesd wrote: »

I recommend that you read the book The Millionaire Next Door...........

If you are getting basic rate tax relief only, no salary sacrifice NI benefit, no higher rate income tax relief, then pension contributions for your wife are a good deal. If you're getting higher rate tax relief or salary sacrifice NI savings then it's probably going to be better to use contributions in your own name initially, then switch to contributions from her after you're no longer getting those. This way you can get the higher reliefs now and she can get the pot for income tax personal allowance saving later.

It isn't necessary to abandon your desire to change job. One of the key things to know about investing is the power of compound growth. If you pay in more now, you only have to do that for a few years to get a big gain later. So you can compromise with high commitment to paying into pensions and reduced spending now to get you an earlier chance to change job.

I started putting serious money away for the second time - after spending it the first time on a very worthwhile thing - around 2005/6. By 2012 I'd reached my contingency minimum income level - enough to live on for life if I had to, around £12,000 a year - and I'm now working on my minimum target retirement income - around £18,000 a year - and very generous safety margins that almost double those targets. I don't want to be forced back to work if things go badly...

I have ordered the book!

I am a higher rate tax payer - and my employers contributions are maxed out - I need to find that tipping point you mention between pension contributions in my name and in my wifes name.

In terms of changing my job, I can now thanks to this thread and your insights genuinely see a path toward at least giving myself that as a viable alternative at some stage in the future - that in itself makes me feel a little less uptight - my original 'shock' at the fact that all my effort & contributions didnt seem to count for too much progress has given way to the realisation that with clever planning and advice then there may be cause for some small optimism.

In terms of your last paragraph - if the vigour with which you applied yourself to my situation is any indication of how much effort you will have put in to your own scenarios - then I'm not surprised in the slightest!

It_Aches

jamesmorgan wrote: »

The challenge then becomes one of building up the shortfall from £10K to £25K until you reach state retirement age. The simplest method is to build up funds within an ISA (the other method is to use a pension in flexible drawdown, but you need to be taking at least £20K in an annuity before you can do this). So if you retire at 60 and assuming your state retirement age is 67 you will need approx 7*£15K=£105K in your ISA (taking a cautious approach and ignoring any growth during drawdown).

Thanks jamesmorgan for commenting - the challenge you mention, following on from jamesd posts is now an intriguing one for me.

My target of 25k has always excluded state benefits and so in theory at 67 (or who knows what age by the time I get there) the state benefits will either be a bonus addition to my finances...or following on from other posts...they could be my 'lifeline' meaning an income drawdown from 55 or 60 is more realistic - because the state benefits could be considered as part of my safety margin calculations in respect of the disadvantages of the drawdown method - ie they would help negate (or part negate) a negative turn of events regarding the drawdown...

I'm sure someone will be along shortly to tell me how wrong I am with that train of thought - but for now its quite an interesting prospect to consider...