Pension calculation help to get me to 25k pa

Thrugelmir

Maximise your returns by paying the minimal amount of charges you can. In this deflationary environment returns are going to be harder to come by. The FCA's crack down on fund managers charges is going to be pretty revealing too.

After years of building a pot built on Investment Trusts. The discounts have narrowed to such a degree, that I decided that I might as well hold individual shares in a SIPP. Been pretty liberating. As the lack of fees and charges is noticable. With a good solid income stream to reinvest.

jamesd

It_Aches wrote: »

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?

If I wanted a 100% safety margin, that would mean doubling the target pot size using those approximations. Not doubling the monthly payment in. But I'd really want to do it with some Firecalc work instead.

Since £300 a month increases the pot size at 55 by £500,000 - £447,380 = about £53,000 you can see that you would need considerably more to get a real 100% safety margin on the whole target income, a pot size of £1,000,000.

That pot size is greater than the cost of an annuity to provide the income, but the annuity lacks the upside and the likely inheritance aspect, as well as paying a lower spousal income.

Where the safety margin calculation can be of more interest is if there are a range of acceptable income levels. You can then have a 100% safety margin on the lowest and some chance of failure on the higher levels, using something like Firecalc to work those things out. With this sort of approach you're exploiting the ability to benefit from the positive results while providing for the unlikely worst cases.

But you don't have to use just one approach. Recall that the risk is highest if there is a need to drain capital in the early years after a major market downturn? I outlined some things you can do about that but there's another one as well.

You can make use of cash or a term annuity - paying out for say five years - or a level single life lifetime annuity with part of the pot to handle some of the core income. That exploits the high certainty aspect of the annuity as well as the gradual real value decrease of the level annuity to provide an assured income boost at the higher risk time, without buying it for life at the higher level needed for a whole target income.

jamesd

It_Aches wrote: »

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.

You'll also find that you should include the state pensions in your planning. You can add inflation-linked income starting from a specified age in Firecalc. £7500 per person from your state pension ages is a number to use for that. You'll find that it improves the minimum income in the worst case scenarios because it provides some certain income level, even though the specified target income will be higher by the amount of the state pensions.

Including the state pensions is of particular use if you want a level income before and after state pension age, since this would require faster capital drawing from the other pension pots initially, then a drop in the drawing rate from them once the state pensions start.

marathonic

It's always worth double checking your end results using a different calculator as there appears to be some bugs with the H-L one at least. There was one identified above and another I notice today is that the end fund value when I put '60000' in the existing funds box is reduced by £94,000 if I enter '060000'.

I dread the thought of basing my contributions level, something I may not revisit for 5+ years, on the result of a calculator with such bugs.

It_Aches

jamesd wrote: »

Where the safety margin calculation can be of more interest is if there are a range of acceptable income levels. You can then have a 100% safety margin on the lowest and some chance of failure on the higher levels, using something like Firecalc to work those things out. With this sort of approach you're exploiting the ability to benefit from the positive results while providing for the unlikely worst cases.

But you don't have to use just one approach. Recall that the risk is highest if there is a need to drain capital in the early years after a major market downturn? I outlined some things you can do about that but there's another one as well.

Got it, understood, thanks.

FatherAbraham

It_Aches wrote: »

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...

Yeah, well, maybe.

Just be aware that a 6% withdrawal rate from a retirement pot (which James uses) is way above the traditional 4% withdrawal rate (from the 1998 "Trinity"), which itself has been criticized as too high.

FireCalc's US focus can blind one to alternative possibilities, such as the Japanese experience. Take heed of Dirk Cotton's recent critique of over-optimistic withdrawal rates based on blinkered historical data at his "Retirement Cafe" blog:

http://theretirementcafe.blogspot.co.uk/2013/10/safe-withdrawal-rates-is-60-new-95.html

A 6% withdrawal rate from a drawdown pot makes sense as a tax-reduction strategy; it does not follow that consuming 6% is a good idea.

The price of an index-linked annuity is a good benchmark indicator for the cost of retirement income which optimally consumes all one's capital on average. There is no free lunch, so one should view retirement-income strategies which promise far higher retunrs with careful and diligent skepticism.

Warmest regards,
FA

It_Aches

jamesd wrote: »

You'll also find that you should include the state pensions in your planning. You can add inflation-linked income starting from a specified age in Firecalc. £7500 per person from your state pension ages is a number to use for that. You'll find that it improves the minimum income in the worst case scenarios because it provides some certain income level, even though the specified target income will be higher by the amount of the state pensions.

Including the state pensions is of particular use if you want a level income before and after state pension age, since this would require faster capital drawing from the other pension pots initially, then a drop in the drawing rate from them once the state pensions start.

Yes, I was experimenting with Firecalc again last night.

So, jamesd I guess I have squeezed enough free guidance from you in this thread, I am hugely grateful - and like Batman I expect you will have other people to go and help - but if I may delay you just for a moment longer and ask your opinion on the bigger picture...

Given where I am today with the current pension pot and high likelihood of downsizing (+50 to 100k) then what would be your confidence level after everything we have discussed that I could achieve a net 25k pension income excl state benefits by the time I'm (a) 55 and (b) 60 - whether that be by annuity, drawdown or a mix?

My confidence now for the age 60 scenario is quite high and even for the age 55 then I am cautiously optimistic that with careful thought and planning that could also be a reasonable possibility......your thoughts?

It_Aches

FatherAbraham wrote: »

Yeah, well, maybe.

Just be aware that a 6% withdrawal rate from a retirement pot (which James uses) is way above the traditional 4% withdrawal rate (from the 1998 "Trinity"), which itself has been criticized as too high.

FireCalc's US focus can blind one to alternative possibilities, such as the Japanese experience. Take heed of Dirk Cotton's recent critique of over-optimistic withdrawal rates based on blinkered historical data at his "Retirement Cafe" blog:

http://theretirementcafe.blogspot.co.uk/2013/10/safe-withdrawal-rates-is-60-new-95.html

A 6% withdrawal rate from a drawdown pot makes sense as a tax-reduction strategy; it does not follow that consuming 6% is a good idea.

The price of an index-linked annuity is a good benchmark indicator for the cost of retirement income which optimally consumes all one's capital on average. There is no free lunch, so one should view retirement-income strategies which promise far higher retunrs with careful and diligent skepticism.

Warmest regards,
FA

Understood FA and thanks.

Worry not, this thread has given me cause not for recklessness going forward but for much more detailed and diligent planning. I appreciate that a focus on spending as well as saving is important and that there are a number of paths that could lead me toward my targets - but that my targets are not yet within touching distance - many more years required yet...unfortunately.

But to finish on an uncharacteristic note of confidence, this thread, after the initial surprise at the distance between me and my goal has eventually led me to be grateful for the saving I have done to date - I joined my current employer around 8 years ago and to that point I had just a very small pot with Equitable Life - now after 8 or 9 years of (generous) employer contributions and upping my own contribution I can at least see how that is now working for me and making my target at least a rational possibility.

jamesd

FatherAbraham wrote: »

Just be aware that a 6% withdrawal rate from a retirement pot (which James uses) is way above the traditional 4% withdrawal rate (from the 1998 "Trinity"), which itself has been criticized as too high.

And too low. And just plain wrong. It's worth reading more on it, the Wikipedia article provides a good start. I tend to quite strongly agree with this text from that article and those it quotes:

"The Trinity study and others of its kind have been sharply criticized, e.g. by Scott et al. (2008),[2] not on their data or conclusions, but on what they see as an irrational and economically inefficient withdrawal strategy: "This rule and its variants finance a constant, non-volatile spending plan using a risky, volatile investment strategy. As a result, retirees accumulate unspent surpluses when markets outperform and face spending shortfalls when markets underperform."

Laurence Kotlikoff, advocate of the consumption smoothing theory of retirement planning, is even less kind to the 4% rule, saying that it "has no connection to economics.... economic theory says you need to adjust your spending based on the portfolio of assets you're holding. If you invest aggressively, you need to spend defensively. Notice that the 4 percent rule has no connection to the other rule—to target 85 percent of your preretirement income. The whole thing is made up out of the blue."

While I'll use simple flat rates as approximations, I agree that it's irrational to use them for a fundamentally varying thing.

FatherAbraham wrote: »

FireCalc's US focus can blind one to alternative possibilities, such as the Japanese experience. Take heed of Dirk Cotton's recent critique of over-optimistic withdrawal rates based on blinkered historical data at his "Retirement Cafe" blog:

http://theretirementcafe.blogspot.co.uk/2013/10/safe-withdrawal-rates-is-60-new-95.html

Agreed about the need to consider lots of cases. It's an uncertain world.

FatherAbraham wrote: »

A 6% withdrawal rate from a drawdown pot makes sense as a tax-reduction strategy

Why as a tax reduction strategy?

FatherAbraham wrote: »

The price of an index-linked annuity is a good benchmark indicator for the cost of retirement income which optimally consumes all one's capital on average.

I don't agree. If the only two choices were gilts or annuities, I would agree - the annuities would be delivering the gilt return, after profits and costs. But there are higher paying alternatives to gilts and their annuity proxy that more optimally consume one's capital on average by delivering a higher income from assets that pay at a higher rate.

FatherAbraham wrote: »

There is no free lunch, so one should view retirement-income strategies which promise far higher retunrs with careful and diligent skepticism.

And careful and diligent planning for variability. That understanding and embracing of uncertainty in income results is the price of the lunch. While the price of the annuity is a lower income in the less pessimistic cases. Different meals, depending on the tastes of the individuals.

In this I just don't think that there is one answer that is right for all. It's good to see you presenting a contrasting viewpoint and some interesting reading sources - thanks!

jamesd

It_Aches wrote: »

Given where I am today with the current pension pot and high likelihood of downsizing (+50 to 100k) then what would be your confidence level after everything we have discussed that I could achieve a net 25k pension income excl state benefits by the time I'm (a) 55 and (b) 60 - whether that be by annuity, drawdown or a mix?

I think that at current annuity rate it is unlikely to be wise to use annuity purchase for more than a small part of a retirement income at ages between 55 and 75, unless one is unable to deal with the uncertainties and/or has a low risk tolerance. One or both of those apply to a large part of the UK population but not to me and I think not to you, since you didn't run screaming from uncertainty but embraced it and trying to manage it to achieve your goals.

It_Aches wrote: »

My confidence now for the age 60 scenario is quite high and even for the age 55 then I am cautiously optimistic that with careful thought and planning that could also be a reasonable possibility......your thoughts?

I think that it is reasonable but that it is your job to learn about the uncertainties and how to manage them and pick a blend that works for you, then monitor and adjust over the years. Tools and options are part of the education brief I use here but ultimately it is your life and you bearing the consequences for your choices, so you must make them.

While I told you some of my own results, I achieved it in part by saving and investing more than 60% of my total of net pay plus gross pension contributions. At the moment I've accumulated a pot that is around 90% of that total net pay plus gross pension contributions over the eight years. I intend to continue until I can comfortably hit my targets.

You seem to have a well paying job now and be planning to switch to a less well paying one. My inclination would be to try switching to the lower income now for spending - or lower - and use that for a few years to establish a quite generous safety margin while still in the higher paying job. Exploit the income from the job while you can and exploit the power of compound growth with big accumulating early on.

You are not planning to retire yet, so you have the flexibility to adjust work and future retirement income contributions later, as well as to adjust the retirement age you end up using - another safety margin option.