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contributions and pot required to retire at 55 with stable income

marathonic
Posts: 1,786 Forumite


Working out these figures was more an academic excercise for me as opposed to my actual pension planning.
However, the results are pretty interesting. The subject is: 'Someone who wants to retire at 55 and take an annuity that rises with inflation whilst using their 25% Tax Free Lump sum to give them the same income as the £144 state pension per week until they reach 70 (probably the state pension age when I get there).'
The assumption is that the tax free lump sum is invested in a product that provides a return of 1% over inflation - which should be a relatively low-risk product given the expected return. The 25% lump sum capital is to be entirely depleted by the persons 70th birthday.
The theory is that someone could use these assumptions to come up with a smooth income after retirement - no jump in income when they reach state pension age.
From age 55, with a return of 1% in excess of inflation, a pot of £111,285 would be entirely depleted at age 70 by withdrawing £144 per week (£7,488 annually). To achieve this as a 25% tax-free lump sum would require a pot of £445,140. The withdrawal rate on the initial lump sum pot value is 6.66%.
Therefore, if one were to draw down on the remaining 75% at a rate of 3.33% per year, the pot could sustain an income, including state pension when it comes, of 2.5 times the value of the state pension - or £360 per week.
To achieve a pot, in todays money, of £445,140 by investing at a return of 3% above inflation after charges from the age of 20 to 55 would require monthly contributions of a little over £600 (this also needs to increase with inflation).
This looks like a pretty hefty goal but, if anyone disagrees with the figures, let me know.
However, the results are pretty interesting. The subject is: 'Someone who wants to retire at 55 and take an annuity that rises with inflation whilst using their 25% Tax Free Lump sum to give them the same income as the £144 state pension per week until they reach 70 (probably the state pension age when I get there).'
The assumption is that the tax free lump sum is invested in a product that provides a return of 1% over inflation - which should be a relatively low-risk product given the expected return. The 25% lump sum capital is to be entirely depleted by the persons 70th birthday.
The theory is that someone could use these assumptions to come up with a smooth income after retirement - no jump in income when they reach state pension age.
From age 55, with a return of 1% in excess of inflation, a pot of £111,285 would be entirely depleted at age 70 by withdrawing £144 per week (£7,488 annually). To achieve this as a 25% tax-free lump sum would require a pot of £445,140. The withdrawal rate on the initial lump sum pot value is 6.66%.
Therefore, if one were to draw down on the remaining 75% at a rate of 3.33% per year, the pot could sustain an income, including state pension when it comes, of 2.5 times the value of the state pension - or £360 per week.
To achieve a pot, in todays money, of £445,140 by investing at a return of 3% above inflation after charges from the age of 20 to 55 would require monthly contributions of a little over £600 (this also needs to increase with inflation).
This looks like a pretty hefty goal but, if anyone disagrees with the figures, let me know.
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Comments
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I agree with your figures for the payment of the SP replacement. The main pension according to my calculations runs out at aged 90 which is rather too close to life expectancy for comfort.
I also agree with the contribution to reach your goal.0 -
Thanks for verifying the figures Linton. It looks like a retirement at 55 is even more of a pipedream than I once thought - and this is coming from someone who contributed up to 26% of my salary throughout my mid-20's (during the low markets of 2008 - 2011).
What a shock those that are proud of investing £100 per month in a pension are in for when they reach what they expect to be a retirement age of 55.
Having purchased a house last year, I temporarily reduced contributions but it looks like I need to increase them again, sooner rather than later.0 -
It sort of goes to show how unnatural it is to retire at 55 for the vast majority of the population. Trying to accrue enough to live on in barely thirty working years for many people nowadays to sustain them for a similar to longer period.
Whilst it's fantastic to be in such a situation it's more a case of being able to retire rather than doing so.
I think the main lesson to be learnt is either to find a job that you are happy to Cary on with or be able to reduce hours either in your chosen profession or alternative.
Thirty years or more in retirement is excessive though it's interesting to see the actual numbers.0 -
I am saving about 12% of my wage in pensions, which is a reasonable sum, and I get some heavy contributions from the NHS too, but I harbour no ambitions to retire at 55. I'd be bored as anything.
However, I appreciate that it might not be my choice!0 -
Its not quite as difficult as it may first seem. This figures do assume no employer contribution and a single person. I think a couple of moderately well paid people with a reasonable employer contribution should be able to retire at 55.0
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Retiring at 55 means considering a retirement income for around 35 years, as Linton pointed out (life expectancy of 90 roughly).... Which means the person would be in retirement for about the same length of time as their working life, if they started at 20.
So it's not that surprising that a decent contribution is required if a decent standard of living is required relative to the working lifestyle. Obviously, there's the benefit of compound interest over the period (for those who start contributing early enough) but at the end of the day, what comes out is very dependent on what goes in - both member and employer contributions.0 -
It looks more like £254 than £600 to me for someone who wants to retire at 55 on £18,720, a bit over the median average pensioner income. Such numbers are easy enough for those on average income levels.
Checking the growth part with a regular savings calculator set to £600 a month for 35 years at 3% interest rate shows a pot size of £444,938 in today's money so the calculation itself appears OK.
However, the historic return of the UK market was more like 5.2% plus inflation and £600 a month produces a pot size of £681,655 when the interest rate is set to 5% to allow for 0.2% in charges. With historic returns it takes £392 a month gross to get to £445,000. Get 20% after inflation less than the historic average, 4%, and it takes 38 years to get to £418,736, good enough with the lack of income need for three years more.
But even £392 is inflated so far as real cost goes because it's ignoring tax relief and employer contributions. Lets pretend it's 2018 and the auto-enrolment requirements are being used: 3% from the employer, 4% from the employee and 1% from basic rate income tax relief. Now the net cost to the employee drops to £196. But that's not really right because it requires £58,800 of income for 4% to be £196 a month. Half of that is more likely, say £30,000 a year because £29,900 was the mean income for employees in the 2012 tax year. £30,000 * 0.08 / 12 = £200 a month from the auto-enrolment pension, ignoring the qualifying salary calculations. £100 of that the net employee cost. That leaves £192 before tax relief extra, £153.60 after allowing for it. Total net cost to the employee of £253.60.
I've ignored the low income return, more than that is readily possible based on historic returns and that would further lower the monthly cost.
Calculations like yours are the sort of thing that worry me that we might be making it look impossibly hard to do things like retiring early when it's not really that hard for those on average earning levels, if they want to do it.0 -
Calculations like yours are the sort of thing that worry me that we might be making it look impossibly hard to do things like retiring early when it's not really that hard for those on average earning levels, if they want to do it.
The maths in my post are fine. The only thing in your post that differs from my post is the growth rate used.
Of course, the £600 or so specified in my original post is a lot easier than it sounds and it's up to everyone to calculate how much NET salary this would cost them depending on:- Employer contributions;
- Whether they're lower or higher rate tax payers;
- Whether their scheme uses salary sacrifice;
I think you are missing my point that my figures are what is required to use your 25% tax-free lump sum to sustain an income equal to the state pension from the age of 55 until a retirement age of 70.
A 25% tax-free lump sum of £72,141 (£288,567.48/4) wouldn't last too long withdrawing £7,488 annually.
Even if the rules allowed drawdown at the required rate, a pot of £288,567.48 and income of £18,720 represents a drawdown rate of about 6.5%. That's a little high for my liking if one were to retire at 55.0 -
Basically, my figures would see someone using their 25% tax-free lump sum to withdraw £7,488 in todays money, increasing with inflation between the age of 55 and 70. It assumes a growth rate 1% in excess of inflation - as you wouldn't be invested in the riskier assets at that point.
By the age of 70, the tax-free lump sum would be depleted. After the age of 70, you are in receipt of the state pension - so your income is contant.
The remaining 75% of your pot could be used for drawdown, an annuity, or however else the rules allow. For example, using the figures in my original post, if it gave an annuity of 3.33%, it would result in an annual income of £11,017.0 -
using the 25% lump sum to help boost income in the period before state pension starts is a good idea.
but it's too rigid to insist on providing 100% equivalent of the state pension by this means. because that forces you to accumulate 4 x the amount required inside a pension, which may be more than you need, depending on your other targets and assumptions.
alternatively, you could use a mixture of the lump sum and S&S ISAs to cover this period.0
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