contributions and pot required to retire at 55 with stable income

Jack_Griffin

Tancred wrote: »

What about bills? £11k is just about liveable income but you would still need to live very frugally. You would need to have your mortgage paid off etc. Are you confident of having done that by then? Your plan would work a lot better by targeting retirement at 60 - 55 is much too optimistic in my view.

I agree, 11k is only OK provided there is no mortgage or other debt and no desire to own a newish car or take more than one relatively inexpensive foreign holiday a year.

And one burst of high inflation like in 1974-78 would render most of your assumptions about affordability invalid.

Loughton_Monkey

marathonic wrote: »

Working out these figures was more an academic excercise for me as opposed to my actual pension planning.
......

This looks like a pretty hefty goal but, if anyone disagrees with the figures, let me know.

As someone who did exactly what you are suggesting, my comments would be that on the one hand, you are overcomplicating it, and on the other, you are over-simplifying it. Let me explain why I say that.

For simplicity try looking at it this way:

1. How much do you spend now? [i.e. The amount you are trying to 'protect' or different if you expect retirement spending to be different]

2. Look at the 'best buy' annuity table here:

http://www.ft.com/personal-finance/annuity-table

.. in which you will see the RPI escalated annuity rate for a 55 year old is £2,493 per £100,000 assets.

3. Divide one by the other to determine the overall size of "retirement assets" that will support your desired income.

This very simple approach gives you a fairly accurate ball-park. It quantifies in round figures the scale of your task. And no I am not saying you would build up a huge pension pot and take the whole lot as an annuity, but given that an annuity providor is generally not ripping you off in any major way, you have an "expert" assessment on what size of assets is required to give the required income for an average life. You can refine later.

I strongly advise you to think (to start with) purely about spending and not how much you throw into a pension pot. Here comes the 'complicated' bit of my answer.

To get to the really accurate answer, you must build yourself a spreadsheet with all the variables in it. That way you can change each variable and get a feel for how 'sensitive' your calculations are to inflation, taxation, investment rate.....

Central to that spreadsheet is what you spend. That's central. When you retire, your main thought is only "how much can I spend" each year. How you fund this is (to start with) academic. You must get this right, and it must relate to what you spend now (or what you think spending might ramp up to when you get promotions.... later in life). It's pointless building up a huge fund very carefully designed to give you £30K a year, when things move on and you find you are "used to" spending £50K a year for the 5 years prior to retirment.

So spending is the backbone of the model. By absolute definition, what you don't spend is saved [invested] so to start with, just don't worry too much, but assume you'll get (say) 7% return on investment over a long time. I would suggest 6% or so is generally manageable, and conservative.

Now you get into detail. Doesn't take long. Put all your spending assumptions, plus inflation, interest rates, what your earnings profile will be over working life, existing assets, etc. in and 'optimise' it to the extent that you are 'happy' with the amount you spend, per year, up to age 55, and also after age 55 [if different].

Lo and behold, now you the best tool you will ever have. On the one hand, you have your annual budget. Control this rigorously. You also have an investment return model. Control this as much as you can.... fund choice... tax relief.... risk profile... Bear in mind this will (unlike spending) not be 'smooth' but should show swings and roundabouts....

Along the way, now, with (say) 20 more years to retirement, you have great opportunity to refine the model. Make it more intricate and detailed. Handle tax issues more accurately. Consider spouse [if any] both from the view of provision, and from the view of tax saving opportunities. Consider drawdown rather than annuity. Consider splits to funds to give part annuity and part flexible drawdown. Consider fineries like continuing to contribute £3,600 to pension even when drawing other pensions (purely for the tax relief!). Consider downsizing. Consider lifetime mortgage on your house. Consider cash flow to advise you about lump sums, non-pension investing, state pension switching in....

Take (at least) annual opportunities to review where you are against plan. This is a great discipline that will tend to ensure that you achieve what you want.

There's a lot more details, but you get the point.....

By the time you are 55, this approach (I strongly suggest), will be (a) very accurate because you've thought about every detail and have vast amounts of historic data, (b) even if doesn't 'quite' get you there will inform you of exactly when you can safely go - possibly 57 or something, (c) give you 100% confidence and experience in strictly managing your spending budgets and investment portfolio - all so essential once you have retire

This approach served me so well, that with hindsight, the thought of early retiring without it scares the hell out of me now. I cringe at the more common approach that tends to concentrate on pension pots and how big to make them. For 2 reasons. 1. A 10%/15% reduction in annuity rates '5 minutes' before retirement would give you rather a shock. 2. The world is so full of people who defined their pension early on when they thought £30K income was "fine", but fail to spot that once they are 5 years away from retiring, the mortgage is paid, the kids have left home, you got that promotion to general manager (with more money) and ramped up to a 'nice' £50K life... It's far too late then to do anything about it. Early investments are the best investments.

PS: Break down spending by type. Utilities, Motoring, Housing, Expenses, Groceries, Taxation, Holidays, Discretionary Spending [stuff, eating out etc...]. Project by type.

kidmugsy

Jack_Griffin wrote: »

I
And one burst of high inflation like in 1974-78 would render most of your assumptions about affordability invalid.

That is a worry I share. Again and again I see people saying that they've built 3%p.a. inflation into their spreadsheet. By God, they are seductive, spreadsheets. But it's spikes that'll kill your finances, rather than drifts; or rather, spikes on top of drifts.

There's another distinction worth making. People say that their spreadsheet is accurate. Hm: but we are, usually, talking about the future. There's no good reason to suppose that a calculation that happens to be precise will prove accurate. Precision and accuracy are different things.

Loughton_Monkey

kidmugsy wrote: »

That is a worry I share. Again and again I see people saying that they've built 3%p.a. inflation into their spreadsheet. By God, they are seductive, spreadsheets. But it's spikes that'll kill your finances, rather than drifts; or rather, spikes on top of drifts.

There's another distinction worth making. People say that their spreadsheet is accurate. Hm: but we are, usually, talking about the future. There's no good reason to suppose that a calculation that happens to be precise will prove accurate. Precision and accuracy are different things.

It is correct to query the accuracy of assumptions, but having 'reasonable' average figures to project is better than simply not doing anything.

My own spreadsheets have turned out to be very accurate 'in the whole round'. But swings & roundabouts do apply [too conservative on this, but too optimistic on the other...]

I was assited by the fact that I did "accounts" from the very day I started work. Very 'nurdish' you might say, but I am no nurd. It was my simple atempt to 'control' financial life rather than be a slave to it. Watching assets/wealth grow is highly motivational and prevents recklessness.

So I had pretty much 20 years of data before my forward calculations could in any way be called a 'retirement model', but over the following 8 years, my "definite" historic figures dominated heavily over "likely" future projections. And then during my final 6 years, I can honestly state that my figures didn't change at all in any material way. They changed a lot in detail. It's pretty obvious that by this time, with 33 years of hard facts, and only 1 year to go, my retirement assets were going to be 'spot on'.

And now 8 years in retirement, I find myself still using the 'frozen' model from the day I retired. It remains broadly correct but over the whole piece, income has been marginally better, and spending has been marginally less than planned. Mainly because I erred on the side of caution. But I keep to the original budgets, and account for the differences into a "contingency fund", which is today, a 'surplus' representing 7.7% of my entire "net worth" on retirement 8 years ago. That's equivalent to about 2 years' spending.

bigadaj

gadgetmind wrote: »

Own? Earn?

Either way, it's always better to be salting something away for a rainy day.



Rubbish. Means testing in retirement is being phased out such that making your own provision is of far more value.

And who the hell wants to be dependent on hand outs at any stage. Come on guys, man up and be self reliant!



Yes it is.



Hard workers don't receive benefits and tax breaks (including private pensions, where you create your own retirement pot) have been under attack for many years.

It's all very well quoting how you want the world to be you have to deal with the world as it is.

I'm not justifying the situation as it cuRrenlty is, just staing the reality, I've listened to dozens of finance programmes on TV and radio confirming that people on lower incomes should t save as they are 'robbing' themselves of future benefits. Of course this isn't correct or sustainable, and the problem with this situation is those people may well lose out in future once we've discovered we can't pay them the support and benefits previously allowed, still that was the opinion right the wat through the noughties.

Also remember we live in a democracy, though subject to market forces. Labours long term destruction of the economy will quickly be forgotten by many if their promises to make people, feel better off are believed, and politics is always a question of getting in power and then worrying about delivering, at which point the spin changes to, we didn't realise how bad things really were.

Personally I'd like a cut to many benefits but that won't be popular, partciulalry as so many people have benefitted from them, a few years ago you could be earning twice the average wage and still be eligible for some benefits dependent on your situation, all totally crazy.

gadgetmind

bigadaj wrote: »

I'm not justifying the situation as it cuRrenlty is, just staing the reality, I've listened to dozens of finance programmes on TV and radio

I think you need to improve the quality of your sources of information.

bigadaj

gadgetmind wrote: »

I think you need to improve the quality of your sources of information.

Rather poor that gadget, you must have heard the same over many years I'm not saying its sensible, but it's what low earners have been advised by many.

We can all try and live in the world we want, or accept the one we're in.

It's going to be interesting how things pan out politically as benefits are cut, the problem is that once given out they are accepted as the norm, even where they are unjustifiable and unsustainable. We're in a situation where people honestly believe they're being paid benefits to look after their kids, and many areas of the country it makes sense as benefits pay more than the majority can earn.

The next election will be critical as currently it looks like labour may well win, and if balls is chancellor then benefit cuts look less likely. This isn't sustainable so labours reaction if they are elected will be interesting. People who gain from benefits would probably be those generally who are less likely to vote so less political leverage. I've been surprised how the Tories have avoided criticism for the low level of interest and particularly savings rates, given the preponderance of older Tory voters who will have been hit as savers. I know this is technically a boe issue but governments will always have influence, amazed that farage and his mates haven't ploughed that furrow more profitably.

gadgetmind

bigadaj wrote: »

Rather poor that gadget

Why?

you must have heard the same over many years I'm not saying its sensible, but it's what low earners have been advised by many.

Not from any reputable sources, and even for those few cases where there was some shred of truth, recent changes to pension/benefit legislation have removed these corner cases.

benefits pay more than the majority can earn.

Please reference relevant statistics.

I know this is technically a boe issue

I'm not sure what boe means in this context, or any other content.

bigadaj

Had a bad day gadget? I'm just quoting my interpretation of commonly reported issues. Certainly not justifying anything just retelling.

gadgetmind

bigadaj wrote: »

Certainly not justifying anything just retelling.

AKA passing on ill-informed tittle-tattle while trying to dress it up as the way things really are.

I'm still waiting for real facts and statistics so we can have a grown up discussion.