Pension or....

suicidebob

It's only fairly recently I've started planning for retirement in around 30 years... Fast approaching 40!

I have a pension through my employer, and I have been looking at other ways of saving another pot towards retirement. I've done some potentially meaningless calculations and was wondering if they were reasonable.

Here's my plan:

I'm currently 37
I want guaranteed income, and obviously want to achieve the highest growth possible with absolute minimal risk
Save £200.00 per month for the first year, rising £15.00 each year thereafter. There's plenty of scope to increase this initial £200 to nearer £300. Continue this for around 27 years.
Achieve 3.5% / 2.8% interest per year
This gives me a fund of just over £200K
Retire in year 28 when I reach 65
I will take £50K immediately, then pay myself £8.5K per year, rising 2% every year until I reach 85, so final year I will withdraw around £11K.
I intend for this to cover my basic living expenses, with state pension and private pension funding any treats and entertainment, holidays etc
This leaves me with a surplus of £19K which will hopefully be enough to cover any breaks in employment

To get me started I intend to open up a First Save 7 year bond, paying 3.5%.

I'm a basic rate tax payer.

Is this just a stupid idea?

lvader

suicidebob wrote: »

It's only fairly recently I've started planning for retirement in around 30 years... Fast approaching 40!

I have a pension through my employer, and I have been looking at other ways of saving another pot towards retirement. I've done some potentially meaningless calculations and was wondering if they were reasonable.

Here's my plan:

I'm currently 37
I want guaranteed income, and obviously want to achieve the highest growth possible with absolute minimal risk
Save £200.00 per month for the first year, rising £15.00 each year thereafter. There's plenty of scope to increase this initial £200 to nearer £300. Continue this for around 27 years.
Achieve 3.5% / 2.8% interest per year
This gives me a fund of just over £200K
Retire in year 28 when I reach 65
I will take £50K immediately, then pay myself £8.5K per year, rising 2% every year until I reach 85, so final year I will withdraw around £11K.
I intend for this to cover my basic living expenses, with state pension and private pension funding any treats and entertainment, holidays etc
This leaves me with a surplus of £19K which will hopefully be enough to cover any breaks in employment

To get me started I intend to open up a First /save 7 year bond, paying 3.5%.

I'm a basic rate tax payer.

Is this just a stupid idea?

With 30 years left before retirement you need to look at risk in a different way, by investing purely in bonds you are risking that inflation will eat into your savings. You need to have some higher risk investments to lower your overall risk.

suicidebob

lvader wrote: »

With 30 years left before retirement you need to look at risk in a different way, by investing purely in bonds you are risking that inflation will eat into your savings. You need to have some higher risk investments to lower your overall risk.

What type of investment would you recommend? And what sort of growth is reasonable with that timescale?

planteria

Equity Funds.

lvader

suicidebob wrote: »

What type of investment would you recommend? And what sort of growth is reasonable with that timescale?

You should probably go for a lifestyle type fund with a mixture of asset classes in it, the long term returns are lower than pure equity funds but less volatile so would better fit your (low) risk profile.

suicidebob

planteria wrote: »

Equity Funds.

What percentage of these funds have returned an average of 3.5% for the last 7 years?

planteria

good question.

but either direct equity investments or investing in 1 or more equity fund is considered to be the best place to put your money for the long-term...unless you have a business that you can use the money more effectively in or want to invest in property.

kidmugsy

If I were investing for a 30 year horizon I wouldn't use cash alone; and certainly not tax-exposed cash. Inflation could wipe you out, and you're likely to make far less money than you could with a more diversified portfolio.

Having ensured that I had an adequate cash emergency fund, I'd expect to diversify my investments. Some shares, some bonds, even some gold sovereigns. Say (off the top of my head) 60% equity, 10% gold, 20% bonds, 10% cash. Each year rebalance the portfolio back to around those proportions, probably mainly by directing the new money suitably. (If there were a big crash in equities, you'd have to decide whether to divert a chunk more of the cash into equities than would be implied by the rebalancing.) Use S&S ISAs for the equities and bonds, the best interest-bearing accounts you can find for the cash, and a local safety deposit for the sovs.
As for the returns you can expect, Lord knows. I am influenced by this document from Credit Suisse.
http://www.investmenteurope.net/digital_assets/6305/2013_yearbook_final_web.pdf

After ten years, say, take stock and consider whether you want to change your strategy. Meantime go and read the Monevator blog e.g.starting with
http://monevator.com/the-warren-buffet-passive-portfolio/
where you'll see that Mr Buffet advocates a portfolio for his widow of 90% equities, 10% short-duration bonds. I dare say that his widow will be wealthy enough to use such a risky portfolio: my widow won't be.

P.S. You'll need to distinguish between "bonds" as used by serious investment people - e.g. Gilts (UK govt debt) and Corporate Bonds (plc debt) - and "bonds" as used by Building Societies - i.e. fixed term cash deposits.

P.P.S. Excellent post at Monevator.
http://monevator.com/9-lazy-portfolios-for-uk-passive-investors-2010/

gadgetmind

suicidebob wrote: »

What percentage of these funds have returned an average of 3.5% for the last 7 years?

Out of interest, why did you pick seven years as your timescale?

suicidebob

gadgetmind wrote: »

Out of interest, why did you pick seven years as your timescale?

Because that's the term of the 3.5% fixed savings account I was looking at.

gadgetmind

suicidebob wrote: »

Because that's the term of the 3.5% fixed savings account I was looking at.

Fair enough, but given your investment horizon, minimum risk is really high risk due to inflation. You need a balanced portfolio of equities, bonds and (perhaps) property, with an emphasis on equities.