How Much Pension Do You Really Need?

atush

It would not be my advice.

It would be my advice to split the money into cash for short term, bonds for medium, and equities for long term.

Basically the pot has to last as long as your pension money (ie until you die) so it could be used over 3 decades. So it needs to be diversified or you run the risk of losing ground to inflation.

TBC15

Would this be 1/3 divisions? And what approx. size pot wouldbe likely to generate the £5000 required.

I realise this is look into your crystal ball and tell mehow long a piece of string is buts what’s your feeling?

Daniel54

TBC15 wrote: »

Would this be 1/3 divisions? And what approx. size pot wouldbe likely to generate the £5000 required.

I realise this is look into your crystal ball and tell mehow long a piece of string is buts what’s your feeling?

It would be beter to start your own thread rather than hijack this one

TBC15

|Good point well put, I’ll get my coat.

PennyForThem_2

I find it difficult to come to terms with how your outgoings diminish with retirement. I don't live a lavish lifestyle, but some outgoings are going to stay the same whatever and may increase if you are living at home 24/7.

Yes, maybe costs of commuting, work clothes. But if you work outside London then minimal.

I work now past retirement age - have a comfortable life style with no worries about money. Give up work and my safety net disappears. Yes, I know I will have enough but I may not have a cushion.

I have alternatives which I can take - have that choice and I know how lucky I am to have that. I can downsize releasing loads of equity, I can reduce my living style (food and wine mostly as I hate travel) but I won't have that spare 'free' money to impulse buy - the artwork I like, the blouse I want.

I know I am lucky - I belong to the baby boomers generation - I worry for my kids (who actually probably don't share my middle class ethos).

jamesd

TBC15 wrote: »

If a couple was buildinga pot of investments to supplement pensions on retirement it appears traditionalto go into bonds as they gets closer to retirement to avoid the inevitable dipsin the market. Is this a golden rule or if the investments are substantialenough could they carry on as normal?

It is not a golden rule and if you are using income drawdown a higher percentage of bonds above a certain point decreases your chance of making it to the end without running out of money or alternatively decreases the income you can take while not running out of money. Something between 20% and 30% is likely to be the level of bonds that maximises potential. Some bond allocation is useful for rebalancing, which increases returns.

While it uses US past data, Firecalc has an option that shows the effect of varying bond allocation vs equities on success rate. It is not directly comparable to the UK but it does tend to provide generally consistent results and in the area of bond allocation it's probably correct enough to rely on.

The thing about avoiding dips in the market is that doing that costs you returns long term by causing you to go into investments that have lower returns. Lower long term returns means less money in the pot so you're less well protected against future downturns.

It is traditional to use higher bond allocations in retirement than before but that is in part based on risk tolerance reducing or assumed to be reducing, not on maximising income or chance of success.

jamesd

TBC15 wrote: »

Would this be 1/3 divisions?

One third each in cash, bonds and equities would significantly decrease either the income that can be taken or the chance of maintaining that income until death.

A cash target should really be at least a year or two of income from the investments so that you can use it to smooth out income variations. One year has been found by a study to improve success rate, longer periods/amounts not reported on.

TBC15 wrote: »

And what approx. size pot wouldbe likely to generate the £5000 required.

A very crude guideline is to multiply the target income by twenty, assuming 5% income from investments. 25 is probably safer unless you are adding safety margin in some other way. A more sophisticated answer is to use a tool like Firecalc and look at the effects of past US markets on success rates or income levels and make a decision in part based on that. It is an excellent tool for helping to understand the effect of safety margins on success rates and acceptable income levels.

jamesd

PennyForThem wrote: »

I find it difficult to come to terms with how your outgoings diminish with retirement. I don't live a lavish lifestyle, but some outgoings are going to stay the same whatever and may increase if you are living at home 24/7.

Some things change up, some don't and desire to go on holidays is likely to decrease when less able to walk, say. Have a read of the US data in "Reality Retirement Planning: A New Paradigm for an Old Science by Ty Bernicke, CFP" and WadePfau's blog entry about it.

jamesd

geelamch wrote: »

I am now leaning towards minimum lump sum and larger pension.

If it is a defined benefit pension like final salary then either the default lump sum amount or reduced lump sum is likely to be bast, depending on the scheme rules and health. Rules decide the commutation rate, health determines life expectancy and anticipated value of the pension income vs lump sum that can boost spending power while alive.

If that is for a defined contribution pension like a personal pension or group personal pension it's better to take the 25% lump sum in almost all cases. This is because:

1. The lump sum can be reinvested over time in identical investments within a S&S ISA to produce tax free income. If the lump sum is left in the pension pot it produces taxable income instead.
2. The lump sum could be recycled into pension contributions to get more tax relief and another tax free lump sum, subject to the limits on lump sum recycling.
3. If an annuity is to be purchased the pension lifetime annuity would be producing taxable income while the annuity that can be purchased outside a pension would have much of the income tax free because it's partly treated as a drawing of capital.
4. The lump sum outside the pension diversifies and reduces legislative risk. Instead of just being subject to pension rules you get some exposure to ISA rules so it's less likely that one change will have a big effect on you. Think of the current government's dropping of permitted withdrawing rates from pensions a few years ago by dropping the GAD multiplier that was reversed after a couple of years.

geelamch

James d ,it is a final salary scheme and I also have an avc for £95.60 a week ,been member for 33 years so probaly looking at getting the max pension if I give it another 6-7 years.
Wife does £70 a week and her employer puts in £40 weekly.