Would you retire on these numbers?

jamesd

Assuming that you can live comfortably enough on £12,000 a year, would you want to retire at 52 when rough projections show these income results, for a person with average or lower life expectancy:

age	growth:	6%	5%	4%	3%	2%	1%
100		20500	18500	16500	14800	13300	11900
95		20700	18800	16900	15200	13600	12300
90		21100	19200	17400	15600	14100	12700

Age is the age at which the money runs out for the income level in the table. Growth is inflation-adjusted growth, with historic UK stock market at about 5%. So £16900 means 4% growth and running out of money at age 95. Everything is assumed to be inflation-adjusted, but spending is not adjusted for levels above inflation that historically have happened.

What's your reasoning for your view?

FatherAbraham

jamesd wrote: »

Growth is inflation-adjusted growth, with historic UK stock market at about 5%. So £16900 means 4% growth and running out of money at age 95. Everything is assumed to be inflation-adjusted, but spending is not adjusted for levels above inflation that historically have happened.

What's your reasoning for your view?

I would look carefully at what Wade Pfau's been saying recently about sequence-of-returns risk, especially during the drawdown phase (see http://theretirementcafe.blogspot.co.uk/2014/07/half-right.html?spref=bl), and think about more sophisticated modelling than using a single geometric average for growth (given the consequences of an error).

Nevertheless, even taking Pfau's maximum growth reduction of 4% into account, the numbers look good enough. Although you haven't clarified the role of the state pension in that income figure.

Warmest regards,
FA

AlwaysLearnin

Ignoring the actual numbers, as desired income levels are a personal decision, if you're saying you've got ~25% contingency at 3% then I think I'd be pretty comfortable with that. Especially given that you sound like an experienced investor who understands risk, diversification etc, reducing the liklihood of any investment disaster.

If this is your position, congratulations! You have control.

Whilst writing I'll also just say thanks for all of the excellent input you add to this board/these forums.

hugheskevi

I'd be concerned about that the £12,000 figure only being inflation adjusted. That would start at age 52 being around 50% of average earnings, but fairly rapidly decline to maybe 25-33%. That is quite a drop in living standards, particularly if personal inflation is more in line with earnings than prices (ie based heavily on services rather than goods). Personally I'd be concerned at anything less than earnings adjustment until at least State Pension age and would consider more detailed modelling of retirement needs to generate a U-shaped income stream through retirement.

I would also want to know the impact of working an additional year is on the number - the impact of an extra year of saving (and not drawing down savings) may well be to increase annual income by as much as 10% or so, in which case even if £12,000 is comfortable another year may well be very attractive.

Also, would the investment strategy be somewhat aggressive to take advantage of the ability to absorb a loss, or would the strategy be to de-risk, locking in more certainty at the cost of a lower expected income.

£12,000 feels very low, with little margin for larger shocks (eg house repairs, new roof, etc), and I'd want assurance that the figure is enough to live comfortably.

So, I think on the numbers given I would want to retire, but I would want to be absolutely assured about all of the assumptions given that the target is so low.

jamesd

FatherAbraham wrote: »

I would look carefully at what Wade Pfau's been saying recently about sequence-of-returns risk, especially during the drawdown phase (see http://theretirementcafe.blogspot.co.uk/2014/07/half-right.html?spref=bl), and think about more sophisticated modelling than using a single geometric average for growth (given the consequences of an error).

Thanks, yes I do. I've very much appreciated your past mentions of his blog and have been gradually working through everything. Lots of interesting reading material there!

Firecalc currently says that I should delay for three or more years to reach the target that I give it (not £12,000) with a suitably high confidence level.

FatherAbraham wrote: »

Although you haven't clarified the role of the state pension in that income figure.

I've assumed full flat rate state pension at my current date. I don't currently qualify for it all but have in the past purchased enough years that I will be able to get there a few years before my current state pension age. I'm in the group that has spent a lot of time outside the UK and when in the UK, contracted out, so overall I'm likely to be one of the winners from the flat rate system.

There's also an interest only mortgage to pay off and I've considered the due date for that in the cash flow model.

I'll hold off for longer on saying what I'm planning to do. At this point I'm fairly confident that I have comfortably met the "survive indefinitely without benefits" if not working goal that I started out with in the 2005/6 period. Far from the ideal way to do it but 60%+ of (net pay plus gross pension contributions) can achieve a lot with a high enough income and low enough spending target.

It's also worthwhile for me to remember with great care that my investing time has so far been largely during a bull market, since I didn't go really heavily into investing rather than saving until after the initial 2008 drops, when I set up salary sacrifice down to minimum wage after a change of employer in May that year. I knew I'd seen drops and wanted to exploit any future drops. Served me well.

kidmugsy

Would you spend any part of your capital, at any age, on an I-L annuity?

bristol_pilot

I've been looking recently at what net income I will need to live on in retirement and I came up with a number that is more than twice £12,000 in Year 1 and that is with no housing costs. £12,000 seems very low to me, council tax alone could easily be 15-20% of this.

Don't fall into the trap of doing a lot of sophisticated modelling without validating the assumptions.

jamesd

AlwaysLearnin wrote: »

Ignoring the actual numbers, as desired income levels are a personal decision

I agree. I'd call £12,000 more my minimum desired level than a central or good case level.

AlwaysLearnin wrote: »

Whilst writing I'll also just say thanks for all of the excellent input you add to this board/these forums.

If I've been helping to educate people that they can take control, and showing how, that's good! Very few people will do what I've done but that's OK, the tools work for others, just at different levels.

hugheskevi wrote: »

I'd be concerned about that the £12,000 figure only being inflation adjusted. That would start at age 52 being around 50% of average earnings, but fairly rapidly decline to maybe 25-33%. That is quite a drop in living standards, particularly if personal inflation is more in line with earnings than prices (ie based heavily on services rather than goods). Personally I'd be concerned at anything less than earnings adjustment until at least State Pension age and would consider more detailed modelling of retirement needs to generate a U-shaped income stream through retirement.

I agree. That consideration is why I mentioned inflation, without wanting to say more that might have directed responses too heavily in one particular direction - I want a broad range of replies, not too heavily directed by the question.

hugheskevi wrote: »

I would also want to know the impact of working an additional year is on the number - the impact of an extra year of saving (and not drawing down savings) may well be to increase annual income by as much as 10% or so, in which case even if £12,000 is comfortable another year may well be very attractive.

The improvement for a few years is very substantial and a significant part of my decision-making, as is knowing that I'm in the best job I have ever had or am ever likely to have and a reluctance to be compelled to go back to work that would be way less attractive than what I'm doing now.

I have significant amounts in ISA investments that have not yet been paid into a pension. I have a salary sacrifice pension scheme. I'm not this year sacrificing much more than it takes to eliminate my higher rate tax liability. My employer adds half the employer's NI so I would get almost 39% combined income tax and NI gains on basic rate pension payments. At the moment for almost all - £4-5k - of the basic rate sacrifice portion I'm getting about 59% because I'm getting higher rate income tax reduction while also getting the basic rate NI reduction. That won't continue at deeper sacrifice levels.

hugheskevi wrote: »

Also, would the investment strategy be somewhat aggressive to take advantage of the ability to absorb a loss, or would the strategy be to de-risk, locking in more certainty at the cost of a lower expected income.

Heavily diversified but below 100% equities in volatility, though I expect to maintain well in excess of 50% equities, since higher levels are needed for longer terms to maximise potential income and I'll be starting quite early. A range of conventional investments and also P2P and to be some VCT use starting this year.

I now have enough money outside the pension, and that requirement is decreasing as I get closer to 55. I'm considering eliminating most of my basic rate income tax liability this year using VCTs then using salary sacrifice more next year, combined with reduced VCT use.

One to two or more years of spending will be in cash or near-cash highly likely to be available money not linked to equity capital drawing.

hugheskevi wrote: »

£12,000 feels very low, with little margin for larger shocks (eg house repairs, new roof, etc), and I'd want assurance that the figure is enough to live comfortably.

Agreed. It's perhaps also worth mentioning that the home I own is close to my minimum requirement and a first floor flat. That is not ideal for long term retirement planning and one thing I'm considering is what, if anything, I should do to change that. Working longer would allow an upgrade while still hitting income targets. But an upgrade could probably not be done with an interest only mortgage like the one I have now. And interest only is ideal for my personal inclinations and investment preference. But with between £50,000 and £100,000 outside a pension I could spend some of that and, if permitted, port the current mortgage. That would compromise the target hitting since I'd have to replace it from income or miss the income targets. Which would mean committing to working a year or perhaps two longer to cover the cost.

hugheskevi wrote: »

So, I think on the numbers given I would want to retire, but I would want to be absolutely assured about all of the assumptions given that the target is so low.

My current thinking is more along the lines of median pensioner income as a central target - say £18,000 - and also upgrading to a more long term suitable property before I retire. But I'm seeking open-ended feedback on things to consider and general opinions. I don't want to go a lot later than I could but in spite of my investment risk tolerance, my overall financial risk taking is not high. That low overall tolerance is why I accept the higher investment tolerance.

jamesd

kidmugsy wrote: »

Would you spend any part of your capital, at any age, on an I-L annuity?

If that appeared to be a rational investment choice, given my quite high risk tolerance, yes.

A rational investment choice for me would also include preserving sufficient capital to provide for care needs in the last few years of life. Imposing that requirement would also mean raising the capital unspent at death target to above zero, perhaps £100,000. The care needs provision is sufficiently costly that it alone would require a delay in retirement if it's to be provided for in the long term poor investment performance cases.

The more optimistic investment returns outcomes at higher target income levels would provide sufficient income to cover care needs and eliminate the need to preserve capital for care needs. At the higher performance levels the returns might make it useful to buy an enhanced annuity just for de-risking some of the income, at some age. Unfortunately I don't know the investment outcomes at the date I retire.

I'm not greatly keen on annuities but they can be useful and if I think they fit my needs, I'll use them.

wotsthat

Won't you have more spare time in retirement? £12k is enough if you're filling time at work but maybe you'll want to relax the spending in retirement?

jamesd

bristol_pilot wrote: »

I've been looking recently at what net income I will need to live on in retirement and I came up with a number that is more than twice £12,000 in Year 1 and that is with no housing costs. £12,000 seems very low to me

Yes, that's pretty common. The £12,000 is based on actual spending plus some moderate margin.

bristol_pilot wrote: »

council tax alone could easily be 15-20% of this.

Currently under £800 a year, around 6.5%. Band A property. Band C would be around 8.5%. But no guarantee that this tax will not rise at rates well in excess of inflation, or be replaced by one that does.

bristol_pilot wrote: »

Don't fall into the trap of doing a lot of sophisticated modelling without validating the assumptions.

That's definitely a risk and I think that some safety margin for that risk is required.