Working out what we need and how far away we are...

kangoora

Temrael wrote: »

Thanks for all the replies guys and girls.

The main reason we think we will be happy living on a lot less than currently is that at the moment, about 66% of what we earn is either going straight into pensions or into long term savings. That obviously won't need to continue in retirement. We live pretty frugally, to the point where I'd like to think we are over saving it at the moment.

Agreed, I used the x 25 rule and also went onto one of those pension planners and nearly had a heart attack (that would have simplified my retirement planning anyway ).

But when I subtracted mortgage and associated endowment & life insurance. Removed costs for the second car which wouldn't be required. Then subtracted the £7k a year helping kid through Uni. Then accounted for no NICs or pension payments. Then subtracted some estimated FS pensions at age 60 and then finally took out state pensions the number dropped by a massive amount.

Any pension calculator which only goes by your current salary and doesn't take into account most of the above is, at best disingenuous and at worst, scaremongering you into massively over-investing IMO. The HL one, for example, makes no reference to 'required salary', it's just based on current salary the same as a few others I've looked at.

P.S. I'm not saying the calculator should be psychic, but it should be clear what you should be aiming for, ideally giving you the option to do what-if scenarios.

Temrael

Hmm doing some more calculations...

We actually live all in on £2,165 per month currently. So that's the quality of life we are used to, this includes putting money aside for holidays, Christmas and birthdays, house maintenance etc.

So that means that we only actually need a total pension that pays just under £26k per year (a bit less than the £40k I'd said!) to see no drop in quality of life.

Allowing for tax for both of us I think this would mean a total gross pension of just over £27k per annum. Does that look right?

That being the case we are way closer than I thought! We only need to fund a gap of around £5k (between the £22k we already have waiting for us and the £27k we need). If we keep going at the rate we are we should achieve that in the next few years (taking ISAs etc. into account).

Shout if you think I'm missing something obvious, it's quite likely I am. It all looks too good to be true at the moment.

jackyann

It is worth considering what concrete things you want to take into retirement as well.
Will you be likely to downsize your house? It is a good plan to future-proof it against disability. How will you fund home improvements?
What kind of car will you want to run, and how will you save for its replacement?
Do you want to buy a caravan / camper van or something similar?
What money do you want set aside for helping children / grandchildren or giving as major gifts?
It's a good idea to have a fund for this kind of stuff.

hugheskevi

Allowing for tax for both of us I think this would mean a total gross pension of just over £27k per annum. Does that look right?

Think carefully about exactly what you are targeting.

Currently, your expenditure requirement is £2,165 per month, which is about the level of average gross annual earnings across the country. Let's say that you target that in constant price terms, so you have that amount of income in retirement, taking into account inflation.

By the time you reach 70, you have the same purchasing power in goods terms, but average earnings will have increased significantly more. If it is assumed that price growth is 2% and average earnings growth is 4.75%, then by the age of 70 (in 30 year's time) your income would be less than half of average earnings, compared to about 100% now. That would be a severe reduction in living standards compared to someone with average earnings.

So instead you may wish to target having an income of about average earnings, at least until you enter retirement.

kidmugsy

Temrael wrote: »

Allowing for tax for both of us I think this would mean a total gross pension of just over £27k per annum. Does that look right?

It's about what we get through as a "base case", though in our case after tax. However perhaps (i) the assumption that investments will grow at the same rate as earnings-inflation will prove too optimistic, (ii) you have to allow for predictable non-base-case one-offs e.g. car replacements, larger expenditure on your house to make it fit for older folk, hiring of help with domestic duties that require much bending or lifting, demands on the Bank of Mum and Dad, etc, (see jackyann's post), (iii) the risk that in future various tax avoidance opportunities will vanish because (is it conceivable?) a government will wrestle seriously with the obvious insolvency of The State, and (iv) the risk that such a government might find itself needing to cut back on "free" welfare benefits, even up to introducing some charges for the NHS. (Yes I know we're all used to paying for prescriptions, for glasses, and for dentistry, but it may have to be extended beyond those.) In other words, the prudent saver would try to build in a margin for "contingencies".

Temrael

Cheers guys, we actually do already have a bit of fat in that figure (saving for car replacements etc.), we probably would downsize house to a certain extent, and yep we need to make sure that all these figures are based around today's money, allowing for inflation etc. Perhaps something like a total income of £30k p.a. in today's money. I totally take the point too about allowing for the new costs that would come with retirement.

My key aim in all of this, given my likely redundancy in the next year or two, our high disposable income at the moment and a sense that we'll probably be a fair bit worse off from the point of my redundancy until retirement - is to try (as far as it is possible) to really clobber our retirement saving in the next year or two while retirement is still such a long way off.

That way...

a) The funds have longer to appreciate and compound.
b) There won't be such a pressure to get a highly paid job after the redundancy to fund big pension contributions (as we'll be mostly there).

We just needed something to aim at, and we'll inevitably end up over-achieving it as the likelihood is we'll still have reasonable jobs and be making modest contributions until retirement anyway.

I guess the risk is we go hell for leather overpaying into pensions for the next couple of years and then promptly get hit by a bus and never see a penny of it.

greenglide

I guess the risk is we go hell for leather overpaying into pensions for the next couple of years and then promptly get hit by a bus and never see a penny of it.

Driven by your children? They would benefit big time!

Temrael

Shhhh... they'll hear you.

greenglide

Or a conspiracy - my children drive your bus, your children drive mine!

Scary:(

kidmugsy

Temrael wrote: »

I guess the risk is we go hell for leather overpaying into pensions for the next couple of years and then promptly get hit by a bus and never see a penny of it.

Or just that you invest madly in equities and they collapse and stay low for a long time.

http://blogs.ft.com/andrew-smithers/2014/08/long-term-investing/