Is this calculator right?

jumperabv3

I'm still young for pension discussions (29 years old) but just planning ahead ... got around £6,000 in my pension pot and saving around £240 per month (£300 plus the 25% the govt. adds) .... from time to time if I manage to save more I throw some £100 - £200 as one off payment into the pot as well...

I looked at this calculator here from KeysRs:

http://www.keyrs.co.uk/annuities/annuities-vb/c/annuity-goog-generic-c02/

I typed £120,000 and age of 55, chose "already retired" just for the purpose of filling out this form ... now assuming that if all goes well (and who really knows) then maybe I will get to that pot in that age which is 26 years from now ...

I've noticed if I don't take any cash from the pot at the age of 55 - then according their calculator a pot of £120,000 will allow me to buy an annuity of approximately £6,400 per year, which is £535 approx per month.

I wanted to ask if that is correct? Is this the most you can get, more or less from your pension pot? And can I ask for how long would you get these payments of £535 - is this until you die? How does it work?

Thanks in advance.

CLAPTON

jumperabv3 wrote: »

I'm still young for pension discussions (29 years old) but just planning ahead ... got around £6,000 in my pension pot and saving around £240 per month (£300 plus the 25% the govt. adds) .... from time to time if I manage to save more I throw some £100 - £200 as one off payment into the pot as well...

I looked at this calculator here from KeysRs:

http://www.keyrs.co.uk/annuities/annuities-vb/c/annuity-goog-generic-c02/

I typed £120,000 and age of 55, chose "already retired" just for the purpose of filling out this form ... now assuming that if all goes well (and who really knows) then maybe I will get to that pot in that age which is 26 years from now ...

I've noticed if I don't take any cash from the pot at the age of 55 - then according their calculator a pot of £120,000 will allow me to buy an annuity of approximately £6,400 per year, which is £535 approx per month.

I wanted to ask if that is correct? Is this the most you can get, more or less from your pension pot? And can I ask for how long would you get these payments of £535 - is this until you die? How does it work?

Thanks in advance.

well basically is seems far too high


if you want an indexed linked amount for the rest of your life staring at 55 when you would be looking at about 3% (or less )of your lump sum


so on £120,000 maybe looking for £3,600 per annum i.e. 300 per month.


forget sophisticated calculators and just look at common sense

atush

There is the glaringly obvious fact that you dont HAVE to buy an annuity, you could use Drawdown. And that you might not want to retire at 55 if you have life changes (such as children at university etc).

6.4K is low for an annuity for a 65 year old, so you can see buying an annuity at age 55 is not the best plan. They get better value later on after age 70.

In drawdown, depending on the investments you choose, you could consider drawing 4-6% of the available pot This is after your 25% TFLS which you should take (but can still use for retirement just put it in a S&S isa or 2). 4-6% of 120K is 4800-7200.

I would hope as your salary rises, that you put more into pensions and will have more than 120K in your pot.

Of course do not neglect an emergency savings acct of 3-6 monhts outgoings, and saving for a house deposit.

jumperabv3

Thank you both!

Your_Hero

jumperabv3 wrote: »

I've noticed if I don't take any cash from the pot at the age of 55 - then according their calculator a pot of £120,000 will allow me to buy an annuity of approximately £6,400 per year, which is £535 approx per month.

I wanted to ask if that is correct? Is this the most you can get, more or less from your pension pot? And can I ask for how long would you get these payments of £535 - is this until you die? How does it work?

Thanks in advance.

This is about right for a single life, level payment annuity. You will receive this for life. Death options can be added for extra cost.

As atush rightly points out, you do not need to buy an annuity though and can opt for drawdown instead which offers more flexibility and control in income and death benefits. The main drawback with this approach is that your pot will eventually be exhausted and you will run out of money. Whereas an annuity is payable for life, even if your original "pot" has run out.

We are jumping ahead of ourselves here and you need to walk before you can run (unless you are Usain Bolt). Keep saving money into your pension, and review it regularly to ensure the projected pot/income is adequate. Retirement options would probably have changed by the time you retire.

jumperabv3

Thank you YH.

CLAPTON

draw down isn't a magic bullet
it merely means you draw money out of you pot and the reaminer is still invested


the investment needs to grow by inflation plus say 3% to equal tha index linked annuity.
It is not easy to find an investment that can guarantee this for the rest of your life (hopefully a vey long time).
Bear in mind the FTSE 100 has not regained its 2000 peak

atush

It is not easy to find an investment that can guarantee this for the rest of your life (hopefully a vey long time).
Bear in mind the FTSE 100 has not regained its 2000 peak

No you can't find Guarantees in this area, Guarantees Cost Money.

Bear in Mind the Ftse has income reinvested, so overall has made money in the last 10 years.

dunstonh

draw down isn't a magic bullet
it merely means you draw money out of you pot and the reaminer is still invested

Plus, if you are going to use drawdown, it is worth using a rate lower than the annuity rate most of the time as the annuity rate gets uplifted due to mortality gain. Drawdown does not.

It is not easy to find an investment that can guarantee this for the rest of your life

Its called an annuity

A dirty word to some but actually fits the needs of the majority.

jamesd

jumperabv3 wrote: »

I'm still young for pension discussions (29 years old) ... I typed £120,000 and age of 55, chose "already retired" ... I've noticed if I don't take any cash from the pot at the age of 55 - then according their calculator a pot of £120,000 will allow me to buy an annuity of approximately £6,400 per year, which is £535 approx per month.

I wanted to ask if that is correct? Is this the most you can get, more or less from your pension pot? And can I ask for how long would you get these payments of £535 - is this until you die? How does it work?

That number would probably be for a level annuity, one that pays that fixed amount for life, with no increases for inflation.

For inflation-linked income using income drawdown it is fairly commonly suggested that taking 4% of the capital value each year is reasonable, without a particularly high chance of failure. Income drawdown means leaving the money invested and taking an income from it.

While I quite often use such approximations, it's better if you can to start getting an idea of how investment returns vary and how you can plan to deal with the uncertainty. To do that, try this experiment:

1. Go to www.firecalc.com and look at the Start here text in red part way down the right side of the page. Put in 12000 as the spending, 120000 as the portfolio and 35 as the number of years. Click on Submit.

What you will get is a pretty picture showing you what would happen if past stock market performance happened, with different starting dates because you don't know what state the market will be in when you retire. If you get a replay of the Great Depression starting the year after you retire that would be very bad news. If you get anything else it's decent to good news.

As you can see you will not be able to sustain that desired £12,000 income level with what has been put in so far. Every result shows you running out of money before you reach age 90, 35 years after retiring. But we're not done yet, we haven't allowed for the state pension.

2. Click on the "Close the Results Window" text at the top of the results page. Click on the Other Income/Spending "button" near the top of the page. There is a "Your Social Security" line. Social Security is the United States name for their form of the state pension, which works closely enough to ours for this purpose because it is inflation-linked. Put 8000 in the first box on that row, the full flat rate state pension level, and 2028 in the starting in box, 14 years from now to assume that you reach state pension age at age 69. Click on Submit.

You still fail to maintain the target income level. What income could you maintain?

3. Close the results window. Click on the Investigate "button" at the top. There is a section on that page for "Given a success rate, determine spending level for a set portfolio, or portfolio for a set spending level". Click on the circle/radio button for Spending level" there. Click on Submit.

Now you have a graph that shows you your expected success rate for various income levels. Income along the bottom, success rate vertically. It also tells you that you could take an income of 7345 and would on average have had a success rate of 95.2%.

At this point you should now have some idea of how varying investment results that depend on the chance of when you retire can affect your planning and how you can adjust your success rate by varying income, or you can attempt to invest more.

4. You can do better. Close the results window. Click on the Spending Models "button" and click on the radio button/circl next to Percentage of Remaining Portfolio. In the middle of that paragraph there is a box with 0 in it. Change that to 95 and click on Submit.

Your income level with a 95.2% success rate has increased from 7345 to 9384 because you were willing to cut your spending if it happened that you found yourself retired when bad things happened. Flexibility of spending is also a key to success and it lets you plan for normal results while also adjusting so that the unusually bad results will leave you above your minimum target level.

You can now look at the not retired yet section and put in some numbers there to get some sort of plan for how to get to your target. You'll find as you explore that age of retirement makes a huge difference.

You're young enough so that if you want to you probably can retire at 55 or earlier.

Play around, ask questions and welcome to the world of planning to deal with investment uncertainty and still achieve your objectives.

FatherAbraham

jamesd wrote: »

For inflation-linked income using income drawdown it is fairly commonly suggested that taking 4% of the capital value each year is reasonable, without a particularly high chance of failure.

However, the consequneces of failure can be horrendous, so it's best avoided.

Warmest regards,
FA