How much is enough?

dunroving

dating_thoughts wrote: »

I think it's important to know when you're going to retire. This is because inflation is very important to consider. Although £15,000 may be okay in today's money it may not be enough when you plan to retire. For example if you were to retire in 25 years I believe the average salary may be about £85,000. This originates from if the average salary today is about £20,000 at 3% inflation year this would be £80,000 for the next 25 years. And salary rises are roughly in line with inflation rises over the long-term.

I get around this by only using "today's money" and not modelling growth. So if I put away 20% of my salary, I continue to put away 20% even if I get a pay raise.

When I first put together my current systematic, thorough financial plan, it was all done assuming "zero sum gain" (any growth would be matched by inflation, and vice versa).

Now I look at my investments and think "Great, I am 25% ahead of schedule" but I don't back off. I just assume that growth mirrors cost of living inflation since I started (it hasn't; it has outpaced it but you never know when there'll be another market downturn).

It's a lot easier for people on final salary or other defined benefit pensions because they have a guaranteed benefit and it will generally grow with inflation.

I would probably re-do my calculations every 5 years but I plan to at least semi-retire before I need to do that! Up until about 3 years ago I never did the calculations I just put away as much as I could. Then when I did the maths 3 years ago I realised I was in a much better situation than I thought. Better that than the other way around..

hugheskevi

And salary rises are roughly in line with inflation rises over the long-term.

HM Treasury are assuming a long-term rate of average wage growth of 4.75%, so 2.75 percentage points above CPI (ref here):

The default assumption used is a single figure for the average long term growth in salaries (4.75%). This figure is set by HM Treasury for the valuation of the public service pension schemes (which includes the Civil Service pension arrangements) and reflects current assumptions for long term average wage growth across the economy (i.e. over the next 10 to 20 years).

It is an interesting assumption, I think many would view it as optimistic, but it is crucial for adequacy over the long-term. If accurate, it suggests investment returns may only be a little higher than earnings growth which would increase the difficulty of hitting a target expressed as a proportion of final salary. Also important to note it refers to average earnings - personal earnings are likely to escalate more rapidly, as the average figures include older workers exiting and younger workers entering the labour market.

Regarding discussions earlier in the thread, I think many folk may be surprised at the power of two key saving features when smoothing lifetime consumption (which is what pensions are all about, with an important secondary feature of tax efficiency). Earlier in life, increasing saving is very powerful, as it reduces consumption in that period and increases available resources in future periods. Later in life saving will be much less effective, just because of time left to do something meaningful before retirement. Fortunately at this point working longer has huge power. Just a year or two of earning and saving rather than retiring and consuming can make huge differences to retirement outcomes.

With proper planning, reviewing and responding there is no need for any fall in living standards at any point - indeed, any fall in standards would be a failure of the plans, as smoothing lifetime utility (which is different to financial resources, but probably correlated for most people) is what every rational agent should be doing

atush

mlv-1967 wrote: »

I respect other people's opinions even though they may not agree with me. Please respect mine. Thank you.

I dont recall saying anything disrespectfull. If you want respect, give it to others

atush

mlv-1967 wrote: »

And the risk of a stock market crash? It happened in 1987 and many gurus are predicting dire trouble, especially if there is more trouble in the middle east or China and Russia misbehave. The world is an unpredictable place.

If you are going to quote such events do a little reading research first.

My father died just before the crash (unexpectedly and early) due to a brain aneurysm. My mother invested his Life insurance in August 87. The Market Crashed and she her acct was almost halved. But it did recover int he following year to where it was and then grew.

Loughton_Monkey

Back to the debate.

I do not consider it possible to discuss retirement income 'needs' in isolation. It can only be considered against lifetime earnings amount and pattern. Many, many people spend 40+ years working and earning (say) £12,000, increasing gradually to (say) £25,000 in today's values. Such people may well have a decent retirement on £15K a year. Others having earned £35,000 to £90,000 over their career (today's values) would struggle immensely on £15K.

There are two significant variables:

1. The cost of your lifestyle in (say) the last 10 years of working life. i.e. what you are used to spending. Within this is housing cost. Of huge significance is the difference between a house owner on the one hand [who might see a significant drop in costs due to mortgage repayment on or about retirement age] and on the other hand a renter [who can 'look forward to' an unending demand for inflation linked rental costs for the rest of their lives].

2. What you envisage doing in your retirement compared to when you were working. i.e. more expensive holidays now you have the time? Or just hunker down and watch TV because you've done everything/been everywhere you wanted? Start helping your (grand) children with their housing/education/travel? Or basically stop spending anything on them because they're now fully on their own two feet?

As a retiree of 8+ years, I would have found it virtually 'impossible' to live on less than I did in my last 10 years. The 'mix' of spending is a little bit different but you get used to a certain scale of annual budget. £15K would pay my utilities/insurance/housing maintenance only! Yes, if some catastrophe forced me to live on £15K I could, but only after selling up, massively downsizing, or renting a caravan or something.

This is why retirement planning is so important and needs to be started early in working life. Do your own maths over a 40 year working life. Ramp up your lifestyle spending (as a percentage of earnings) and you will see the drastic effect this has on the 'drop' in spending you might have to swallow when you retire.

dunroving

Loughton_Monkey wrote: »

Back to the debate.

I do not consider it possible to discuss retirement income 'needs' in isolation. It can only be considered against lifetime earnings amount and pattern. Many, many people spend 40+ years working and earning (say) £12,000, increasing gradually to (say) £25,000 in today's values. Such people may well have a decent retirement on £15K a year. Others having earned £35,000 to £90,000 over their career (today's values) would struggle immensely on £15K.

There are two significant variables:

1. The cost of your lifestyle in (say) the last 10 years of working life. i.e. what you are used to spending. Within this is housing cost. Of huge significance is the difference between a house owner on the one hand [who might see a significant drop in costs due to mortgage repayment on or about retirement age] and on the other hand a renter [who can 'look forward to' an unending demand for inflation linked rental costs for the rest of their lives].

2. What you envisage doing in your retirement compared to when you were working. i.e. more expensive holidays now you have the time? Or just hunker down and watch TV because you've done everything/been everywhere you wanted? Start helping your (grand) children with their housing/education/travel? Or basically stop spending anything on them because they're now fully on their own two feet?

As a retiree of 8+ years, I would have found it virtually 'impossible' to live on less than I did in my last 10 years. The 'mix' of spending is a little bit different but you get used to a certain scale of annual budget. £15K would pay my utilities/insurance/housing maintenance only! Yes, if some catastrophe forced me to live on £15K I could, but only after selling up, massively downsizing, or renting a caravan or something.

This is why retirement planning is so important and needs to be started early in working life. Do your own maths over a 40 year working life. Ramp up your lifestyle spending (as a percentage of earnings) and you will see the drastic effect this has on the 'drop' in spending you might have to swallow when you retire.

I agree that it helps, hugely, but it isn't essential. I ended up back at square one in my late 30s and didn't pay into pension (other than a few years of NI) until then. I plan to retire at 61.5 on a modest sum, which will be bolstered at 62 by a small US social security pension and at 66 by a partial UK state pension.

I really wished I had started sooner (and that I hadn't cashed in 2.5 years of teachers' pension and 1 year of local government pension in the mid-1980s!) but with sufficient planning and modest spending, it's possible not only to retire on a liveable income but retire early.