Hope is not an Effective Financial Strategy

gallygirl

shangaijimmy wrote: »

Gally you are a star! Mrs SJ can gladly have the big TV tonight now...I will be busy plotting!

Hope you find it useful. I found I played with it so I could see what sort of things I needed to think about, then built a spreadsheet of my own. Then when I felt happy with the figures I was using I popped them into cfire to see what it said. I had a 98% rate - mind you, I don't think they had Mr Trumps's trade wars accounted for :eek:.

I have managed to break my spreadsheet , so I will be joining you tonight, though it's a bit late to do anything about it :rotfl:.

shangaijimmy

Gally - afraid to say i've had a look at that, and i'm nowhere near that level of understanding yet!! And when i say nowhere near I mean that may as well be written in Alien code!

hiddenshadow

shangaijimmy wrote: »

Gally - afraid to say i've had a look at that, and i'm nowhere near that level of understanding yet!! And when i say nowhere near I mean that may as well be written in Alien code!

You're essentially playing both Time Traveller and Historical Analyst...that site runs through the last 100+ years' worth of stock market data and say "what if the stock market behaved exactly the way it did from [year X] to [year X + retirement length], how would SJ fare?" The bright graphs in the results show each year's data point, e.g. "Year: 1954: Cycle Start Year: 1899: Portolio: -$715,142"...you've lost your house, your neighbours' houses, and can't afford any food (cat or otherwise) ... compare that to "Year: 1988: Cycle Start Year: 1953: Portfolio: $149,935", you have almost £150k to leave to the kids when you die.

In the most basic sense, you really only need to worry about 4 values/areas:

Retirement Year: when you plan to retire (I put in 2039 for your 21 year scenario)
Retirement End Year: when you plan to die (I put in 2075, assuming you might make it to 96!)

Portfolio value: sum of your pension accounts today (real or hypothetical)

Spending Plan: I put in Inflation-Adjusted, with an amount of £30k (so it should assume that your income stays at the same level as £30k today for the length of your retirement)

I find it easiest to fiddle with the portfolio value and see what happens.

For example, if your current pension value is:

£100,000, you have a 1.11% chance of living to 96 sans gutter
£150,000, you have a 26.67% chance of being gutter-free
£200,000, you have a 55.56% of making it
£250,000, you have a 82.22% of succeeding
£300,000, you're golden with a 98.89% chance of success

... I hear you say that you definitely don't have that amount in your pension today! ...

then we move to to the spending plan. You'll be MF so you can tighten your belt.

Income £20,000 instead of £30k, now you've got better odds:
£100,000, you have a 26.67% chance of success!
£150,000, you have a 68.89% chance of being gutter-free
£200,000, you have a 98.89% of making it
£250,000, you have a 100% of succeeding
...same with any higher amounts, obviously....

Alternately, you could see what sort of income you might have if you just say "I want to maintain my pension portfolio, but not eat cat food"

Spending Plan: % of portfolio (4 is the rule of thumb number, but you can use higher or lower numbers if you want to check out risky/conservative numbers)
Floor Spending: Defined value, £15,000...e.g. no matter how badly the stock market does, you need this much to live
Ceil Spending: Defined Value: £30,000...e.g. no matter how well the stock market does, you won't spend more than this
55.56% chance of success with that plan if you're starting with £100,000
...likewise you can play with any of those numbers to figure out what values make the most sense for your scenario...

[Note: for all of these you can download a spreadsheet where it will show you the year-by-year breakdown of what your portfolio would be worth if the stock market behaved the way it did in the given year, what your pension income is for that year, what you have left at the end of the year, etc.]

Also note that none of this is all that helpful in the decision of "how helpful is it that I'm putting £30/mo extra into my pension right now?", but it does show you where you might want to get to pension-wise before retirement, and once you know that you can figure out how feasible it is to increase contributions / plan a lower cost retirement / what-have-you.

(I hope that very long-winded explanation helps a bit! It's much easier to describe this stuff in person when you can point to stuff and gesticulate wildly about the cat food / gutters or lack thereof) :rotfl:

gallygirl

shangaijimmy wrote: »

Gally - afraid to say i've had a look at that, and i'm nowhere near that level of understanding yet!! And when i say nowhere near I mean that may as well be written in Alien code!

In that case:
What ages do you want to retire?
What pensions have you got so far? Are they indexed etc?
How much will you need to live on? Deduct mortgage, pension payments etc, depending on how early you want to retire you may need to add uni costs for 3 kids :eek:.
Would/could you downsize to release equity straight away or later?
How often would you need to replace cars etc?
How frugally would you be prepared to live to retire early?
What gaps do you have to fill till pensions kick in?

Then just build a spreadsheet to work everything out. Simples :rotfl:.

The key to it is having a table of %'s you can easily change which link through to the main table. I worked out expenditure based on current levels, then had inflation at various levels. Same with growth on investments, a lower interest rate on cash savings and indexing of pensions and tax allowances. I suppose at your young age you'd better do increases in pension age as well. Try taking 25% lump sums and 0 lump sums.

It really taught me how money works in the longer term. What I didn't do is model scenarios with growth cycles - that's where cfire comes into its own, but it's best to really understand your own figures first.

shangaijimmy

Hidden - thank you... I'll have another fiddle!!

shangaijimmy

gallygirl wrote: »

In that case:
What ages do you want to retire? - Lets say 60
What pensions have you got so far? Are they indexed etc? - I have £52k, Mrs SJ - £25k.Not sure on index lnked, but think so...
How much will you need to live on? Deduct mortgage, pension payments etc, depending on how early you want to retire you may need to add uni costs for 3 kids :eek:. Lets say £30k
Would/could you downsize to release equity straight away or later? - Yes - Lets say £50k
How often would you need to replace cars etc? - 8yrs?
How frugally would you be prepared to live to retire early?
What gaps do you have to fill till pensions kick in? -

Then just build a spreadsheet to work everything out. Simples :rotfl:.

The key to it is having a table of %'s you can easily change which link through to the main table. I worked out expenditure based on current levels, then had inflation at various levels. Same with growth on investments, a lower interest rate on cash savings and indexing of pensions and tax allowances. I suppose at your young age you'd better do increases in pension age as well. Try taking 25% lump sums and 0 lump sums.

It really taught me how money works in the longer term. What I didn't do is model scenarios with growth cycles - that's where cfire comes into its own, but it's best to really understand your own figures first.

Nudged a few answers in red!!

shangaijimmy

Hidden you're a star! Now it makes sense. I've just looked at Mrs SK's pension and i'd undercooked it a little. So i reckon we're at 22.27% chance of making it if we retire at 60, and 56.44% if we retire at 65 (no way i'm going that long)! So we best pull out fingers out! At least we can ramp things up once the mortgage is gone in 6yrs!

Gally - i will build a spreadsheet, unless i can acquire one of someone to start me off

Thank you both so very much for helping. I said i needed to learn, and learn i have!

gallygirl

Great stuff, you're on your way :T. My spreadsheet is still broken , and is based on rental income and guesses of what income tax will be in Spain, so no good to anyone, including me, at the moment! It really is one area where I think building your own is best, you really get to grips with it.

shangaijimmy

Having slept on it i will be attacking a spreadsheet in work today as i should have some free/waiting around time this morning.

Not much else happening other than me giving blood.

hiddenshadow

shangaijimmy wrote: »

Hidden you're a star! Now it makes sense. I've just looked at Mrs SK's pension and i'd undercooked it a little. So i reckon we're at 22.27% chance of making it if we retire at 60, and 56.44% if we retire at 65 (no way i'm going that long)! So we best pull out fingers out! At least we can ramp things up once the mortgage is gone in 6yrs!

Gally - i will build a spreadsheet, unless i can acquire one of someone to start me off

Thank you both so very much for helping. I said i needed to learn, and learn i have!

Nice! Glad my explanation wasn't completely incoherent.

You could also simulate how big an effect it'll be in 6 years when you can throw more at the pension. Shift your retirement year forward by 6 years (to simulate it being 2024 instead of 2018), plug in your estimated pension pot at that point, and then compare it to shifting retirement forward 7/8/9 years with bigger contributions. It can definitely be motivating.

DH and I currently have a 17% chance of successfully retiring at 50...no idea if we even want to do that, but if we do we'd better get a move on!