Planning for younger people

Rosemary7391

I thought I'd best start a new thread rather than derailing the other one.. I'm currently 25, a student but I'd like to have some sort of plan to retire eventually. Online pension calculators don't seem to work very well; they assume a fairly fixed income, so calculated I needed to save £500/month to get the retirement income I'd like. Great, that's half my current income, but less than 20% of what I expect to be earning later in life... So, are there any calculators that allow you to vary the amount you save over time? Or do I need to make my own?

Also, how do you decide how much to put into general savings as opposed to a pension? It's all very well having a pension, but I can't pay for building repairs with it, eat from it or fund jobsearch expenses when I'm unemployed, it won't help me move house after finding a job - I need accessible savings for those things.

Thanks for any suggestions or thoughts
Rosemary

Rosemary7391

weenie15 wrote: »

Instead of just saying that you 'should probably' do this, perhaps just go ahead and 'do it'?

The spreadsheet will at least give you more of an idea in terms of numbers and help you to plan. Break up your long term goals into smaller/short term ones so that you will have little milestones to achieve to keep up your motivation.

It's possible that when you jot down all your expenses and trim off unnecessary costs, you might be surprised to learn that you are able to save a bit more than £50 a month.

I spend all day playing with numbers, so I'd rather use something that already exists if at all possible. It seems odd if such a thing doesn't exist.

I do save more than £50 a month, more like £3-400, I'm just more concerned about where it should best go. If, for instance, I now put an extra £50 a month into the pension, that's 2 months less I have to finish my phd and find a job after my stipend finishes. Or the difference between going to a conference (where I might find a job) or not.

atush

I would think about getting a savings pot together first if you are still a student and working part time. 3-6 months living exoenses perhaps.

Although if you do have a job with an employers pension, join it.

Then once you have your emergency pot, and have finished study and have a full time job- save 1/2 your age as a %. So if you are 26, look at putting 13% in a pension (but this can include your tax relief and your employers contribution). This can make a good start, but you may have to delay putting in more than the amount your employer will match while you save up any deposit needed for a home.

buzzyzoe

I am of a similar mindset in that I think it makes more sense to put money into other areas while you are younger and then build up some sort of pension pot later in life.

For example, I am 26 and don't have a pension at all at the moment, but I have bought a flat and am putting all my spare cash into overpaying my mortgage. That way, I'll save on mortgage interest and be able to save more once I've paid it off. Then I can save harder and faster for pension income.

My plan is to fund my retirement through BTLs but it only makes sense to start doing this once I've already paid off the mortgage on the property I live in.

It would be useful to have a spreadsheet that would calculate different rates of savings for different amounts of time

Rosemary7391

Thanks atush. I do have 6 months living expenses saved, although that pot has to cover a few things in addition, like repairs - I own a flat. It also covers travel/holidays, I live far enough from my friends and family that I'm not prepared to give up my 1 UK holiday/year and occasional weekend away. I don't work part time - the PhD is more than enough work ! So no option to join an employers pension.

I won't have stable employment until I'm in my mid thirties, unless I decide/am forced to change career. So I'll still have the same problem of deciding how much to keep back in case of unemployment. And waiting until my mid thirties to start a pension seems silly, although it won't be from nothing as I do have a small pension pot from when I worked before starting my PhD.


Buzzyzoe, doing one thing at a time does seem like a reasonable approach... although I want to buy a house in the SE at some point, it feels like a pipe dream but if I did manage that I don't think I could wait until I paid off the mortgage to start a pension. If I make the spreadsheet I'll share it

jamesd

Rosemary7391 wrote: »

... I'm currently 25, a student ... Online pension calculators don't seem to work very well; they assume a fairly fixed income, so calculated I needed to save £500/month to get the retirement income I'd like.

I make that something in the £36,600 sort of income range plus around £8,000 state pension assuming 4.75% investment growth after fees and inflation and a retirement age of 70, which is also what I'd assume your state pension age to be.

To get those numbers I used a regular savings calculator and put in 500 for the amount, 45 for the number of years and 4.75 for the interest rate. Then I multiplied the value by 0.04 to use the common 4% income rule, which is too pessimistic probably for 30 years of retirement but I chose to use it to allow for 40 years.

You can use the regular saver repeatedly for different numbers of years to get to your target, so you could say start with £10 a month now and 45 years, increase to £50 for 40 years in another one then £100 for 35 years and so on. Add up the values of them all to get the total at the end/retirement date that you're choosing to use.

Pension calculators will normally assume a lower than long term growth rate and will assume that to provide income you buy one of the most unpopular annuity products around, an inflation-linked annuity with spousal pension. Drawdown could be expected to pay twice as much as that at the moment.

Rosemary7391 wrote: »

Also, how do you decide how much to put into general savings as opposed to a pension? It's all very well having a pension, but I can't pay for building repairs with it, eat from it or fund jobsearch expenses when I'm unemployed, it won't help me move house after finding a job - I need accessible savings for those things.

Good sized emergency fund first, you're also relatively young so can prioritise things like home buying.

A catch in such planning is that except in a pension your investments are vulnerable to benefits means tests and bankruptcy. So you could lose the lot unless you get to the point where you can live off them indefinitely. What this means is that for retirement planning the pension option still has substantial safety advantages.

What it also means is that if you do want to be able to survive long term it can be best to do it as rapidly as possible to minimise the time between when you start and the end of the time when you don't have enough to avoid losing it all to long term ill health or unemployment.

One do it as rapidly as possible approach is to cut back on pension contributions to just what an employer would match and redirect the rest to non-pension options.

If you reach the point where you can afford to delay some income for five years you can also consider some VCT use to reduce greatly your effective income tax rate at the cost of having the money tied up for at least five years. VCTs pay 30% tax relief initially, any dividends are tax exempt but you have to hold for five years or repay the 30% to HMRC. Risk levels vary widely from moderately risky to very risky depending on which VCTs you choose.

It took me about six years of saving then investing more than 60% of my (net income plus gross pension contributions) to get to the point where my investments exceeded benefit levels to the point that I could live on them indefinitely and a bit longer to get to a more comfortable level above that.

Much of that is just not appropriate or viable for you yet since you're still in the low income to get potentially substantially higher future income part of your own life. Most of your own lifetime net worth is still tied up in the years in the future when you'll be working and earning more. Much of the pension discussion here is involving people who've already used those years of earning and swapped them for accumulated capital. For now long term investing in a S&S ISA is likely to be a decent way to go since you own a home and the money would still be available for contingency use.

missbiggles1

Are you planning a career in academia after you finish your PhD?

wjr4

Random question - but have you sorted your life cover/mortgage protection? This is always the priority, then income protection once you are in a stable job/require it.. always ahead of a pension. (sorry this doesn't answer your question!)

Rosemary7391

missbiggles1 wrote: »

Are you planning a career in academia after you finish your PhD?

Yes. I'm aware of the small likelihood of making it, but I want to try so I want to plan on that basis.

rjw4 wrote: »

Random question - but have you sorted your life cover/mortgage protection? This is always the priority, then income protection once you are in a stable job/require it.. always ahead of a pension. (sorry this doesn't answer your question!)

Random questions are good I didn't think I needed life insurance - I have no dependants, if I get run over by a bus then my parents will get my flat and as they gifted me the deposit that seems fair! I don't see how I'd get mortgage protection (you mean to pay it if I lost my income?) being a student, nor income protection as a student. That seems unlikely to improve when I move to fixed term employment so I think I'm stuck with old fashioned saving!

Jamesd - thank you, that is a lot of information. I'll have to try and take that in this evening!

missbiggles1

Rosemary7391 wrote: »

Yes. I'm aware of the small likelihood of making it, but I want to try so I want to plan on that basis.

Actually, if you manage to make it, your pension is likely to be sorted, the USS is excellent.

https://www.uss.co.uk/

Good luck either way.:)

Rosemary7391

missbiggles1 wrote: »

Actually, if you manage to make it, your pension is likely to be sorted, the USS is excellent.

https://www.uss.co.uk/

Good luck either way.:)

Thank you that does look very generous - in fact I'm not sure I'd like to rely on it being so when I get around to it! Same with the state pension, I'd prefer to assume it won't be available when I retire than rely on it significantly.