Does this retirement plan look realistic?

Temrael

Hi all,

Sorry this'll be a bit of a long one. Might want to grab a cup of tea first.

You back? Good.

My wife and I are trying to plan for early retirement and (at least in Excel) our figures seem to work ok, but I just wanted to see if there's anything we might not have thought of/bad assumptions etc. We're hoping the below plan is a little pessimistic. i.e. Hopefully we'd find ourselves pleasantly surprised, rather than with an unexpected shortfall.

We are currently 42 and 41 and we are looking to retire in 10 years time (if we can). We live pretty frugally and have been putting away most of what we earn for several years with this in mind.

I have
DC personal pension of £116k currently
Final salary pension paying £4.2k pa from age 60 (NRA)
Another final salary pension paying around £1k pa (if taken from age 59) and a £7k lump sum
State Pension Forecast of £8k (so long as I make 5 years more NI contributions)

DW has
DC personal pension of £44k currently (woefully neglected so far)
State Pension Forecast of £8k (so long as she makes 6 years more NI contributions)

Joint Assets
We have joint savings/ISAs of around £110k currently

Desired Income
We have worked out we need a joint take home income of £25,500 per annum (in today's money) to maintain a good standard of living (that's a bit more than we live on now).

Assumptions
- State Pension Age rises to 67 and then 69 by the time we get there (I believe this is on the worse end of what's currently proposed).
- Pension Access Age therefore rises to 57 and then 59 by the time we get there (10 years less than State Pension Age).
- Our savings/cash does not grow at all, i.e. it merely keeps pace with inflation (we are actively managing it across about 40 high interest current accounts/regular savers but inflation could rise to the 3%/4% level we are currently achieving).
- Our DC personal pensions only grow by an average of 1% (above inflation and after fees) from now and forever. This feels very low, I think people often use 4%?
- Personal allowance remains at around £12k pa in today's money.
- Fees to access the DC pensions flexibly remain low (they are with Aviva who charge £100 pa currently I believe)
- We don't downsize the house to release any money.
- Any increases in costs for care are offset by decreases in leisure spending.

The plan for the next 10 years
- Stop contributions to my DC pension now, and just allow it to continue growing (at an assumed 1%) until I start to draw down from it flexibly at 59. With the other pensions I have, I am already going to be paying a bit of tax. Without any more contributions it should have grown to £136k (in today's money) by the time I can access it in 16 years.
- For the next 10 years (while we are working) continue paying about £12k pa gross into DW's DC pension. This should (with continued growth) get it to a point where it is worth £187k (in today's money) by the time she can access it in 17 years.
- Also, for the next 10 years continue saving £5k pa to get the savings/ISAs to around £161k (again, in today's money).

Retirement
- In 10 years time retire, living for 5 and a bit years off of the savings (dropping them to about £25k)
- Then my DC pension (and little FS pension) become accessible at 59, access it via flexible drawdown.
- DWs DC pension becomes accessible the following year (along with my larger FS pension)
- Between the two of us we draw a bit more than the required £25.5k per annum via flexible drawdown (allowing us to slightly top up the savings)
- State pensions kick in at 69 allowing us to scale back the DC drawdowns (by which point the savings are back up to about £40k).

With this model we seem to be able to live till 95 without running out of money in either of the DC pensions or savings. That's far longer than our parents made it to (late 60s/mid 70s) so we don't have great genes. If by some miracle we do end up at 95 there should still be just enough left in the bank for two plane tickets (or transporter perhaps!) to Dignitas in Switzerland. :rotfl:

One thing we do need to do in more detail is look at the effect of each of us dying before the other, to ensure that the surviving one would have enough to live on from the savings and in the inherited DC pot (my FS pensions pay out 50% I think).

Other than that though, any thoughts on any the above would be very gratefully received. Are we being too pessimistic or optimistic anywhere, anything we've not thought of etc.?

Thanks in advance,

fjh

Do you own home or rent - I.e any capital ?

coyrls

What is the logic behind stopping contributions to your DC pension?

Temrael

We've got a house worth about £300k with no mortgage. Not planning on downsizing but could do if we became less mobile.

Temrael

coyrls wrote: »

What is the logic behind stopping contributions to your DC pension?

Hiya, just that I'm getting to the stage where (with the other pensions) paying some income tax becomes unavoidable. I figured it might make sense to focus more on the wife's pension and building the savings that we'll need until the pensions become accessible at 59.

Very open to other ideas though.

hugheskevi

We have worked out we need a joint take home income of £25,500 per annum (in today's money) to maintain a good standard of living (that's a bit more than we live on now).

£25,500 is 91% of median full-time employee salary.

If average earnings and CPI increase in line with the last published assumptions made by the Office for Budget Responsibility then by the time a 41 year old today reaches age 70, that £25,500 would have fallen to 44% of median full-time earnings (despite increasing in line with CPI).

Although your income would still have the same purchasing power, your relative standard of living would have fallen considerably from its current position.

Temrael

hugheskevi wrote: »

Although your income would still have the same purchasing power, your relative standard of living would have fallen considerably from its current position.

Thanks for that, that's interesting, I think I understand. But if we can still do the same amount of shopping, holidaying etc. that we are used to, would we notice?

How much would one look to increase income (beyond inflation) to account/allow for wage growth?

hugheskevi

Thanks for that, that's interesting, I think I understand. But if we can still do the same amount of shopping, holidaying etc. that we are used to, would we notice?

Would you be happy using a computer and watching a television from 1988 (29 years ago) today, on the basis that they were fine for you in 1988? Similarly, a 1988 car, fridge, freezer, cooker, etc.

It also depends on how much you measure yourself against friends, neighbours, family etc, who would be seeing their income increasing well beyond yours (but would of course still be working).

How much would one look to increase income (beyond inflation) to account/allow for wage growth?

The OBR projected earnings increasing by 2.75 percentage points more than CPI each year, in the longer term. But I think that is optimistic, and the gap will be smaller.

Personally, I assume my spending needs will increase in line with earnings to age 70, and by RPI (1 percentage point above CPI) thereafter.

Temrael

Interesting, thanks for that. Ok I'll have a play with the sums. Probably won't go the full 2.75% but may perhaps be able to narrow/slow the gap a little.

Triumph13

Temrael wrote: »

Assumptions
- Pension Access Age therefore rises to 57 and then 59 by the time we get there (10 years less than State Pension Age).

Temrael wrote: »

Retirement
- In 10 years time retire, living for 5 and a bit years off of the savings (dropping them to about £25k)
- Then my DC pension (and little FS pension) become accessible at 59, access it via flexible drawdown.

I hate to be the one to point this out, but you'll only be 52 in 10 year's time and so you would have 7 years to bridge, not 5 and would therefore run out of money on your assumptions before being able to access your DC funds at 59.


The good news is I think this part of your plan should still be achievable with a bit of investment growth. If you were to say keep £25k of your savings in cash as an emergency fund and put the rest in mainly equity funds, then an average return of 3.5% over inflation would get you to 52 with enough for 7 years of your desired income from the investments and with whatever remained of your emergency fund after any intervening emergencies. Of course if markets underperform badly and you don't get that 3.5% average real return then you might have to work an extra year, but I would think that would be a risk worth taking.


I haven't run the numbers on the pension side of the equation yet, but will do if I get a moment.

Temrael

Triumph13 wrote: »

I hate to be the one to point this out, but you'll only be 52 in 10 year's time and so you would have 7 years to bridge, not 5 and would therefore run out of money on your assumptions before being able to access your DC funds at 59.

Ack! Thanks so much for that, not sure how I ended up wrong there, I'll need to check my spreadsheet tonight.

One of the extra years is accounted for by the fact that I meant I will stop work at the end of 2027 (so 11 years left to work really) and I'll be 53 then. That still leaves 6 and a bit years to live without the pensions though as you say (which might be a struggle without working longer). I'll have to have a look.

We could make a portion of the savings S&S ISAs as you say, I guess it might make sense to have that pot invested slightly more cautiously as we'll need to access it earlier than the pensions (but as you say it will need to grow if we're not to work longer).

What do you think about me using 1% average growth on the pensions (after fees and inflation). Is that stupidly pessimistic? They are invested 90:10 Equities/Bonds at the moment (the rationale being we have lots of cash savings in lieu of Bonds). I'm a bit sceptical of Bonds at the moment, and the Bond fund selections we have access to are quite long dated.