Thoughts on current standings

Zola.

Hello folks,

I am taking stock of my pension and looking to improve it.

A little break down....

I am 32, been paying in to a pension for 4.5 years. I rang today to get latest balance, it is £15,000. I currently put in 4% and work puts in 6% (6% is the max they do).

I recently got a pay rise and so I am going to up my pension contribution to 6%, making it 12% total, so effectively £320 going in to the fund each month.

Is this a decent amount, or should I be looking to add more?

I also put £250 a month into Vanguard Life Strategy 80% S&S ISA with my partner. She has only the automatic enrollment witjh her work, so I think more has to be done perhaps?

Just hoping for any advice. :beer:

Ideally when 55+ I want to be healthy, wealthy and wise...

kidmugsy

I suspect that a pension is not a good investment for a 32-year old unless

(i) Your contributions attract employer contributions too: if your employer is already contributing his max then your extra contributions attract no more from him. Or
(ii) You are contributing by salary sacrifice so that you save not only 20% income tax but also 12% employee NICs and even perhaps some of the employer NICs. Or
(iii) Your contributions let you avoid tax at 40%/60%/45%, and/or let you avoid loss of child credit or the like.

If you don't satisfy one of (i)-(iii) then it seems to me that locking your money away for 25 years or so isn't adequately compensated.

Zola.

Well, they put in 6% as long as I put in a minimum of 4%, which I already do. If I match their 6%, then of course 12% is going in instead of 10% and I am only 'missing out' on about 55 quid more a month from net pay. Ultimately as my wage (hopefully) continues to increase, their 6% is of course going to be more as well.

I am contributing through salary sacrifice also.

dunstonh

Ideally when 55+ I want to be healthy, wealthy and wise...

You are going to need to increase the amount you are putting aside if 55 is a possible objective. Your current fund value is behind where it ideally needs to be. So, at this time you are playing catchup and paying an amount that is more typical of someone looking to retire at state pension age.

Zola.

dunstonh wrote: »

You are going to need to increase the amount you are putting aside if 55 is a possible objective. Your current fund value is behind where it ideally needs to be. So, at this time you are playing catchup and paying an amount that is more typical of someone looking to retire at state pension age.

How much more so % wise - 15% ?

I do plan to put more into the investment platform also.

I am not overly concerned whether I actually retire at 55, but I would like to have a good amount tucked away to at least give me options at that age.

Zola.

*bump*

TheTracker

Zola. wrote: »

How much more so % wise - 15% ?

I do plan to put more into the investment platform also.

I am not overly concerned whether I actually retire at 55, but I would like to have a good amount tucked away to at least give me options at that age.

Use a compound interest calculator via google to play some numbers. Placing £570 a month into investments growing 4% after fees above inflation long term, with a starting balance of 15k will give you around 300k at 55 and 580k at 67. With a drawdown of 3% that's about £9k or £17k pa drawdown before fees and taxes. How much do you figure you'll need? More sophisticated online calculators will let you factor in salary increases.

It's fairly basic spreadsheet work to model your own circumstances. Some people assume anything from 2-8% growth. People assume anything from 2-4% drawdown. These parameters affect prognosis significantly.

It sounds like you're asking the effect of putting in 5% more per month, which appears to be 55/2*5. The respective numbers would then be £360k or £710k, and £11k or £21k.

In both cases you can see the power of compound interest, with the 12 years from 55-67 being as valuable as the 23 years between 32-55, and the value of starting early.

Personally, I've found the best way to increase early retirement likelihood is to increase earnings. You can save more and spend less, but these are constrained more than earning potential. Do some of all three and you'll be quids in.

Zola.

Thanks for your reply! The thing is I don't really know how much I will need. Very hard thing to gauge. I did some calculations which said I'd be wanting 60% of salary (19k) if mine stayed at 32,000 for the next 20 years, which I am of course hoping isnt the case.

I had planned to target the mortgage aggressively, aiming to have it paid in under 10 years (23 to run as it stands), I need to see whether or not to go so aggressively at this, or else build up more savings/investments and pension contributions.

Just not sure which has priority!

Linton

Zola. wrote: »

Thanks for your reply! The thing is I don't really know how much I will need. Very hard thing to gauge. I did some calculations which said I'd be wanting 60% of salary (19k) if mine stayed at 32,000 for the next 20 years, which I am of course hoping isnt the case.

I had planned to target the mortgage aggressively, aiming to have it paid in under 10 years (23 to run as it stands), I need to see whether or not to go so aggressively at this, or else build up more savings/investments and pension contributions.

Just not sure which has priority!

As long as your investment returns exceed your mortgage interest rate it makes sense to keep your repayments to the standard rate.

kidmugsy

Zola. wrote: »

I am contributing through salary sacrifice also.

So you satisfy test (ii). Full ahead both!

dunstonh

Thanks for your reply! The thing is I don't really know how much I will need. Very hard thing to gauge.

Not really. You know your spending habits now. So, remove any that wont exist in retirement (e.g. mortgage). Keep the ones that you will still need to pay (electric, gas etc). Then consider that you will have a lot more free time and will likely spend more money in that period (so include an allowance for that). Remove or reduce any work related costs (eg petrol unless you plan to travel more).

This should give you an idea of the monthly budgeting your need. Then think about lump sum requirements. You are going to be alive around 35 years in retirement potentially. New boiler, multiple cars, lifestyle events that you cant fund from income etc.

So, you should end up with a lump sum and income figure in todays terms. Add a healthy amount on top of both as you are almost certainly underestimating what it will be (energy costs tend to go up by more than inflation for example) and there is your target figure in todays terms. You then set a monthly contribution to achieve the pension value needed to pay those things.