Do I have my sums correct or am I pie in the sky?

nellis10

I've posted this in my little MFW diary but here is the gist of it:

Current Salary £47500 with potential pay rise of 4-6% next month.
Pension currently 5% but increasing to 20% in new tax year 2017/2018.
Mortgage has 17.5 years left to run - currently 67K. Mortgage paid off by age 62.

• Keeping 4 savings vehicles: 2 x pension, 1 x ISA, 1 x regular saver
• Attempt to retire on £20,000/yr at 61 - 15 years from now
• Assuming all compounding rates average out at 4-5% per annum for next 15 years
  Pension
• Pension 1: Currently 96.5K adding £1500/yr & compound @ 4% for 15 years = £210K
• Pension 2: Currently 10K adding £10000/yr & compound @ 4% for 15 years = £230K
• Total pension fund could be £440K which would then compound itself from 62 to 67 to £560K
• Don't take any pensions until 67 but use cash & ISA from years 62-67
  ISA
• Year 1 = £3900 invested
• Year 2- Year 15 = £9K/yr invested (meaning I don't overpay mortgage at all in this time) & compound @ 4% for 15 years = £195K - given emergencies/renovations/expenses this might reduce to £100K during the 15 year period.
  Cash
• Regular Saver @ £3600/yr & compound @ 2% for 15 years = £68K

Question:

Do I have my sums correct (assuming no disasters happen in the next 15 years to either myself or global economy)?
Is this a reasonable retirement plan?
Am I being way too optimistic?

Welcoming all responses.
Nat.

nellis10

Perhaps this is the incorrect sub-forum.
Would a moderator please move this to Savings & Investments.
Apologies.:o

sandsy

The main thing that's not clear in your post is whether you've allowed for the effect of inflation over the next 15 years. If inflation is 2.5%pa for the next 21 years, your projected pension pot of £560k at 67 will only buy the same as £333k worth of goods in today's terms.

nellis10

sandsy wrote: »

The main thing that's not clear in your post is whether you've allowed for the effect of inflation over the next 15 years. If inflation is 2.5%pa for the next 21 years, your projected pension pot of £560k at 67 will only buy the same as £333k worth of goods in today's terms.

Thanks for responding Sandsy.
I'm being fairly conservative in my retirement needs and projecting an income around £20K in today's money.

Should I add in a 2.5% deficit each compound or just look to have my compounding be at the 2-3% and project my savings needs based on that?

AnotherJoe

Its easier and comes to the same thing, to simply have your growth assumption include inflation because then everything is in todays terms. For example if you think that inflation will be 2% and your investments grow at 5%, then model 3% growth and you are comparing like with like.

nellis10

AnotherJoe wrote: »

Its easier and comes to the same thing, to simply have your growth assumption include inflation because then everything is in todays terms. For example if you think that inflation will be 2% and your investments grow at 5%, then model 3% growth and you are comparing like with like.

Thanks Joe.

I have a compounding spreadsheet and I have models for 0%, 2%, 4%, 5%, 8% and 10% just to see what return I would need for the pot size I am looking for.

I'm figuring the investment returns of 4% above inflation as that's what most of the articles I am reading are saying for investments (I include my pension investments in that too).

But if I can hit my "pot" with 2% so much the better. Just means putting more away, more that I don't currently have.

The main thing I'm concerned with, is I'm not planning with these figures to overpay mortgage which seems scary.

But everyone's advice is to up the pension and start investing and cover the mortgage with the investments/lump sum on retirement.
Is that true?

AnotherJoe

Not necessarily. Most people would aim to have paid off their mortgage before they take retirement / pensions anyway.

Whether you do that with "overpayments" or just arrange the mortgage term so you reach the same date as if you'd overpaid is somewhat academic. (Apart from the flexibility)
Say your mortgage term is 20 years but you "overpay" so it finishes in 15. Now you are a star on the MFW forum.
Now suppose you change your mortgage length with your lender so it's 15 years. Now you are no longer a star and are bad because you aren't overpaying.
But same effect, mortgage paid off after 15 years.

The "scary thing" to my mind is losing out on 40% tax relief because of the obsession on the MFW forum about overpaying and getting rid of your mortgage irrespective of all other considerations. Sometimes it's the right thing to do sometimes it isn't.

On that forum, that question is rarely raised, it's become an end in itself and many people have lost perspective of the bigger picture. Great they end up in retirement with no mortgage, bad, they end up with a poorer pension than they could have.

nellis10

AnotherJoe wrote: »

Not necessarily. Most people would aim to have paid off their mortgage before they take retirement / pensions anyway.

Whether you do that with "overpayments" or just arrange the mortgage term so you reach the same date as if you'd overpaid is somewhat academic. (Apart from the flexibility)
Say your mortgage term is 20 years but you "overpay" so it finishes in 15. Now you are a star on the MFW forum.
Now suppose you change your mortgage length with your lender so it's 15 years. Now you are no longer a star and are bad because you aren't overpaying.
But same effect, mortgage paid off after 15 years.

The "scary thing" to my mind is losing out on 40% tax relief because of the obsession on the MFW forum about overpaying and getting rid of your mortgage irrespective of all other considerations. Sometimes it's the right thing to do sometimes it isn't.

On that forum, that question is rarely raised, it's become an end in itself and many people have lost perspective of the bigger picture. Great they end up in retirement with no mortgage, bad, they end up with a poorer pension than they could have.

Thank you for your patience Joe. This makes perfect sense to me.
If my aim is to retire (potentially) in 15 years, then I have 15 years to pay off the mortgage (roughly the term left anyway due to overpayments to date).

In that time, I could have made twice the amount of the interest I will end up paying on the mortgage if I don't overpay.

I've done some calculations, and I can afford to up my pension to 20% and come back into the 20% taxable income, but a sizeable amount goes to pension going forward.

That along with new ISA (starting small and will increase with better knowledge), building up the Emergency Fund the rest of the year, and Regular savers going forward for cash pot, should see me OK to pay off mortgage even after 10 years if I play my cards right lol

I'm sorry for all these posts folks, but I am in blind panic mode at the moment, as I am seeing a VERY short tunnel within which to made the right financial decisions for the rest of my life. I'm absolutely bricking it now! :eek::eek::eek::eek:

AnotherJoe

You can always cut back pension contributions later if its an issue, you arent locked in to that, take the 40% whilst you can. At some point, I think 40% will go.

ps regards locking in, without knowing anything about teachers pensions, the one thing i do know is they have upped the retirement age so a separate pension alongside it may allow you to retire earlier. Thats what I'm doing, my small DB company pension starts at 65 and i'll be retiring this year about 3 years short of that, SIPP will bridge the gap (easily as i've been cramming into it last few years but had i started earlier i wouldn't have needed to cram so much)

nellis10

AnotherJoe wrote: »

You can always cut back pension contributions later if its an issue, you arent locked in to that, take the 40% whilst you can. At some point, I think 40% will go.

ps regards locking in, without knowing anything about teachers pensions, the one thing i do know is they have upped the retirement age so a separate pension alongside it may allow you to retire earlier. Thats what I'm doing, my small DB company pension starts at 65 and i'll be retiring this year about 3 years short of that, SIPP will bridge the gap (easily as i've been cramming into it last few years but had i started earlier i wouldn't have needed to cram so much)

I have no DB pension, just current DC pension at work and my previous work pension which I am paying in about £1500 a year and then phoning the taxman to see if I get relief, which I won't from this year on, as I will keep my taxable income below the 40% threshold by upping pension contributions.

That will also help, I hope towards not paying 40% tax on my medical insurance benefit at work and thus should also increase my savings allowance from £500 to £1000 - correct? So I will all round even though nominally it looks as those I am a 40% taxpayer?

AnotherJoe

nellis10 wrote: »

I have no DB pension, just current DC pension at work and my previous work pension

My bad I thought you were a teacher for some reason.