Retirement Planning 5 years out

Secret2ndAccount

NedS said:

How can you possibly begin to plan how much you will need in retirement if you really have no idea how much you spend?

Well, if you've earned 40k the last few years, and each year managed to put away 10k, then you have a pretty good idea you can live on 30k, and can be nigh on certain you will be okay with 40k. If you've got n x 40k put away, then you are good to go - doesn't matter what part of the 30k was food, and what part was petrol to get to work.

I reiterate that you can measure your past spending to any level of detail; that is not an exact predictor of your future spending, particularly if you move from work to retirement. It is also no guide at all to your future investment returns which could fluctuate +/-20%, whether you can afford for that to happen or not.

It's useful to have a clear idea of what your essential living costs are (non-discretionary spending) ...

I have a bit more time for this as an idea, but I'm still not convinced it works. I probably spent £200 on Pepsi last year, but if I was battening down the hatches I would only need £60 for the same quantity of Asda Cola.

JohnWinder

JamTomorrow said:

Is there any recommended reading on what that asset allocation should be and how to taper towards that over the next 5 years?  

Thanks for any pointers on this next stage of my retirement planning journey.

Knowing some of the issues I still have no idea what the best approach is. Of course, the best will only be known after the event, but a lot of it is about how much you've got and how much can be put at risk. Here's some reading to keep you going:

https://www.kitces.com/blog/managing-portfolio-size-effect-with-bond-tent-in-retirement-red-zone/

https://www.bogleheads.org/forum/viewtopic.php?t=262636

https://earlyretirementnow.com/

This latter will land you right on the topic, at #43 in a series relevant to you!

Nebulous2

NedS said:

Secret2ndAccount said:

sheslookinhot said:

tigerspill said:

Monitor your spending in detail. Every penny.  This is the only way you will have a starting point from in expenditure.
I recorded every penny in a spreadsheet (and still do).  Takes only i minute each day.  Well worth the effort.  It will give you real confidence as you plan to turn off the income tap.

I agree with this. I think you have too much tolerance on your “Number”. 30 or 40k per annum seems too wide a range. Monitoring expenditure would help you decide what is your “real” number. 

Why is it so important to nail down your spending to the nearest tenner? Your investments could easily grow 20% more, or 20% less than expected over the next five years. Most of us could easily spend 20% more, and could (less easily) spend 20% less if we needed to.

Personally I have no idea how much I will spend in the next 12 mths.

How can you possibly begin to plan how much you will need in retirement if you really have no idea how much you spend?

It's useful to have a clear idea of what your essential living costs are (non-discretionary spending) and how much you spend (or are likely to spend) on extras / discretionary spending. Then you know to what extent you could tighten your belt in a crisis without going under, and how much you need for a comfortable retirement lifestyle. This year has been an excellent opportunity for us to conduct such an exercise as Covid has forced us to cut right back on spending with very few discretionary items this year, 

I don't have much of a handle on what we spend, or  will spend, now I have retired.  I'll have my DB pension and we will withdraw money from savings on a monthly basis until state pension age. I've a rough idea what we will need, but will adjust it if required. 

What we have always been good at is squeezing a lot out of what we do earn. We brought up a family on one income, as a lifestyle choice, where most people around us had two. That meant trade-offs, very little interest in clothes, a fair bit of travel but usually Europe, self-catering or camping, driving rather than flying. We have always eaten well, but I don't do the shopping, and don't know how much we spend on that. 

What I do is control costs. Do the MSE thing of multiple bank accounts, chasing opening bonuses and regular savers with some interest, switching utility suppliers and renegotiating broadband and phones. I keep a spreadsheet that I update every month, on the first, of our net position. We've avoided any interest paying debt other than a mortgage for many years.

enthusiasticsaver

Given that this £300k is the only pot you will be able to access until 57 I would look to move at least some of it (maybe 2 years income) into cautious investments/cash perhaps within 3-5 years of retirement so at some point over the next 5 years. If you are not fixed on actually retiring and the stock market dips at the time you intend to go presumably you have the option to continue working. 

You wont have to repay your mortgage when you stop work. When is it due to be repaid? I am guessing your spa will be around 68 so you will have a further 11 years and beyond to fund presumably from an occupational pension? £40k is way above state pension so you need to cash flow beyond that. 

SouthCoastBoy

Bimbly said:

JamTomorrow said:

Another potential complexity I am looking for views on is that my mortgage of £215k is due for repayment after I can access my private pension (when I am 60).  I am assuming that, even with no employment income, that I will be able to keep that mortgage and that the lack of employment income wouldn’t result in that mortgage being taken away if I can demonstrate the means to pay the interest? 

You can get mortgages to run until you're 75 (some places, even 85). I would be looking at this before you stop salaried employment.

I think nationwide offer mortgages up to 90 years of age, so definitely scope to extend mortgage into retirement

JamTomorrow

tigerspill said:

Monitor your spending in detail. Every penny.  This is the only way you will have a starting point from in expenditure.
I recorded every penny in a spreadsheet (and still do).  Takes only i minute each day.  Well worth the effort.  It will give you real confidence as you plan to turn off the income tap.

Plenty of discussion on modelling spending and agree this is useful to a point but I just need a directional view of what my spending will be in that period.  I know I can be, and will be, more frugal if needed in that period.

I've been tracking my spend against a budget for the past 10 years in excel and also have a separate 'Retirement Budget' forecast as well.

Using 12 and 36 month MATs my spending over the past 5 years would indicate ~£35k to £40k (excluding holidays), but that has included some fairly uncontrolled spending which I know I could reign in if I needed too.  

A more bottom up derived 'retirement budget' would suggest £25k-£30k of spend, hence why I would put my range in the £30k-£40k - i will still want some holidays and flexibility.

JamTomorrow

chiefie said:

If you are a hrt payer bang in as much of this tax allowance into a sipp that you can (as long as you are under LTA)

I've been putting £30k-£40k in for the past 3 years and plan to max out at £40k for the next 5 years through to work becoming optional.
As well as being a HRT I should have earnings of the full amount above £100k that erodes your personal allowance for the next 5 years.  Therefore that ~£25k pension through salary sacrifice is only costing me ~£9.5k in after tax income, with the remaining £15k of pension costing me £8.7k. 

£40k of pension for ~£18k of after tax income is good business (unless Rishi gets rid of it today or in the future and then I will reassess).

This approach to max out over the next 5 years could result in the LTA becoming a marginal issue for me when I can access my private pension (depending on investment returns).  But a nice problem to have and given the opportunity cost of the contribution going, and the fact that I means I won't have to contribute to pension after I am 50, is a small risk/cost worth paying for me.

JamTomorrow

rebuswad said:

There is a good 6 part Monevator series on plugging the gap until Pension kick in, worth a read https://monevator.com/how-to-maximise-your-isas-and-sipps-to-reach-financial-independence/ . 
Personally I'm retiring soon and have 10-13ish years until Pensions kick in, and I view those funds as a separate bucket from my pensions. It's about a 40/20/40 allocation, which includes 6 years worth of cash. I've hopefully got a bit more than I should need or I would have more in cash/bonds.

Thanks for confirming what I expected to hear.  I will have a good read of this article and look to rebalance the asset allocation of my private pension and non pension funds.

I already have about 2 years emergency cash fund offseeting against my mortgage and suspect I will initially move out of the P2Ps when they mature, and either build up that cash holding over the next few years or put into an ISA (Funds TBC).

Is your 40/20/40 = Cash/Equities/Bonds?

JamTomorrow

Retireinten said:

How are you planning to pay off your mortgage and at what age?

Tentative plans are to pay this off from my private pension lump sum at 58, but if I can keep my offset mortgage (Base +0.5%) I'd probably keep the mortgage until I have to pay it off (or if base rates rise significantly).

JamTomorrow

NedS said:

Presumably, if you stayed invested in higher risk investments, and markets crashed a year before your planned retirement, you would have the flexibility to carry on working if necessary? That gives you the capacity to take on some extra risk if you are so inclined, but once you make the decision to go, you have some headroom in your figures, but not a huge amount. If you have the flexibility to reign spending in to around £30k/year, that only requires £210k from your nominal £350k pot (which could conceivably be anywhere between £150k and £500k in 5 years time).

Work becoming optional at 50 should hopefully be entirely optional for me and therefore if there was a market drop I would be confident I could carry on working.  My skills are quite transferable across industries and a number of my peers have dropped into contracting at day rates that would keep the wolves from the door.

However, because I feel I don't need to chase returns now I would be quite frustrated if in 5 years time the markets had tanked and I hadn't addressed my asset allocation over the previous 5 years such that work being optional was now delayed / not an option at 50.

I think the least worst option for me would be to have lost out on returns through holding cash / low risk investments, to make a £30k-£40k/year for the period between 50-57 achievable, as opposed to continuing to be overweight in equities to chase returns I don't think I need at the risk of delaying when work is optional.