Is this a reasonable use of compound interest? What did I miss?

Aaiieeee

Hi all, so I've been playing with a compound interest calculator and felt the output was reassuring but I need to check my assumptions!

So, starting with £62,000 already saved I could invest £1000 per month into a stocks and shares ISA for 14 years.  Assuming 5% growth per year I'd have £363k by age 50.

I could then contribute £0 and instead withdraw £5k per year for the next 10 years and end up at £528k at age 60 (again 5% assumed). I'd still earn money in this period but could drop annual income by £17k (£12k + £5k) as an ease into later life. If the first 14 years didn't go so well I could not withdraw anything here as a hedge.

I could then withdraw and live off £30k a year for 35 years (age 60 to 95) and be left with £202k, assuming 5% again.

Any thoughts?

Some assumptions:

I'd get 5% on average for the next 59 years, after inflation.

I'd be able to contribute £1000 for 14 years (currently doable).

I'd stick to this flawlessly

No inheritance or state pension

That £30k per year is sufficient for those years (assuming no unexpected major costs etc).

daveyjp

You can't consider one side of the equation and only assume increases in the fund at 5%.  The amount being withdrawn needs increasing each year to reflect inflation.

Aaiieeee

haha yes that does make a lot of difference.  If I include a 3% inflation rate on withdrawals on the last part I end up with £-1.1m

Thanks

grumiofoundation

Why only stocks and shares ISAs? 

Pensions and/or stocks and shares lifetime ISA will be more tax efficient than stocks and shares ISA (which are ‘best’ would depend on what tax band you are in currently and will be/expect to be  one retirement. Whether you pay workplace pension via salary sacrifice? I am assuming you are already maximin employer contributions). 

You aren’t going to be accessing all the money before these become accessible so worth considering. 

Would suggest looking at lower growth rates to ‘stress test’ your plan. 2%, 3%, 4% above inflation. 

Do you have a mortgage? And does this factor into retirement plans? 

Aaiieeee

I see that I have been using current rates of withdrawal (£1k, £30k respectively) rather than inflated rates in 14 and 24 years respectively means that the saving years are wildly under what is needed.

If I didn't withdraw anything during 50 and 60 and instead withdraw £24k (after 24 years of inflation, so £12k in today terms) it could work (all else being the same).

But then its only £12k income so not viable for 35 years

MaxiRobriguez

Aaiieeee said:

haha yes that does make a lot of difference.  If I include a 3% inflation rate on withdrawals on the last part I end up with £-1.1m

Thanks

Your money from 60-95 should still be, somewhat, invested, given that's a 35 year time frame.

Even if you hold a large cash proportion, say 4x years of £30k, then if you did hit your £500k+ target then you're still 75% invested - which if your 5% gains above inflation target holds would be greater than impact of inflation. You'd be nowhere near -£1.1m.

Probably not wise to rely on +5% after inflation growth though. Perhaps tone it down to 3 or 4%.

And as someone else said, look at your vehicles - a pension provides tax efficient benefits that will help you get to bigger targets than the S+S ISA would.

Linton

Wont your £1000/month also increase with inflation?  It may be easier if you work entirely in current £s and decrease your assumed return by 2-3%.

Also have you factored in State Pension?  You would need to cover it during the period between retirement and State Pension Age but after 68 you can assume you would be getting £9K+, inflation adjusted,

Albermarle

No inheritance or state pension

Why no state pension ?

JohnWinder

I think you're on the right track, and I think it makes it easier to include inflation in all the figures (so your growth assumption is 7%/year being 5% real plus 2% inflation), but...

That might be a bit ambitious for safe planning. Secondly, an asset that halves in value in the first year, then doubles in the next has an average growth of (-50+100)/2, but you're back where you started; so get a hold of the distinction between average growth and CAGR (compound annual growth rate).

Next, sequence of returns can have a big impact. You want asset prices to crash as you start accumulating, but you certainly don't want them to crash as you start withdrawing. Be sure you've got sequence of returns risk by the throat.

If I read it right, you envisage withdrawing 5.7%/year starting at age 60, and think you'll go underwater by 1.1M. I don't think that's right. There's a whole range of possible outcomes, many of which include getting to 95 with as much as you had at 60. Read up on the '4% rule' for withdrawals, have a look at the portfoliovisualiser site which shows your situation running from 1975 to 2020 with plenty of money left over. Also try the modelling at the firecalc site. And the portfoliocharts site to see what portfolios were more or less sustainable for your circumstances. After all that, have a look at the earlyretirementnow site.

helpyhelper

I calculate you as having 314k after the 14 years. 123k from the initial investment and 191k from you 1k contributions with returns. 

Thrugelmir

Aaiieeee said:

I'd get 5% on average for the next 59 years, after inflation.

A challenging target. You'll need to factor fees into account as well. Make the wrong investment decisions and matters could easily go awry. Markets are roller coaster rides where there's rarely certainty for long.