When can I stop contributing to pension?

kimwp

Ah, ok, thank you. So far I've only done most likely, I'll ponder what ifs - I'm hoping someone will advise some numbers on this thread to start with.

Sea_Shell

And don't forget the FREE money from the government too, by way of tax relief.

Steve182

I'm approaching 36
no dependents, no partner, full state pension from 67.

At 36 I had no dependents and no partner. Then a few years later I joined a dating site and that all changed.

A decade further on it was a toss up between moving to a larger house, private school or state school for my son, a decent boat or investing.

Investing won!!

jamesd

So, let's generate some targets for you to consider. All in today's money terms.

Assuming state pension of 9k at age of 68 and retirement at 60 you need to provide 8 * 9k = 72k of pot for this at age 60.

There's considerable study of safe withdrawal rates in drawdown and two of the informal rules, allowing one third of 1.5% total costs, are either:

1. 3.2% of initial (age 60) pot increasing with uncapped inflation each year, on a thirty year then die plan. Formally called constant inflation-adjusted income, informally 4% rule because of the cost-free US number. This starts out extremely pessimistic and increases are very likely, if you don't you're almost certain to die with more money than you started with.

2. 5% initially, usually increasing with inflation but sometimes skipping it or cutting or increasing more depending on the circumstances that you live through. Guyton-Klinger rules for a forty year plan at 99% success rate (the other 1% you have to make extra adjustments). Starts closer to average expectation.

With a 15k a year requirement and some flexibility you need 6k more than the state pension. 3.2% for 4% rule for 30 years is too short so I'll use 3% to approximate what forty years needs. 6k / 0.03 = £200,000. For GK it's 6k / 0.05 = £120,000.

So age sixty requirement is 72k plus one of those, so 192k or 272k.

You have 70k at 36. UK pure equity growth is about 5% a year, a high equity mixture about 4% so I'll use 4%. 24 years to 60.

1.04 ^ 24 = 2.56 times growth expected. (often shown as X ^ Y on calculators)

192k / 2.56 = 75k
272k / 2.56 = 106.25k 

Depending on the drawdown rule you want, you'll reach your requirement in a few months to a year and a few months at your current contribution rate.

Safety margins are good so if you're content I suggest a year then dropping to what gets employer matching.

But your target is low - I once asked for opinions about my then- minimum of 12k and that was the general view about that.

There are some researched and published retirement living standards that might get you to a different target.

kimwp

Thanks @jamesd, this is exactly the kind of thing I was hoping for - I really didn't know where to start. Some questions in bold if you have time - 

jamesd said:

So, let's generate some targets for you to consider. All in today's money terms.

Assuming state pension of 9k at age of 68 and retirement at 60 you need to provide 8 * 9k = 72k of pot for this at age 60.
How come this isn't 8*15k?
There's considerable study of safe withdrawal rates in drawdown and two of the informal rules, allowing one third of 1.5% total costs, are either:

What does it mean to allow one third of 1.5% total costs?
1. 3.2% of initial (age 60) pot increasing with uncapped inflation each year, on a thirty year then die plan. Formally called constant inflation-adjusted income, informally 4% rule because of the cost-free US number. This starts out extremely pessimistic and increases are very likely, if you don't you're almost certain to die with more money than you started with.

2. 5% initially, usually increasing with inflation but sometimes skipping it or cutting or increasing more depending on the circumstances that you live through. Guyton-Klinger rules for a forty year plan at 99% success rate (the other 1% you have to make extra adjustments). Starts closer to average expectation.

With a 15k a year requirement and some flexibility you need 6k more than the state pension. 3.2% for 4% rule for 30 years is too short so I'll use 3% to approximate what forty years needs. 6k / 0.03 = £200,000. For GK it's 6k / 0.05 = £120,000.
Am I right in thinking this assumes I live until 108 (40 years from 68), or have I got confused somewhere?
So age sixty requirement is 72k plus one of those, so 192k or 272k.

You have 70k at 36. UK pure equity growth is about 5% a year, a high equity mixture about 4% so I'll use 4%. 24 years to 60.

1.04 ^ 24 = 2.56 times growth expected. (often shown as X ^ Y on calculators)

192k / 2.56 = 75k
272k / 2.56 = 106.25k 

Depending on the drawdown rule you want, you'll reach your requirement in a few months to a year and a few months at your current contribution rate.

Safety margins are good so if you're content I suggest a year then dropping to what gets employer matching.

But your target is low - I once asked for opinions about my then- minimum of 12k and that was the general view about that.

There are some researched and published retirement living standards that might get you to a different target.

Quite astonished that I would reach my target so soon - I was taking a very pessimistic approach of saving 25 times spend and then assuming that it at least kept pace with inflation by being invested as I know very little about the stock market. It's really good to see some of the assumptions I could make - thank you again for laying it out - and I'll take a look at that link.

Thrugelmir

Stock market returns aren't correlated to inflation. Historically vast majority of stocks don't even beat the return on cash over the longer term. 

manetti

In response to your original problem, I too have found that online calculators can be too rigid, or make too many unchangeable assumptions.

I did some research and came across this calculator which is one of the best I have found: https://financialmentor.com/calculator/best-retirement-calculator

It's fairly simple to complete but allows for varying income streams at different stages of life, start and stop dates for contribution amounts, changes to spending habits at set stages during retirement, changing investment performance at different ages....a really flexible tool. The table it outputs shows all of the totals for earnings/income/savings at each year of the calculation.

One things to note is that it's a US-focused calculator, so for the question about which tax rate you will pay I just set it as zero and accept that any calculated figures will be before any tax is due.

kimwp

That's really helpful, thank you @manetti

jamesd

It isn't 8*15k because that part is only looking at the amount of money you need to pay yourself the same amount as the state pension from retirement until the state pension starts.

Research has shown that the effect of costs on safe withdrawal rate is to reduce it by one third of the costs. So when I allow for costs of 1.5% I deduct 0.5 from the safe withdrawal rate.

The plan is to provide for 40 years from retirement at age 60. That's why I provided for 8 years of paying yourself the same as the state pension from age 60.

While your situation looks good, your target is low and you might not get the 4% plus inflation growth that I assumed. Since you only get one chance I suggest considering the highest of the three retirement living standard levels and maybe also retiring earlier if you fancy that. Or just so you could if health got in the way of working.

kimwp

jamesd said:

It isn't 8*15k because that part is only looking at the amount of money you need to pay yourself the same amount as the state pension from retirement until the state pension starts.

Research has shown that the effect of costs on safe withdrawal rate is to reduce it by one third of the costs. So when I allow for costs of 1.5% I deduct 0.5 from the safe withdrawal rate.

The plan is to provide for 40 years from retirement at age 60. That's why I provided for 8 years of paying yourself the same as the state pension from age 60.

While your situation looks good, your target is low and you might not get the 4% plus inflation growth that I assumed. Since you only get one chance I suggest considering the highest of the three retirement living standard levels and maybe also retiring earlier if you fancy that. Or just so you could if health got in the way of working.

Thank you, oops, yes of course! I think I understand it now, I hadn't even thought about costs and I'd deducted a rate of inflation (of 3%) from the 4%, it's hard to tell with these models how those things fit in, but I now have a bit of confidence to start playing with the numbers (spreadsheet time!)

I'm currently thinking I'm going to aim for my personal pension to give me 20k a year from age 60, (approx 400k according to GK? How do I calculate it from age 50?) then if the state pension is still around, I have a luxurious retirement - it's not so much that I'll completely stop paying into my pension when I've reached the amount that's likely to achieve that, more that I then have the freedom to eg scale back days to do more volunteering or save for a nice holiday etc, having (hopefully) sorted out "old me".