FIREside Chats

SuperSecretSquirrel

edinburgher said:

I know the cool kids don't include state pensions and home equity, but I'm not cool

How do you go about factoring the SP into net worth Ed? Is it as simple as adding (£179.60 x 2 x 52 x 25) to the total?

edinburgher

@SuperSecretSquirrel - Yes - I couldn't think up any more sensible way to do it. I'm trying to plan a sustainable model for the relative value needed to replace employment income and that seemed the best way to model it. Granted, there are always doomsters saying the state pension won't survive, but if that's the case I'll adapt (reduce spending, a side hustle, a wee part-time job nobody else wants).

kaycastle

This is a brilliant idea for a thread @edinburgher I literally just posted in my diary about how I don't understand any of this stuff and the retirement planning forum seems to be for people that spend a lot more than me. Then I spotted this...somewhere to ask all my silly questions and see all the different approaches. 

• Why am I investing? I haven't opened one yet but I want one of those Vanguard stocks and shares ISA It seems like its the only option these days as interest rates on ISAs/savings are poop. I also want to retire before I'm allowed to access pensions or at least know that I can. I want to know what its like to go to work but not actually need to. I'm also keen to explore going down to part-time work at some point during my 40s.
  
• How much do I think I'll need? -I haven't quite worked it out but I'm going to use edinburgher's old chestnut of 25x expenses but without mortgage payments. So about £360,000. I really don't spend that much but I've also added contingency to that as well.
  
• How am I going to get there? Personal savings between the ages of 50-55. Then personal pension, then state pension as a final safety net - just in case I turn into some sort of geriatric spendaholic and blow all my cash and then need pennies for food  
• Current employer pensions are ~18k. New job that I started a year ago is amazing and just combining my pots into that, They seem to have lots of tools you can use - I'm just not sure how to actually work out how much that pot might be when I'm 55.
•  Use state pension as a safety net. I'm only 24 years away from qualifying for full state pension. I do have 2 incomplete years that I can choose to pay to qualify. One I need to pay £500 and another £800 by 2023. Is it worth doing this, it looks like it is on the surface. That will mean when I'm 50 I've only missed 2 years if I stop work at that point.
•  Should be mortgage free by 38, if I then just simply put everything I'm spending on my mortgage into savings I'd have £259k by age 50...
• I need to do so much spreadsheeting to work this all out properly and lots of reading/understanding of vanguard.
• I think its also worth noting that I'm trying to live a healthy active lifestyle and aiming to be a healthy active old person who can make the most of all of this. So I guess I'm investing in myself as well as money? 
• I think I'm quite lucky to enjoy the simple things in life so I feel like I can achieve this without a huge pile of money. But I do think it will be good to work out how I want to spend my retirement - I've always pictured myself wandering museums, national trust places, doing lots of volunteering, learning about whatever I like, lots of gardening and occasionally popping across to the continent for some sun.
•  Its morbid and awful to think about and I never include it any of my plans because you never know but I will inevitably get some inheritance at some point which will be about ~150k - I like to leave that out of my plans and if I land up with that at some point, I'll just go on a few more holidays or use it to help my future children.
• How long do I have? I'm almost 30. I would like to have financial freedom by age 50. Financial freedom for me is knowing that if I wanted to quit work tomorrow I'd never need to find another job. 

Haven't taken into account husband's pension or anything as he finds this all a bit boring.

South_coast

kaycastle said:

This is a brilliant idea for a thread @edinburgher I literally just posted in my diary about how I don't understand any of this stuff and the retirement planning forum seems to be for people that spend a lot more than me. 

LOL, I've just signposted you to this thread after reading that in your diary - you've beaten me to it 🤣!

Karmacat

hugheskevi said: 

I bought Premium Bonds for the first time ever this week Still never purchased a lottery ticket though - if the live draw comes on TV I quickly scribble down 6 numbers and consider myself £1 up when they don't come up.

I love that!  That's a lot of fun in a financial sort of way.

becky_rtw

Hi @kaycastle just to say I went mortgage free a few years ago (just turned 39)and it made such a difference to be able to decide to work part time if I wanted. I took a year out to do a masters and then worked 3 days a week or a couple of years. It was bliss. 

I know saving in pensions is more efficient in the long term because of tax benefits, but I'm a big believer in being mortgage free as it gives you so many options career and retirement wise.

I went back full time in the end as my earning power is high and a few more years of my income makes a big difference to our luxuries in retirement but I didn't have to and that makes a big difference to how I treat work these days. It's much harder to get stressed about it when you don't rely on the money.

Anwyay good luck with your planning. Spreadsheets are good 😎

kaycastle

Thank you @South_coast  

@becky_rtw That sounds perfect and definitely the sort of decisions I daydream about being able to make without worry. So nice to hear from someone who is already there. Well done on all your hard work!

Karmacat

kaycastle said:

• because you never know but I will inevitably get some inheritance at some point which will be about ~150k - I like to leave that out of my plans and if I land up with that at some point, I'll just go on a few more holidays or use it to help my future children.
  
• How long do I have? I'm almost 30. I would like to have financial freedom by age 50. Financial freedom for me is knowing that if I wanted to quit work tomorrow I'd never need to find another job. 

kaycastle, good for you for starting this journey in your late 20s, thats absolutely brilliant.  I just want to stick my oar in about the inheritance.  It's not inevitable, it really isn't.  The way things are going, who knows what will be funded by the time your parent/parents get to be elderly, let alone you?  I'm in my 60s, and I've watched layer after layer of benefits and free of charge stuff being stripped away from people older than me, so that by the time I get to their age, there's nothing, and I just continue on as before.  I'm pretty okay as these things go, but I'm very aware that plenty of other things could be de-funded, so that pensioners would have to carry on paying for things, including to the point of releasing equity to pay for care again: it happened once, but was a political no-no back then and the system was reformed.  Though this Daily Mail article (I know, but it **seems** detailed) 17,000 elderly people were forced to sell home to pay for care costs in just one year | Daily Mail Online says it still happens.

kaycastle

Karmacat said:

kaycastle said:

• because you never know but I will inevitably get some inheritance at some point which will be about ~150k - I like to leave that out of my plans and if I land up with that at some point, I'll just go on a few more holidays or use it to help my future children.
  
• How long do I have? I'm almost 30. I would like to have financial freedom by age 50. Financial freedom for me is knowing that if I wanted to quit work tomorrow I'd never need to find another job. 

kaycastle, good for you for starting this journey in your late 20s, thats absolutely brilliant.  I just want to stick my oar in about the inheritance.  It's not inevitable, it really isn't.  The way things are going, who knows what will be funded by the time your parent/parents get to be elderly, let alone you?  I'm in my 60s, and I've watched layer after layer of benefits and free of charge stuff being stripped away from people older than me, so that by the time I get to their age, there's nothing, and I just continue on as before.  I'm pretty okay as these things go, but I'm very aware that plenty of other things could be de-funded, so that pensioners would have to carry on paying for things, including to the point of releasing equity to pay for care again: it happened once, but was a political no-no back then and the system was reformed.  Though this Daily Mail article (I know, but it **seems** detailed) 17,000 elderly people were forced to sell home to pay for care costs in just one year | Daily Mail Online says it still happens.

Thank you! I completely agree and always worth keeping that reality in mind - I never put it into calculations as I don't like the uncertainty. But my parents were fairly old when they had me - they are now mid 70s and they've been quite savvy about sorting things like that out as they have similar opinions and also ran into trouble with the whole care cost thing with my nan but they are lucky to have some very savvy solicitor friends who helped them with it. They love talking about it more than I do and always want to discuss what I'm going to get but I don't want them to think about it at all, probably why I mentioned it for the first time ever as they were just talking to me about it yesterday haha. And although I think there is a higher chance of something more than other people I also do tell them that they can blow it all on cruises, I don't mind haha. But yeh I don't include it any calculations and treat it as something "if it happens, then I just deal with it as and when" but I treat it like its not going to happen.   

OhIJustLostMyShoe

edinburgher said:

@SuperSecretSquirrel - Yes - I couldn't think up any more sensible way to do it. I'm trying to plan a sustainable model for the relative value needed to replace employment income and that seemed the best way to model it. Granted, there are always doomsters saying the state pension won't survive, but if that's the case I'll adapt (reduce spending, a side hustle, a wee part-time job nobody else wants).

In theory, the best way of modelling it is to come up with multiple "expense periods".  

For the average FIREr that means:

1) Pre-retirement spending
2) Post-retirement spending (e.g. no commuting, dry-cleaning)
3) Post-state pension age spending

Effectively for (3) you can subtract your estimated state pension from the estimated spend.  So if you're getting a state pension of £150 per week, or £7,800 per year, and you expect to spend £14,000 per year in retirement, you can effectively assume post-SP retirement spending of £6,200.

Obviously if you're just trying to do some rough estimates of things, it doesn't matter too much.  The reason why it can matter is because especially for those of us planning to retire fairly early, we need to think not just about overall net worth and safe withdrawal rates, but also where that money will actually come from.

There is absolutely no point in putting all of your money into your SIPP if you want to retire at 50.  Equally, if you put all of your money into ISAs and taxable GIAs you're missing out on tax benefits.  Monevator did a great series on ISA vs SIPP that covers all of this.  Point is, for many of us we will actually have three (potentially different) SWRs.  One for our ISAs, one for our SIPPs, and one for our SIPPs when we also have income from DB / SP.

For what its worth, I haven't got round to modelling this for myself yet, but probably will later on in the year.

EDIT: My overall point, which I neglected to mention, would be that you don't count it as part of your net worth at all - it sits on the other side of the equation as a reduction in your required withdrawal.