Are we mad?

Skibunny40

Mallygirl - I didn't even know you could get ankles replaced!  I've got a dodgy ankle already - perhaps I should start that cash pot now!

Linton

I think your planning strategy has serious problems....

1) No plan will last 20-30 years.  It must be based on assumptions which will almost certainly prove to be wrong. If you plan to run out of money at 80 you could be running into difficulties in your 70's.

2) It is very likely that at least one of you will last into your 90s.

3) By the time you reach your 80's your exotic holidays could be distant memories and the smart car you bought in your 50s or 60s could be on the scrap heap.  They wont provide much consolation if you cant afford to pay a cleaner or a gardener to do things that you can no longer manage yourself or repair the house, enjoy a bottle of wine, or take any sort of holiday.


I think a better approach based on what I actually did and intend to do in the future is:

The objective of a plan is to decide whether you have enough money to retire.  To get to that point:

1) Assume you will continue your current day to day living expenditure adjusted for inflation well into your 90's. 

2) Make pessimistic assumptions as to how large a lump sum you will need now to finance this.  If you use an SWR approach make the % historically low.  If you are basing the calculation on modelling future returns and expenditure use an inflation rate higher than now and a very undemanding investment return.  I used and continue to use 3% inflation and inflation+1% investment return.

3) Add the desired expenditure for exotic holidays and fast cars in the next say 5 years to the lump sum from (2) and view it as a separate "fun fund".  This is what you require to be able to retire.

Some years after returement  you can repeat the analysis.  SInce you started off with historically pessimistic assumptions you can reasonably expect that you will have more money than planned.  This should provide extra financing for the "fun fund".

Skibunny40

Linton - you don't beat around the bush, do you?!  But I do appreciate it, honestly! 

I fully realise that no plan can last 30 years, which is why we'd be revisiting it frequently, cutting back if necessary  and there's always the option of going back to work in the early days if things are really bad (or if we just get bored, always a possibility!)

Trying to fit my figures into your plan looks like:
1) £24k as basic (& some luxuries) spend per year until age 90. I just can't bring myself to contemplate any older than this - I'll check how OH feels tonight!

2) Can't I just assume investment return = inflation? Much easier sum & more pessimistic?! So if I need £24k x 32 years based on retiring at 58, that's £768k as a pot. However the state pension will provide either £9k or £18k depending if that's one or both of us, so that reduces the pot requirement by either £198 (22 years x £9k) or £396 if we're both still around, meaning our required pot of our money is either £570k or £372k. Let's go with the £570k as we're being pessimistic!

3) £10k per year for 20 years? assuming wants diminish as we get older. Need to work out that figure properly but it's a reasonable ballpark. So £200k in total

Giving a total pot requirement of £770k if I've got my figures right?

Okay, that's very interesting and no, we don't have that much in a pot! Will go away and think some more...although I guess I already knew we didn't have enough money to cover this, hence taking the gamble at 80 years old.

AlanP_2

Scrudgy said:

Looking at my in-laws, who are both now in mid eighties. They started retirement enjoying it immensely, two to three holidays per year, lots of time with family and grandkids.

However, since they hit 80 they lost a lot of interest in travel, and now rarely want to leave the local area, even though they are still both healthy. 

They literally spend almost nothing now, the biggest expenditure by a long way is their council tax. Followed by food and utilities. Spending money on meals out or a trip away from home has not happened for a long time. They are perfectly happy and active.

So perhaps your strategy is sound enough.

My in-laws are the opposite.

Mid to late 80s and have 8 holidays booked over the next 2 years including Japan and there will be a couple short notice / long weekend breaks each year as well so much the same as they have always done since retiring.

The type of holiday, location and length have changed but not the quantity.,


They don't drive abroard anymore so choose locations where a car isn't essential.

For UK trips they will add 2/3 days on at each end to break the journey rather than drive 2/300 miles in one day so 2 weeks in Scotland turns in to 3 weeks away.

We can't keep up with them. Went to Spain with them a couple of years ago. We went for 1 week and I drove a hire car, they stayed on for a 2nd week. We went out walking 5-10 miles most days, we spoke to them when they got back and they enjoyed the second week without us as they could go for the 15 mile+ walks they prefer without us holding them back, 

Albermarle

 Can't I just assume investment return = inflation? Much easier sum & more pessimistic?! 

Yes you can of course, and then if there is some growth you are ahead .

However in your investing strategy you should not be over cautious, as this can be self defeating if you take it too far .

coyrls

Skibunny40 said:

Coyrls - I've done a fair bit of reading round SWR and understand the concept (I think!).

Our plan of dealing with this would be to keep a reasonable cash reserve and to use that rather than take investment funds when the markets are bad. Additionally, any years when the markets do better than expected, I might syphon those profits off to add to cash reserves or, if all else fails, reduce our spending that year. There's a lot of flexibility in our annual spend figure and we'd have no hesitation, or difficulity, in cutting back dramatically if necessary for a year or two. 

Would that cover us? Feel free to say no!  It's really good to be made to consider all these things, so thank you! 

There's plenty of discussion in threads here and some research about cash reserves.  The problem with cash reserves is that you are taking money out of the market and reducing your potential returns.  If you treat cash as part of your bond allocation, then rather than using cash to avoid withdrawals when equities slump, you would be using the cash to buy equities to balance your portfolio.

SWR strategies quote the percentage chance of a portfolio lasting, say 30 years.  No strategy that I know of can deliver the certainty of a defined income to a specific date, at which point there will be no money left, which is what your stated strategy is.

Linton

Skibunny40 said:

Linton - you don't beat around the bush, do you?!  But I do appreciate it, honestly! 

I fully realise that no plan can last 30 years, which is why we'd be revisiting it frequently, cutting back if necessary  and there's always the option of going back to work in the early days if things are really bad (or if we just get bored, always a possibility!)

Trying to fit my figures into your plan looks like:
1) £24k as basic (& some luxuries) spend per year until age 90. I just can't bring myself to contemplate any older than this - I'll check how OH feels tonight!

2) Can't I just assume investment return = inflation? Much easier sum & more pessimistic?! So if I need £24k x 32 years based on retiring at 58, that's £768k as a pot. However the state pension will provide either £9k or £18k depending if that's one or both of us, so that reduces the pot requirement by either £198 (22 years x £9k) or £396 if we're both still around, meaning our required pot of our money is either £570k or £372k. Let's go with the £570k as we're being pessimistic!

3) £10k per year for 20 years? assuming wants diminish as we get older. Need to work out that figure properly but it's a reasonable ballpark. So £200k in total

Giving a total pot requirement of £770k if I've got my figures right?

Okay, that's very interesting and no, we don't have that much in a pot!
 Will go away and think some more...although I guess I already knew we didn't have enough money to cover this, hence taking the gamble at 80 years old.

You can assume investment return matches inflation, though there needs to be some limit to your pessimism unless you are seriously risk-averse.  But assuming return matches inflation for the purposes of paying for the basics seems very reasonable.

For the puposes of very rough planning I suggest you assume both of you are around.  When one goes then the survivor's wish to spend on luxuries will presumably drop and they can down-size the house.  When you have an initial figure you can investigate what happens when one of you dies at various ages.

So working on the basis of to £372K figure covering moderate expenditure.........

I assume the £10K/year for 20 years is for holidays etc.  Then I suggest for a minimum retirement pot you only plan for 5 years of luxuries, so £50K making the total £422K.   In 5 years time if you invest sensibly it is reasonable to expect that most of the time you will make that return or more above inflation on £422K invested. It works out as 2.3%/year and the average return for UK shares over the past 120 years is about 5% above inflation.  For US shares the average return is higher.

The whole point of the strategy is to ensure your basic income is as secure as reasonably possible whereas it can save considerable money up front if expenditure on pleasures can be more flexible.

coyrls

You should be careful about any plan that assumes constant growth (e.g. inflation, or inflation +1%) because it can't account for sequences of return.  A negative sequence early in retirement can have a big effect.  There are many explanations of sequence of returns risk, here is (a US) one: https://awealthofcommonsense.com/2021/02/the-best-way-to-manage-sequence-of-return-risk/

Nebulous2

AnotherJoe said:

Nebulous2 said:

I think you need to firm up your post-retirement budget. The number thread on here will give you some ideas of where other people are coming from, and what they consider their needs to be.  Yours will be individual though. You may find that a lot of costs; commuting, work clothes, national insurance etc are no longer necessary in a post-work era. 

There have been a few threads on here recently about the psychological aspects of spending when you are no longer earning. That is more difficult than many people expected. Where there has been a habit of deferring gratification for the future, switching that off and spending it instead can be difficult. 

There is a broad range of possibilities, rather than a clear glidepath, in what you can draw from your savings / investments before they run out. A plan for 80, can easily end up at 75 or 85 depending on market conditions. 


You may discover that 'joy' comes from other places than spending money.  We had a plan to spend all winter touring abroad in a caravan. We could do that quite easily on 1500 euros a month, considering that as additional money, and recognising that food is already budgeted for. 

 Coronavirus, additional visa requirements, increased paperwork for dogs and elderly parents have all conspired to make that less appealing. We may well go for 4-5 weeks at a time, but the previous plan for beginning of October to end of March seems no longer viable. 

I can understand that but for me its the opposite, its easier since I have an easy glidepath without worries about running out. I am though spending a fair bit on the kids and grandkids rather than me, I'd rather see them enjoying it now that imagine them enjoying it when i've exited stage left pursued by a bear  

If youve had a lifetime of saving and being careful. you dont just go out and buy junk for the sake of it though anyway

I've been interested in the conversations here. Having resigned and finished the end of March, I'm not sure where I'm going to be, with loss of identity probably being more an issue than reluctance to spend at the moment.

I've finished work with a fair bit less planning than many people here, but we have deliberately spent on some of the big ticket items prior to finishing, to reduce the risk of being hit with a lot of expense before we have found our own path. 

I have bought myself an expensive camera, but a retirement contribution from my colleagues, and selling off some of my old gear will help offset a fair bit of that. 

AnotherJoe

Skibunny40 said:

Sorry, one other thing!

During our discussion last night, we were thinking of large unexpected spends that might crop up and how to plan for them on the off-chance.

One of those was health problems such as hip/knee replacements and the very long NHS waiting times. What have others planned? Just suck it up, private health insurance, halfway schemes such as Benenden Health, keeping a "healthcare" pot of cash available? OH has private medical cover through his work for both of us & obviously that would come to an end when he stops working. We've never really used it but sod's law suggests when we don't have it....!

I've had some recent experience of fairly major operations, and they haven't been "that" expensive, In the range of £5k-£12k a time. The £12k was a massive op.

Compared to private health insurance, which might be what, £500/month for a couple in their 60's and 70's maybe? (thats a guess, sometime since i looked)

Thats a year or two's subscription. Plus, no hoops to jump through to get permission.

So, perhaps put aside a couple hundred or so a month and build up a cash pool for eventualities like that. (Health Warning, I dont know about Benenden Health or what it does)