Are we on the right track?

Nasa

Me and partner would like to retire at 55 if possible.  We are both in full time employment.  We would like to achieve a 40k income in retirment.  How much do we need to invest for this to be possible?

Thanks,

eskbanker

A safe withdrawal rate of 4% is often discussed on the pensions board, albeit it's not a perfect model - if using this as a basis for your planning you'd need to accumulate about £1m, in 2021 money terms (if you're assuming that the £40K target is also expressed in current terms rather than allowing for inflation?).

Turning £400K(ish) into £1m over 20 years entails £30K of annual growth (after deducting inflation), so you might be on the right track but not necessarily moving along it quickly enough - how much do you anticipate adding to the pot each year?

Nasa

eskbanker said:

A safe withdrawal rate of 4% is often discussed on the pensions board, albeit it's not a perfect model - if using this as a basis for your planning you'd need to accumulate about £1m, in 2021 money terms (if you're assuming that the £40K target is also expressed in current terms rather than allowing for inflation?).

Turning £400K(ish) into £1m over 20 years entails £30K of annual growth (after deducting inflation), so you might be on the right track but not necessarily moving along it quickly enough - how much do you anticipate adding to the pot each year?

When you say a 4% withdrawal rate will that preseve the value of the capital/assets?  I am assuming 40k per year in todays money.

Between us we can save and invest about 30-35k per year. 
 

Nasa

Does the 1m estimate take into account the state pension?

eskbanker

Nasa said:

When you say a 4% withdrawal rate will that preseve the value of the capital/assets? 

The 4% doesn't preserve the capital value indefinitely but is modelled on depleting it over 30-40 years.  It's a complex area but, as mentioned, it's discussed extensively on threads on the pensions board, so worth spending some time over there to read up on more detail, on threads such as:

https://forums.moneysavingexpert.com/discussion/6293170/foolishness-of-the-4-rule/p1

Nasa said:

Does the 1m estimate take into account the state pension?

No, but obviously you wouldn't be receiving that in the first 12 years of your retirement anyway, if governments stick to their plans.

solidpro

£40k between you or £40k each?

I am roughly aiming for similar - £45k at today's money at 50 years old, passive, but whilst preserving the pot ideally against inflation as well as not actually withdrawing anything except for emergencies. Like cancer.

£200k low/medium-risk ISA @ 5% P/A = £10k
£500k low/medium-risk SIPP @ 5% P/A = £25k
£500k BTL no mortgage rental profit after costs @ £15k P/A = £15k
Total £50k p/a

Inflation slowly erodes the ISA and SIPP down to "nothing" whereas annual property increases (at least where we are) tend to keep up with inflation, so could top up the ISA every year with some surplus or displace some usage with the income from our state pension at 67? Hope there is method to my madness.

Thrugelmir

Is the BTL owned outright or is there a mortgage attached? 

tebbins

Nasa said:

Me and parter are 35 and would like to retire at 55 if possible.  We are both in full time employment.  We would like to achieve a 40k income in retirment.  How much do we need to invest for this to be possible?  We have the following at the moment - 

S&S ISA - 27k

SIPP - 14k

LISAs - 32k

Pension 1 Legal & General - DC - 16k

Pension 2 DB 1/60 accrual - 2.4k

BTL – 304k

Thanks,

Short answer, yes. The rest of my post is technical and mathsy.

From 68 onwards you have £18.7k joint state pension income + £2.4k DB pension income + I'm guessing £10k net from the BTL, you have £31.1k you only need £8.9k (call it £9k I like rounder numbers). Once you retire at say 55, you have the BTL income so only need £30k for 13 years.Very roughly speaking you need £400k (13 years x £30k) + £225k (9k x 25) = £625k. At 68 you can relax the 4% so call it £600k. You have £89k now. If your wealth can at least keep up with inflation, which it should be able to if invested sensibly, 17 years saving £30k a year (if you keep increasing that amount with inflation) and you're set. Those are conservative estimates. On top of this are considerations such as care expenses and any inheritance you may want to leave and how to plan for that.

Since you're investing for life, literally, you aren't just investing for the next 20 years to "get to" retirement, but for another ~30 years after 55 if you have average life expectancy. Over that timescale, going with a very high equity allocation, perhaps even 100% for the next 10 years, before starting to introduce bonds, may be appropriate (IMHO).

I enjoy a challenge like this every so often to test my maths and excel skills so made this at lunch. It is very simplistic assuming a consistent and steady 3% real growth rate net of any costs of investing, maximum state pensions and no deferring, everything is in real terms. It ignores income tax on pension drawdown and the LTA, additional DB pension accrual, untimely death of either partner etc. I assume you max out your LISAs every year and split the rest 50:50 between your ISAs and SIPPs/DB pensions. I also assume when you retire you take income from your ISAs from 55-57, SIPPs from 58-59, LISA from 60 until it runs out then back to ISAs.

In reality everyone's situation is more nuanced but basic models like this can be a helpful illustration. I am sure many people in the forum have created much better versions.

Albermarle

solidpro said:

£40k between you or £40k each?

I am roughly aiming for similar - £45k at today's money at 50 years old, passive, but whilst preserving the pot ideally against inflation as well as not actually withdrawing anything except for emergencies. Like cancer.

£200k low/medium-risk ISA @ 5% P/A = £10k
£500k low/medium-risk SIPP @ 5% P/A = £25k
£500k BTL no mortgage rental profit after costs @ £15k P/A = £15k
Total £50k p/a

Inflation slowly erodes the ISA and SIPP down to "nothing" whereas annual property increases (at least where we are) tend to keep up with inflation, so could top up the ISA every year with some surplus or displace some usage with the income from our state pension at 67? Hope there is method to my madness.

Even taking 5% pa from  low/medium risk investments does not necessarily mean they will erode to nothing . More likely there will still be some left when you die . However if you reduce to 4% and/or move to a slightly higher risk level then the chances of it eroding to nothing become more remote ( that is the theory anyway ) .

Nasa

Thrugelmir said:

Is the BTL owned outright or is there a mortgage attached? 

Yes I have a 349k mortgage at 1.43% fixed

Nasa

tebbins said:

Nasa said:

Me and parter are 35 and would like to retire at 55 if possible.  We are both in full time employment.  We would like to achieve a 40k income in retirment.  How much do we need to invest for this to be possible?  We have the following at the moment - 

S&S ISA - 27k

SIPP - 14k

LISAs - 32k

Pension 1 Legal & General - DC - 16k

Pension 2 DB 1/60 accrual - 2.4k

BTL – 304k

Thanks,

Short answer, yes. The rest of my post is technical and mathsy.

From 68 onwards you have £18.7k joint state pension income + £2.4k DB pension income + I'm guessing £10k net from the BTL, you have £31.1k you only need £8.9k (call it £9k I like rounder numbers). Once you retire at say 55, you have the BTL income so only need £30k for 13 years.Very roughly speaking you need £400k (13 years x £30k) + £225k (9k x 25) = £625k. At 68 you can relax the 4% so call it £600k. You have £89k now. If your wealth can at least keep up with inflation, which it should be able to if invested sensibly, 17 years saving £30k a year (if you keep increasing that amount with inflation) and you're set. Those are conservative estimates. On top of this are considerations such as care expenses and any inheritance you may want to leave and how to plan for that.

Since you're investing for life, literally, you aren't just investing for the next 20 years to "get to" retirement, but for another ~30 years after 55 if you have average life expectancy. Over that timescale, going with a very high equity allocation, perhaps even 100% for the next 10 years, before starting to introduce bonds, may be appropriate (IMHO).

I enjoy a challenge like this every so often to test my maths and excel skills so made this at lunch. It is very simplistic assuming a consistent and steady 3% real growth rate net of any costs of investing, maximum state pensions and no deferring, everything is in real terms. It ignores income tax on pension drawdown and the LTA, additional DB pension accrual, untimely death of either partner etc. I assume you max out your LISAs every year and split the rest 50:50 between your ISAs and SIPPs/DB pensions. I also assume when you retire you take income from your ISAs from 55-57, SIPPs from 58-59, LISA from 60 until it runs out then back to ISAs.

In reality everyone's situation is more nuanced but basic models like this can be a helpful illustration. I am sure many people in the forum have created much better versions.

This is very useful thank you.