Annuity’s Becoming More Attractive?

RogerPensionGuy

westv said:

There's not really much else you can do apart from guess a number and doubling it maybe.

I remember when JFK wanted to know the cost of putting a man on the moon, he ask the guy in charge. 

That guy went to the hundreds of different segments and asked them to produce an estimate of the maximum there segment would cost and told them not to by shy as the government was paying. 

He collected all the hunders of the estimates, he added them together and doubled the total and told JFK.

IIRC that project came on on budget +/- 5%

For my planning I've worked out a number and times it by 1.5 and am using 3 or 4 different revenue streams to hopefully ensure it will pan out ok.

OldScientist

NedS said:

OldScientist said:

1) One question you might ask yourself (if you haven't already) is how much income do you need to support your preferred lifestyle? Consequently, calculate how much you need in excess of your future state pensions and your capped DB pensions (depending on the level of the cap, i.e., 2.5% or 5% are common, based on past UK inflation levels a reasonable rule of thumb might be to assume 50% to 80% of their current value in the long term) and then annuitise enough to bring your income up to the required level.

That isn't always as easy as it sounds.

20 Years ago I had no idea I would need fibre broadband, or an iPhone, or a monthly subscription to Sky to watch F1 or a monthly subscription to Netflix because there's nothing worth watching on terrestrial TV, or that half the features in my new BMW are now based on a monthly subscription model (and a heated steering wheel is now considered essential in winter) [I'm being facetious here as I don't really own a BMW!]. In fact, over half of my monthly direct debits are for things I had no clue I would need 20 years ago. Consequently I also presume I'll equally have no idea what other costs I may wish to incur 20 years from now. So can I simply assume that my current costs will rise with inflation and that will be sufficient?

Agreed that it isn't easy (particularly for those well away from retirement, but the PLSA retirement standards, for all their flaws, might at least form a basic framework - https://www.retirementlivingstandards.org.uk/ ), but it is very important. Most of the things you've included above had their equivalents 20 years - e.g., for dial up/first generation internet I paid almost the same as I do now for fibre and (nostalgia alert!) renting videos from blockbuster in lieu of netflix (which we only use to watch films). Also, except for the BMW, the cost of the things most of the things you've mentioned are relatively small compared to other expenditure such as energy, food, transport, etc.

One way of thinking about this is to break expenditure down into three broad categories:

Essential floor: Food, housing (heating, water, regular maintenance, etc.), and clothing (i.e., stuff we cannot live without or get away without paying - e.g., council tax) - these tend to move fairly closely with inflation for the simple reason that inflation is largely defined by price movements of these sorts of things.

Desirable lifestyle: The things that make life worthwhile (these will vary from person to person), like communications, netflix, hobbies, eating out, transport, holidays, etc.

Aspirational lifestyle: What you'd really like to do if you had enough money, but you'll have no or few regrets if you don't. Again, these will be very different for different people and might include extensive travel (i.e., holiday of a lifetime), a new BMW every 3 years, etc. (as a rather frugal and content person, my imagination lets me down here!).

For those closer to retirement, current expenditure in these categories is likely to be fairly well defined and you can add in additional costs (e.g., more rounds of golf!) and remove others (e.g., costs associated with work).

In terms of funding, for house owners the essential floor (similar to or a bit below the 'minimum' PLSA standard) is likely to be largely supported by the state pension (more so for a couple than for a single person), but may require additional guaranteed income.

The desirable floor may be best supported by guaranteed income such as DB pension (with some allowance depending on the inflation cap) or RPI annuity since there would then be no market or inflation risk.

Unless it can be funded from guaranteed income, the aspirational lifestyle might be best supported by a risky portfolio (i.e., largely stocks). 

Of course, this description is not definitive and there are other ways to think about this.

DT2001

RogerPensionGuy said:

Hwestv said:

There's not really much else you can do apart from guess a number and doubling it maybe.

I remember when JFK wanted to know the cost of putting a man on the moon, he ask the guy in charge. 

That guy went to the hundreds of different segments and asked them to produce an estimate of the maximum there segment would cost and told them not to by shy as the government was paying. 

He collected all the hunders of the estimates, he added them together and doubled the total and told JFK.

IIRC that project came on on budget +/- 5%

For my planning I've worked out a number and times it by 1.5 and am using 3 or 4 different revenue streams to hopefully ensure it will pan out ok.

Going to the moon involved many unknowns and retirement hopefully less. Will your 150% number lead you to work longer than you need? Depending on how flexible your spend in retirement is IMO dictates the margin needed for SOR.
Our non essential budget includes a large figure for travel however the performance of our SIPPS/ISAs might dictate in which years we travel beyond Europe.

RogerPensionGuy

DT2001 said:

RogerPensionGuy said:

Hwestv said:

There's not really much else you can do apart from guess a number and doubling it maybe.

I remember when JFK wanted to know the cost of putting a man on the moon, he ask the guy in charge. 

That guy went to the hundreds of different segments and asked them to produce an estimate of the maximum there segment would cost and told them not to by shy as the government was paying. 

He collected all the hunders of the estimates, he added them together and doubled the total and told JFK.

IIRC that project came on on budget +/- 5%

For my planning I've worked out a number and times it by 1.5 and am using 3 or 4 different revenue streams to hopefully ensure it will pan out ok.

Going to the moon involved many unknowns and retirement hopefully less. Will your 150% number lead you to work longer than you need? Depending on how flexible your spend in retirement is IMO dictates the margin needed for SOR.
Our non essential budget includes a large figure for travel however the performance of our SIPPS/ISAs might dictate in which years we travel beyond Europe.

Noted, in my case I saw lots of poor planning examples in my 20s and decided to plan as 50 to be available to stop paid employment for any reason. 

I had a very plesent lifestyle due mostly to planning, not much luck and zero inheritances and was indeed able to stop setting the alarm at 50.

Employment got better and I really enjoyed it, I saw DB pensions getting attacked wholesale and decided to tweek a few things without affecting my desired lifestyle and indeed my great DB got closed about 6 years ago, DC has been well feed and very happy I did. 

So at 60ish my very Conservative 150% is very understated, various advisors have told me it's much higher and were always keen to look after my income vehicles and do long-term stuff mostly being more IHT effective and providing a nice cash stream for the advisors in the deal.

michaels

NedS said:

OldScientist said:

1) One question you might ask yourself (if you haven't already) is how much income do you need to support your preferred lifestyle? Consequently, calculate how much you need in excess of your future state pensions and your capped DB pensions (depending on the level of the cap, i.e., 2.5% or 5% are common, based on past UK inflation levels a reasonable rule of thumb might be to assume 50% to 80% of their current value in the long term) and then annuitise enough to bring your income up to the required level.

That isn't always as easy as it sounds.

20 Years ago I had no idea I would need fibre broadband, or an iPhone, or a monthly subscription to Sky to watch F1 or a monthly subscription to Netflix because there's nothing worth watching on terrestrial TV, or that half the features in my new BMW are now based on a monthly subscription model (and a heated steering wheel is now considered essential in winter) [I'm being facetious here as I don't really own a BMW!]. In fact, over half of my monthly direct debits are for things I had no clue I would need 20 years ago. Consequently I also presume I'll equally have no idea what other costs I may wish to incur 20 years from now. So can I simply assume that my current costs will rise with inflation and that will be sufficient?

But then again other stuff like TVs etc are now much cheaper relative to income.  In a way relative income becomes key as our own expectations are probably driven by what we see others consuming which is in turn dictated by their incomes....

I do worry that some long retirements are based on maintaining a fixed real income but given that (hopefully) over time average incomes grow in real terms by 2% a year, what is a median income now could become 'relative poverty' in 20-30-40 years time.