How to Plan for retirement ?

Coppice10

I'm 47 and want to start generating what i think could be a 10 year plan to retirement. I'm finding it hard to know what to do though, and think i might benefit from an IFA - but where do i find one which is truly Independent?  I managed to find a website which showed qualified advisors but i struggled to see which were independent.

I have seen on this site that knowing what level of income you might want is a good place to start and perhaps 2/3rds of current salary is a guide - so that would need to be around the 70k mark ( i know we are fortunate - i earn a good salary) 

My workplace pension provider seems to suggest i will have a sizeable pot of £1.2m in 20 years time - but I'm not up for working full time till then!

We will be mortgage free in 10 years - i have 80% of the mortgage in a S&S ISA already but it earns more each year than the 1.27% interest on the mortgage, so ive kept it in the ISA.  Interest rate has 3.5 years left to go. 

We have probably 30k in savings so far, which we can really increase in 3 years when youngest finishes uni. 

I would like to create a bit of a plan which gives me clear steps along the way to retirement and some financial thresholds to meet to make it all possible.

Thank you for any advice.

Linton

1) If you have a large income whilst working I would  not take the 2/3rd figure as a guide unless you really are spending that sort of money on day to day living plus some holidays which you expect to continue for several years.

2) Qualified advisors should use the terms like "IFA", "whole of market", "independent".  If they dont check with them or look elsewhere.  First put together a short list and then arrange a free introductory meeting with each for you to explain what you want and them to explain what they can do and their charging rates.  Choose the oine you feel you could most comfortably work with.

General planning approach...

A) Outline plan

1) Specify on-going annual spending  based on actual expenditure (rather than a bottom-up budget) perhaps with a bit of padding to give a reasonable starting point.

2)  Take off any guaranteed income - State Pension, DB pensions etc  That will give you the net inflation adjusted income you need from your pension pot at current prices.  A reasonable rule of thumb is to convert annual net income to gross and then calculate the required lump sum by multiplying the annual figure by 30.

If this figure is well within your planned pension pot at retirement you can move forward otherwise  reconsider your pension contributions and/or your spending needs

B ) Implementation Plan - How are you going to configure your investments to get the required inflation adjusted income out of your pot?

There are lots of options here ranging from simply buying an annuity to a bespoke set of investments carefully managed to provide sufficient income at acceptable risk.  Which is best for you depends on your circumstances eg wealth, health, reaction to risk, understanding of investing etc

I wont go into further detail as this is a major job in its own right.  

C) Check and due diligence

Will your plan work in the real world?  Again many things you can look into.  eg what happens if one of you dies early or needs care, how will you continue an acceptable standard of living in the face of market crashes.

D) Set things up and jump when you are ready

Marcon

Coppice10 said:

My workplace pension provider seems to suggest i will have a sizeable pot of £1.2m in 20 years time - but I'm not up for working full time till then!

If your pot is projected to be only £1.2m in 20 years (always allowing for the synthetic assumptions providers use), that suggests you aren't contributing a great deal to it. If you're earning a six figure salary, then the higher rate tax relief you get on pension contributions should be a suitable lure...better still if you can make use of salary sacrifice.

Bostonerimus1

Rather than using some percentage of your salary as a guide to your income needs I would do a detailed budget. So start to record all your spending in a spreadsheet. Once you have that you can subtract things like state pension, annuities and DB pensions and come up with a good estimate of how much money you might need to generate from your DC pensions and other investments.

You seem to be rather vague about your workplace pension and I would get more familiar with how it's invested and you should make sure you are contributing as much as you can and also understand how much you are paying in fees. Also it sounds as if you have a cash ISA and you might consider a stocks and shares ISA as you have 20 years before official retirement age.

Albermarle

I have seen on this site that knowing what level of income you might want is a good place to start and perhaps 2/3rds of current salary is a guide 

Probably better to work on 2/3rds of your take home pay ( although still an arbitrary fraction).

As you will be paying less tax/NI/pension contributions, you could probably generate 2/3rd of take home pay from half of gross salary.

jamesd

Two thirds is for lowish to maybe middle earners who have limited scope for cuts. High earners typically go for more like 50%.

If you want a starting income that increases with inflation for life you'll be able to take about 3.2% of your capital as the initial income. You'll need a £2.2 million pot for £70k a year. If you're willing to take cuts you might use the Guyton-Klinger guidelines that start around 5% but skip inflation increases or make extra cuts if you happen to live through bad times 

State pension reduces this a bit but far more for lower incomes where it might be half or a third of income than your 70k where it's 15%.

Linton

Surely just using a % of pre-retirement income  is far too crude. In particular pension payments and  large savings deposits won’t be necessary.  Neither will mortgage payments for most people, neither will  commuting costs.   And then there may be school or university costs for one’s children.   Together these could be using a significant part of the pre-retirement income for some people but much less for others.

Apart from being more accurate a key advantage of using actual expenditure excluding the things that won’t apply in retirement is that it enables you to balance your standard of living before and after retirement. Another could be that it forces you to understand exactly where your income is going.

Mutton_Geoff

I've kept a monthly budget spreadsheet for many years. Prior to retirement I split it into 3 more columns where I copied the amounts across to the new columns for essentials (utilities/council tax etc), nice to have (eating out, basic holidays etc) and the third luxuries (long haul business class holidays, boats etc).

It was easy to then work out what I'd need as a minimum (sum of first two columns) and maximum (including 3rd column). In reality I now operate between the second and third columns.

SouthCoastBoy

I set up a joint acct a couple of years ago that around 95% of our spending comes out of. We fund this with £2650 a mth, it was £2600 when we started,  and this comfortably meets our needs. We are running a surplus so this gives me an excellent indicator of what is needed in retirement.

Additional large capital expenditure items such as cars etc. Would be on top of this, but I have factored that into my spreadsheet

westv

Bostonerimus1 said:

Rather than using some percentage of your salary as a guide to your income needs I would do a detailed budget. So start to record all your spending in a spreadsheet. Once you have that you can subtract things like state pension, annuities and DB pensions and come up with a good estimate of how much money you might need to generate from your DC pensions and other investments.

Many bank accounts allow you to download the last 12 months transactions as a spreadsheet.

MallyGirl

I agree that a percentage assumption is far too crude.
I have a simple list of a sample month with all the bills and regular outgoings in it alongside up to date figures. It is divided into fixed/unavoidable and flexible. That gives me the bare minimum figure plus the nice lifestyle figure. Big ticket items like replacing/fixing vehicles, foreign holidays, white goods live in other buckets that I divide up to get a nominal monthly budget.
This way I know what we would need before considering retirement at all, plus what I would want to have to retire in the way I would like.