How to Plan for retirement ?

Coppice10

Marcon said:

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.

Ive just checked my contributions and I'm contributing 6% and my employer their maximum of 12%. Im about to rerun the figures to check the pot estimate once more. We contribute via PaySave - i think this is salary sacrifice in all but name?

From your comment, one thing i should do is make sure I am paying enough into my pot? 

(N.B just for clarity, its a joint income of about £100k with me earning 80%. Partner has a small pension but obviously will be included in all the figures and decisions)

Coppice10

westv said:

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.

Thats a scary thought! But i'll investigate. There are also third party apps i believe which will bucket up your spending.

Coppice10

Linton said:

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.

I understand your point - I'm going to investigate tracking actual expenditure instead so i can see what exactly will be needed in retirement. Thank you

Coppice10

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.

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.

Detailed budget needed - agreed.

There are 12 std funds for my workplace pension to invest in and the default position changes the mix of these as i approach retirement. None of them are particularly exciting in the returns dept so i have tweaked them slightly to the riskier side as i feel i have enough time on my side to do that. Obviously i will keep a close eye on this. 
Interesting point about fees though - i had assumed i have no impact on this as its all pretty much done by the company? 

Albermarle

Ive just checked my contributions and I'm contributing 6% and my employer their maximum of 12%. 

6% is low even if it is helped by a pretty generous employer contribution.

Higher rate tax relief on pension contributions is very generous and should be taken advantage of + of course it will help to boost your pot, courtesy of HMRC.

Coppice10

Linton said:

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

Just working my way through your very helpful reply.  
A1) - noted & underway
A2) - Checking state pension & DB Pension now. When looking at my DB pension, I'm unsure whether to run it with a lump sum or not. I'm not sure i will need the lump sum (assume my mortgage will be gone by then) so i guess reducing this to zero on the calculator is the best option?  Unless I'm missing something?

Linton

A budget helps you control how your money is used.  However I suggest you leave quite a bit of slack as there may well be many things you buy or do that greatly add to your enjoyment of life but would never appear itemised on a typical basic household budget list of washing powder, utilities, groceries etc.  During retirement you will have more time when you may wish to spend your money in that way.

Ideally being retired should not involve any reduction to the standard of living you had become used to over the preceding decades nor require any more rigorous attention to expenditure.   If it does that would indicate that perhaps you had previously been spending too much and paying too little into your pension.

Coppice10

Albermarle said:

Ive just checked my contributions and I'm contributing 6% and my employer their maximum of 12%. 

6% is low even if it is helped by a pretty generous employer contribution.

Higher rate tax relief on pension contributions is very generous and should be taken advantage of + of course it will help to boost your pot, courtesy of HMRC.

6% is low? I had no idea. So glad i asked!  I do pay AVC's as well, only a small amount (£55pm i think), and the money gets lumped together into the workplace pension pot i believe.  If i increase my contribution overall, does it matter if i do that by increasing the main contribution or via AVC's? Or does it make no difference? 

LHW99

When looking at my DB pension, I'm unsure whether to run it with a lump sum or not. I'm not sure i will need the lump sum (assume my mortgage will be gone by then) so i guess reducing this to zero on the calculator is the best option?

It depends how much extra pension you get per £100 (say) of lump sum given up. Some schemes are generaous, others not.

Also, you may still want at least some lump sum for that dream holiday, longed for sports car (lamborghini?) etc.

jim8888

Don't forget to also start planning what to do with your time! I once read you're very unlikely to start new things in retirement, you'll just continue with what you've always done (which kind of reflects my actual experience, three years into retirement). So get into the garden now, start those piano lessons, take short holidays, start writing that book, go fishing, get down the gym....