How to make retirement possible

Sea_Shell

Rainy day fund.

One has to be able to realise that it is, in fact, raining!!  

That "rain", could come in the form of not wanting to work any more, especially if that's in a job you don't love.



In other words, include it in your overall retirement "pot", with maybe only £50k truly ringfenced for unbudgeted emergencies.

The clue there though is "unbudgeted".   

Your projected retirement income requirements should include an element of budgeting for the known large one off costs that come along.    For example, your figures may need to be +£2000 pa, to enable you to "save" for these things. 

p00hsticks

yellow123fox said:

 Separately, she’s been in a care home for a while now and knowing the costs of that (at the moment), making provisions for that is also essential.

It's my personal opinion but it;s something I've also thought about but have decided that it is not an 'essential' to be included in our retirement budget . As you know, costs of a care home can be eye-wateringly expensive, but the majority of people still don't go into one, and if they do it tends to be for a relatively short period of time.

 My budget allows for the fact that at some point we may need to pay for gardeners, cleaners, carers visiting us in our own home, but I see no point in pulling the purse strings much tighter just to set aside what is likely to be a six figure sum to pay for care that may never be needed, especially as we have a home that coudl be sold to fund any residential care.  

yellow123fox

Thanks for the replies everyone, its helped me feel a little better about the coming years.

The essential bill spend is just that, the sort of essential bills (council tax, car insurance, haircuts etc) that would have to be paid - we'd certainly be wanting to spend more than that, but the difficulties that I had in getting the numbers to add up even at that level was what was bothering me. Our true spend at the moment is probably in the £25-30k range including a couple of holidays, and of course there is plenty going into savings above that.

In terms of what one person would need if the other passes, well, some of the bills would drop down slightly but others wouldn't, of course. If you sought to mirror a state pension at (say) £12k in today's money at a 3-4% withdrawal rate you would need £300-400k in the pension pots at that point (though obviously hopefully both of us live into our 80s and this becomes moot). 

I think people saying that its a psychological decision are probably correct. Could we drawdown £30k for 7 years and then just do the portion of a personal allowance left after a state pension and things work out fine? probably. Could that end up going pretty bad if there was a significant market crash or one of us were to pass not long after 67? also probably. Is one or both of us going to need residential care in a few decades time? who knows. And then you're adding the psychological change of cash savings, which have been a safety net for 35 years, suddenly being viewed as a spendable asset of sorts.

If it was possible to know how the future was going to play out then everyone would be fine, but I don't know how to reduce the uncertainty in our calculations. If you could life would be so much simpler. Maybe aiming to retire at 63 or 64 would be the best balance but it feels like juggling probabilities that exact figures don't exist for.

yellow123fox

And the planned longer-term spends included on our plan are just an amount that should replace our car every 8 years (taking into account a part exchange value) which is roughly what we've done in the past and for a new mobile each every 4 years or so (we have sim only contracts). And then a £1k buffer to get to around £18.5k. It doesn't include the cost of replacing furniture or new bathrooms/kitchens or decorating, but we can make them last for 20 years or so meaning i'd only be expecting one payment on each in retirement, probably after a house move.

It doesn't include the costs of a new boiler/fridge etc mind you (though stuff like that you could add the yearly buffers I suppose).

barnstar2077

You have assets that most people can only dream about.  Retire and enjoy your life!

There will always be what ifs and uncertainty.  There is only so much time that we all get though!  If one of you does pass before they are 65 you will regret not retiring sooner.  If you both live to be 90 and money is a bit tight, you will have had thirty plus great years, and you will never be destitute.

Ringfence £30-50k for house maintenance and emergencies and then have a jolly nice retirement with the rest!  You don't know what a great position you are in!

OldScientist

yellow123fox said:

I was wondering if someone here could help me out because I’m not getting my numbers to add up and its making me think that there was no point in retirement saving as we’ll never be able to retire. A few life events have prompted me into an assessment and I don’t like the sound of things so far.

Me and my wife are both 60 and will be able to claim a full state pension at 67 (we’ve checked this). The range of pensions that we have is:

A DC pot in my name currently at circa £380k

A small DC pot in my wife’s name at circa £25k, and

An old LGPS pension in my wife’s name that will only pay about £1k/year

The expression of interest form means my wife would have access to the DC pot in my name should I die first so it makes sense to think of it as a single pot in my thinking. Though this wouldn’t work out from a tax viewpoint really.

I have calculated our “essential bills spend” at £18.5k/year - I can’t believe it so low - but to have this has an income in an early retirement period (I had originally thought we’d have been able to retire at 60 or 62 or 65) you’d need to withdraw £20k from the pension each year.

To be able to do this at at 3% or 4% withdrawal rate though, you’d need to have a pension pot of £500-£666k, and there’s the problem. We’ll never have that sized pot in the time available. 

I wouldn’t really want to withdraw more than that because of the withdrawal of a state pension after the death of a spouse. My mother has now outlived my dad by 15 years and if that were to happen to one of us, they’d need to make some hefty withdrawals from the DC pots. Separately, she’s been in a care home for a while now and knowing the costs of that (at the moment), making provisions for that is also essential.

The alternative of working to state pension age is equally unattractive though. Having a full state pension means you’d be paying full income tax, which to mean sort of defeats the purpose of having a DC pension because then you’re simply not getting your own money out. So I wouldn’t want to do that either, the original plan in my head was to stop withdrawals and live on two state pensions if possible. I certainly wouldn't be wanting to pay tax on pension withdrawals.

Can anyone see an answer to this seeming paradox?

We also have cash savings of something like £225k but thats kept in easy access cash accounts as an emergency/rainy day fund and I’d rather not touch that.

Once you are in receipt of two SPs, you will have (in today's money) a guaranteed income of £23k+£1k=£24k. So after that date you will only need another £1k-6k to satisfy your 25-30k spending requirements (stated in another post).

So it is the period prior to receipt of your SP that needs some thought. There are several options (some of which will take a bit of mulling)

1) Purchase a term annuity with part of your pension to provide income to cover this seven years
2) Construct a ladder of fixed rate savings accounts (i.e. put £N in an account maturing in 1 year, £N in an account maturing in 2 years, etc.). Assuming that each one will provide a real return (i.e., interest minus inflation) of 0%, then to obtain £10k income will cost £70k (£10000*7 years). In other words, £160k would provide you with income of £23k for 7 years (plus the small £1k pension). Inflation higher than the current interest rates for fixed rate accounts (~4%) would mean that the real value of the income would fall. You might struggle to find accounts that go out to 7 years (but 5 years would probably be good enough).
3) Construct a ladder of inflation linked gilts. This is a bit more complex, but essentially does the same thing as the fixed rate savings ladder, but the income is inflation protected (and capital gains are tax free).
4) Spend from the retirement portfolio - I note that for 7 years, £25k per year was supported for a 50% stocks/50% cash portfolio (see https://www.2020financial.co.uk/pension-drawdown-calculator/ ) with money left even in the worst historical case.

I note that keeping 10 years worth of expenditure in cash may be detrimental to your long term prospects (since it can be difficult to ensure that it keeps up with inflation, although OK at the moment - it depends on the accounts).

Albermarle

Could that end up going pretty bad if there was a significant market crash or one of us were to pass not long after 67

You have to accept there will be significant market crashes at regular intervals, but the historical long term trend has always been up. In any case I guess it is unlikely that your investments are 100% invested in the stock markets. PLus you have a very large cash buffer/rainy day fund, which means you can easily ride out any market crashes without breaking a sweat.

As said you are probably in a better financial position than the large majority of people at your time in life, so stop worrying about it !

Pat38493

To summarise / add to the comments of others:

- Your position is already much better than you think but your assets are not deployed in an optimal manner.
- Your rainy day emergency fund is way too big and if it's really in easy access cash accounts (not even ISAs) it's not shielded from income tax on savings.
- The 4% withdrawal rule is designed to make a pot last for 30 years on the assumption that there is no state pension and no other income or savings available so you don't need to directly apply that in your case.
- You may want to do some analysis on your current spend to check whether your spending need in retirement is really only £18K - that may be your essential unavoidable spending, but you may need some money to enjoy as well.  However if it's really only £18K I would say why are you still working?  One way to do this is to track your real spending for a few months or a year or two and categorise it - there are online tools available to help with this if you like.  Either way, your current fund would support spending significantly more than that per year.
- Don't let the tax tail wag the dog i.e. don't worry about paying tax on the pension withdrawals as long as it's done in a sensible way - that is in the end only deferred tax that you didn't pay when you put the money in there.
- What is your plan for the pensions if you don't want to take any money out after your state pensions arrive?  You should make sure that you have the means to support yourself and live a good life before worrying about leaving money behind (in my opinion at least).

You may want to do some research around the topic of pensions and how to deploy your assets in retirement - posters on this board can recommend books and resources to help.  If you can't be bothered, with more than £500K of assets you may want to look at getting an IFA (Independent Financial adviser and make sure they are independent) to help you either with one off advice or ongoing advice.  An IFA can do cash flow modelling for you to help you understand that your position is actually a heck of a lot better than you thought in your first post. (you can also learn to do this yourself if you are interested).

By research or getting an IFA you could also check your current investment strategy to see what funds you are invested in within your DC pensions.

Also - there are probably other options availble around planning for one or other of you passing away first - this again takes some thought but deployment of life insurance is one option - doesn't have to cover the entire reduction in spend but some years to allow adustments to the new spending level.

yellow123fox

Thanks for the help again everyone, at least I get that our position is better than I thought it was.

As for after state pension age, the idea was that relatively small amounts would be drawn down as discretionary spending for holidays and so on. The issue is more about making early retirement possible in a way thats safe for potential future scenarios a couple of decades away.

Most of the rainy day fund is in cash ISAs i think paying about 5%, maybe £150k or so across the two of us. The rest is kind of hard to keep track of.

theoretica

yellow123fox said:

A DC pot in my name currently at circa £380k

A small DC pot in my wife’s name at circa £25k, and

[...]

To be able to do this at at 3% or 4% withdrawal rate though, you’d need to have a pension pot of £500-£666k, and there’s the problem. We’ll never have that sized pot in the time available. 

[...]

We also have cash savings of something like £225k but thats kept in easy access cash accounts as an emergency/rainy day fund and I’d rather not touch that.

But you do have a pot of over £600k - you have just decided to call some of it a rainy day pot.  You could definitely use it to justify the draw down until state pension age.