Are my assumptions sound on my retirement plan? Or is disaster on the horizon...

Tantalus86

Hi, currently starting to look a lot closer at planning retirement with the aim of retiring as early as possible! Currently age 37 so a fair while to go yet, but don't want to end up like my father-in-law working long into my 70s and ideally don't want to be working beyond my early 50s.

I had used a number of online retirement planners but tbh I wasn't 100% convinced with the numbers that they were spitting out. I know they vary in their approach and use a number of assumptions that to be seemed optimistic.

So I created a spreadsheet to track estimated pension contributions & overall value to help work out a realistic retirement age target - who doesn't love a good spreadsheet...

 

Here are the parameters currently plugged into it.

 

And here is a screenshot of the results

 

1. Am I being too optimistic/pessimistic in any of my assumptions?  

2. How many years into retirement do I need to plan for? Odds are I won't be living to 100, but I suppose there's a chance I could (currently healthy).  

3. How long do you see the current fiscal drag going on for? At this rate i'll be a higher rate tax-payer in retirement.

4. Anything else I've missed? Comments?

 

Note: Will be mortgage free by 2042 and assuming debt free. The spreadsheet is purely for retirement - I had some other savings outside of this for emergency fund & potential uni costs for the kids etc. 

tacpot12

You are being optimistic about your salary growth, but you are too pessimistic about stock market growth.

I would use 1% for salary growth and 6% for stock market growth.

The biggest question I can see that needs asking is about your pension contribution. You have said you are contributing 30% of your salary to your pension. Is this correct, and do you think you will be able to do this all the way up to your retirement? You would be exceptional if you were able to do this. Most people can pay about 6% of salary at your age and increase this to about 10% in the last 10 years before retirement.  

NoMore

Why are you not taking it to account the 25% tax free cash (up to £262875 in total currently) available from pensions. You also seem very simplistic in your withdrawal strategy, basically using your pension up first then ISA, this is unlikely to be the most tax efficient.

squirrelpie

Just my layman's opinion but I doubt such spreadsheets are worth much. Small or not so small changes in the assumptions can make big differences in the results. Plus it's very hard to think of things in terms of future-£. And then real life can intervene at any stage and mess the whole plan up.

So beyond saving what you can afford, and probably not having an outrageous lifestyle in the meantime the only thing that might be worth doing is trying to estimate how much you will need in retirement, IMHO. Then let time pass and see how it all progresses.

Once you actually have enough to have a basic retirement, you can decide to carry on working or not.

enthusiasticsaver

I don't think it is possible to forecast that far enough ahead.  I did a plan 5/10 years at a time putting in pension forecasts and expected expenditure. We retired at 58. From a tax efficient point of view you would be best drawing up to the personal allowance on your pension and making up the difference with your ISA/LISA. 30% employee contributions looks ambitious.  Is that in addition to the £4k into your ISA? What about your wife/partner? 

hugheskevi

Tantalus86 said:

Here are the parameters currently plugged into it.

 

 1. Am I being too optimistic/pessimistic in any of my assumptions?   

You may find it helpful to compare and contrast with the Office for Budgetary Responsibility long-term assumptions, at this link.

Pension access age of 57 is a reasonable assumption, but with a risk it would be higher and very little chance it will be lower. 58 or even 60 would be plausible so there is downside on that assumption. The same applies with State Pension age - 68 is reasonable but with very little chance it will be lower, whilst anything up to 70 is plausible.

The main issues I'd have are with the Future Guestimates. Assumed CPI is reasonable, anything between 2% and 2.5% is fine. Assuming wage growth in line with prices is very pessimistic (OBR assume about CPI+1.83% in long term). Assuming State Pension growth in line with prices is extremely pessimistic (OBR assume CPI+2.37% in long term).

If you are investing in 100% equities then a return of CPI+3 to CPI+4% would be a more reasonable assumption.

Tax thresholds is just a lottery, anything could happen. However, I'd expect the Personal Allowance to rise by a higher percentage than the higher rate threshold, even if that is just both increasing by the same cash amount. The classical assumption would be that they rise in line with earnings in the long-run.

2. How many years into retirement do I need to plan for? Odds are I won't be living to 100, but I suppose there's a chance I could (currently healthy).  

If it is just you, then until at least 90 years of age. If you have a spouse then until both of you are 95 would be prudent. You might want factor in a different income need later in retirement however.

3. How long do you see the current fiscal drag going on for? At this rate i'll be a higher rate tax-payer in retirement.

In the long run, the UK has a gap of about 10 percentage points between tax revenue and expenditure. So some combination of tax growth, borrowing and expenditure cutting is needed. Probably a bit of all 3.

Most of the taxes outside the big 3 (VAT, Income Tax and NICs) have been ramped up as much as they can reasonably be hiked (eg dividends, capital gains, stamp duty, corporation tax, etc). Public services clearly need more funding, not less. It is hard to see any relief anytime soon, and fiscal drag is always an easy option.

4. Anything else I've missed? Comments?

It would be a lot easier to assume CPI is 0% and work in real terms.

It appears inefficient to save in a SSISA for your retirement - what purpose does that serve? 

Is saving in a pension more efficient than a LISA? If so, why the LISA contributions?

You would want your income to keep pace with earnings, at least until retirement. If earnings > prices than a gap will open up under your assumptions.

This far out I agree with others who question the benefits of detailed modelling. Although it is nonetheless important to inform your strategy. I'd be focusing on exploiting the best incentives on offer rather than spreading contributions across multiple pots at this stage. Things can and will change, so always be aware of what is on the table now and take advantage. As individual vehicles get closer to their target amount (which is where the information from spreadsheets is of most use) priorities can be switched.

Note: Will be mortgage free by 2042 and assuming debt free. 

Debt at low cost is good, especially when it is interest and fee-free. You should be able to carry many tens of thousands of pounds of credit card debt to accelerate your plans, even if you just leave it all in cash (known as Stoozing). As an example, in the last few months I've taken out £70K of fee-free, 0% credit card debt from being debt-free, which has helped accelerate use of cash ISA allowances and Premium Bond purchases and giving an income of around £3,000 or so p/a.

Cornish_mum

Hi I have been using a similar spreadsheet modelling approach for about 6 years but work in today’s money (ie discount inflation). I assume stock market growth of 3%. I have found this useful to determine if we are on track and have upped our pension contributions when needed (ie in bad market years) by varying our discretionary spending and increasing income etc. So I think a plan is a good idea as long as you don’t expect to be able to follow it linearly! Life has certainly thrown us many curveballs during this time.

We are aiming for retirement at 55-58 years of age. As we are early 40’s I have worked out our desired retirement income but not a detailed withdrawal strategy (as IMO it’s too early and tax law etc etc is likely to change). 

cloud_dog

I used 3% investment growth as my default and ignored inflation (from a numbers perspective), which allowed me to relate the projected income more closely with current expenditure / costs etc.

Periodically I also stress tested the projections with 0.5% step increments from 0.5% to 5%, just for my own awareness.

My default setting for projecting growth (salary or investments) was to under promise and over deliver.  By doing this we have been able to bring forward our early retirement date by almost 2 years.

Tantalus86

tacpot12 said:

You are being optimistic about your salary growth, but you are too pessimistic about stock market growth.

I would use 1% for salary growth and 6% for stock market growth.

The biggest question I can see that needs asking is about your pension contribution. You have said you are contributing 30% of your salary to your pension. Is this correct, and do you think you will be able to do this all the way up to your retirement? You would be exceptional if you were able to do this. Most people can pay about 6% of salary at your age and increase this to about 10% in the last 10 years before retirement.  

thanks for your feedback. Yes i'm currently contributing 30%, with my employer another 5% and have been in that situation for a few years now. I'm in the fortunate position where I was able to up my contribution and subsequent salary increases during covid negated the impact somewhat. I'm now used to that contribution and living within my means, albeit with a much smaller disposable income. My aim is to carry on with that for as long as I can.

NoMore said:

Why are you not taking it to account the 25% tax free cash (up to £262875 in total currently) available from pensions. You also seem very simplistic in your withdrawal strategy, basically using your pension up first then ISA, this is unlikely to be the most tax efficient.

thanks for your feedback. Regarding the tax free cash - you're right I probably will take that into account. It's in the spreadsheet i'm just playing around with numbers and seeing what works best. Will decide nearer the time how much of it to take.
Very good point about the tax efficiency. That didn't occur to be because I'm an idiot 

squirrelpie said:

Just my layman's opinion but I doubt such spreadsheets are worth much. Small or not so small changes in the assumptions can make big differences in the results. Plus it's very hard to think of things in terms of future-£. And then real life can intervene at any stage and mess the whole plan up.

So beyond saving what you can afford, and probably not having an outrageous lifestyle in the meantime the only thing that might be worth doing is trying to estimate how much you will need in retirement, IMHO. Then let time pass and see how it all progresses.

Once you actually have enough to have a basic retirement, you can decide to carry on working or not.

yeah that's a fair point. Tbh I started the spreadsheet as just a bit of fun, as I'm a bit of a nerd like that. As I can afford to pay quite a bit into my pension now I wanted to see what would happen. If I can get a large chunk into it now, I can chill a bit later on in life.

enthusiasticsaver said:

I don't think it is possible to forecast that far enough ahead.  I did a plan 5/10 years at a time putting in pension forecasts and expected expenditure. We retired at 58. From a tax efficient point of view you would be best drawing up to the personal allowance on your pension and making up the difference with your ISA/LISA. 30% employee contributions looks ambitious.  Is that in addition to the £4k into your ISA? What about your wife/partner? 

Yes currently the £4k into an ISA is in addition to the pension. I was hoping to use that to pay for retiring early before I'm able to take my pension. The missus has a similar aim of retiring as soon as possible, but isn't in a position to save as much as me - so in reality any holiday/luxury I'd be paying for both of us.

Tantalus86

hugheskevi said:

Tantalus86 said:

Here are the parameters currently plugged into it.

 

 1. Am I being too optimistic/pessimistic in any of my assumptions?   

You may find it helpful to compare and contrast with the Office for Budgetary Responsibility long-term assumptions, at this link.

Pension access age of 57 is a reasonable assumption, but with a risk it would be higher and very little chance it will be lower. 58 or even 60 would be plausible so there is downside on that assumption. The same applies with State Pension age - 68 is reasonable but with very little chance it will be lower, whilst anything up to 70 is plausible.

The main issues I'd have are with the Future Guestimates. Assumed CPI is reasonable, anything between 2% and 2.5% is fine. Assuming wage growth in line with prices is very pessimistic (OBR assume about CPI+1.83% in long term). Assuming State Pension growth in line with prices is extremely pessimistic (OBR assume CPI+2.37% in long term).

If you are investing in 100% equities then a return of CPI+3 to CPI+4% would be a more reasonable assumption.

Tax thresholds is just a lottery, anything could happen. However, I'd expect the Personal Allowance to rise by a higher percentage than the higher rate threshold, even if that is just both increasing by the same cash amount. The classical assumption would be that they rise in line with earnings in the long-run.

2. How many years into retirement do I need to plan for? Odds are I won't be living to 100, but I suppose there's a chance I could (currently healthy).  

If it is just you, then until at least 90 years of age. If you have a spouse then until both of you are 95 would be prudent. You might want factor in a different income need later in retirement however.

3. How long do you see the current fiscal drag going on for? At this rate i'll be a higher rate tax-payer in retirement.

In the long run, the UK has a gap of about 10 percentage points between tax revenue and expenditure. So some combination of tax growth, borrowing and expenditure cutting is needed. Probably a bit of all 3.

Most of the taxes outside the big 3 (VAT, Income Tax and NICs) have been ramped up as much as they can reasonably be hiked (eg dividends, capital gains, stamp duty, corporation tax, etc). Public services clearly need more funding, not less. It is hard to see any relief anytime soon, and fiscal drag is always an easy option.

4. Anything else I've missed? Comments?

It would be a lot easier to assume CPI is 0% and work in real terms.

It appears inefficient to save in a SSISA for your retirement - what purpose does that serve? 

Is saving in a pension more efficient than a LISA? If so, why the LISA contributions?

You would want your income to keep pace with earnings, at least until retirement. If earnings > prices than a gap will open up under your assumptions.

This far out I agree with others who question the benefits of detailed modelling. Although it is nonetheless important to inform your strategy. I'd be focusing on exploiting the best incentives on offer rather than spreading contributions across multiple pots at this stage. Things can and will change, so always be aware of what is on the table now and take advantage. As individual vehicles get closer to their target amount (which is where the information from spreadsheets is of most use) priorities can be switched.

Note: Will be mortgage free by 2042 and assuming debt free. 

Debt at low cost is good, especially when it is interest and fee-free. You should be able to carry many tens of thousands of pounds of credit card debt to accelerate your plans, even if you just leave it all in cash (known as Stoozing). As an example, in the last few months I've taken out £70K of fee-free, 0% credit card debt from being debt-free, which has helped accelerate use of cash ISA allowances and Premium Bond purchases and giving an income of around £3,000 or so p/a.

Thanks for your feedback! A fair amount to dive into but some will have been answered in my previous reply. So to cover some of your points:

- I'm crossing my fingers pension access & state pensions ages don't rise before I get there, but who knows. I can see it happening if triple lock remains - can't see that being affordable long term.
- happy to hear you think i'm being overly pessimistic. Tbh those were 'fingers in the air' guesses and you've provided something a bit more data driven
- the purpose of the S&S ISA was to cover income for a few years prior to pension access age. I was being a bit optimistic that I could retire before then. Will review in a few years and see whether that is still required.
- the LISA was because I was an idiot. Learnt my lesson and so won't be contributing any more into it. Will probably just withdraw the whole thing when I can (or may even just take the penalty hit and do it sooner).
- that's an impressive stooze pot! I've actually got a small (in comparison) pot at the moment but there may be a house move coming soon so just wary of that before getting more cards.

barnstar2077

I am eight and a bit years away from retirement now and consider my spreadsheet to be invaluable.

I use 5% for pot growth, but I don't worry about adjusting for inflation or pay increases.  Every year, at the end of March, I put in the new pot values for my ISA and pensions and also what my new contribution amounts are going to be for the following year.
  I'm not increasing the amount I pay in by any scientific method, I just increase contributions by what I think I can afford, while also trying to get to the next roundish number for the yearly sum.  For example, I may go from paying £4250 a year into my ISA to £4500.  Just because it feels good to do it that way.

Then I project what contributing the same amounts in for the next 8 or so years will do, combined with the 5% annual returns.  So I do not include any future percentage increases to my contributions, or remove anything for inflation.

Because I do it this way I am pretty much always pleasantly surprised by the new projections and enter spring with a spring in my step!  :  )

If I was thirty years away from retirement I would still do the projections, just because I find them very motivating, and I think that having even a mediocre plan is better than not having any plan at all!