Planning for later life

MQA

Say if someone needs £20K per year and have 20 years to invest, how much will be needed

kempiejon

You do need to factor in inflation if you want to preserve spending power. 
You would need to factor in tax in your normal country of resident and prevailing rates.
In the UK you could possibly shelter money from taxes eventually.
How near the million are you?
You could always adjust your number to below 94.

Phossy

For clarity, is that 50 k per year Gross or Net? Also, how much state pension are you entitled to?

Albermarle

Are you happy to have little left when you die to pass on ?

Marcon

MQA said:

Phossy said:

For clarity, is that 50 k per year Gross or Net? Also, how much state pension are you entitled to?

£50K will be gross (it was just a figure) I am not sure about state pension I think around £10K

Why not find out? You'll have much more certainty with that than any private provision.

Not clear from your question whether you really are in your 70s, or whether that was purely illustrative. If you're below state pension age, get a forecast: https://www.gov.uk/check-state-pension

kempiejon

MQA said:

kempiejon said:

You do need to factor in inflation if you want to preserve spending power. 
You would need to factor in tax in your normal country of resident and prevailing rates.
In the UK you could possibly shelter money from taxes eventually.
How near the million are you?
You could always adjust your number to below 94.

I was hoping to understand how to factor in inflation and also, tax. (I think it is the pension I need to thnk about with tax? just for my small pension.
if my plan is correct I am on track for 1 million (sounds a lot but it is not) if my plan is correct hence, I am in the process of reviewing my plan.

Inflation is always going to be a thing over 20 years it's impossible to accurately estimate it but pick a number - like an average of 3% per year and adjust for that. Over 20 years it knocks £50k down to £27k. 2% would leave £33k.
If tax is an issue you could potentially defer some of it now by making contributions in a personal pension. Your current pension provisions might affect what you can do yourself.
Would you just spend down your £1M at age 70? Where is your £ invested today and for the future.

MX5huggy

You don’t need £1m to have £50k per year for 20 years because the £1m would grow in fact a not completely unreasonable 5% return on £1m gives you the £50k. So you could have £50k per year and still £1m at the end. The trick is to spend your last £1 on the day you die. 

gm0

None of what follows is advice.  If you want that. Need to buy some of the real regulated stuff. (I am not an adviser). But as a pointer to your own initial research. 

There is a lot of ground to cover to get into modelling this topic properly

But at a basic level you either buy an indexed fixed income in the form of an annuity at prevailing rates at time of purchase.  Easy to look up today's prices for a first guess.  Less easy to guess prices 20 years out.

Or you live off income from a mix of capital being consumed (from initial retirement pot) and from returns on it during the deaccumulation journey i.e. drawdown. 

Very few people live off returns alone (because most people have income needs which require a contribution from capital depletion as well. And even fewer would invest so conservatively for 40 years that there are no expected returns (or indeed the associated risks of said investing).  So a mixture is what most will end up with.  And most people will want to inflation adjust their income.  So a lot of study of this topic needs to build that in.

And this has been subject to a lot of modelling work over a few decades. There is a lot of argument about the validity of various analytical approaches.  Which tend to fall into "simulation of market returns" (pure maths - montecarlo simulation but based on assumptions about ranges/statistical distributions).  And use of historic market data series (backtesting) or looped/adjusted "stress test" versions of that.   Arguments are fairly common about the validity/applicability of these different techniques.  And what they can/cannot tell you about the future or a particular implementation approach.  The past does not bound the future.  And yet a plan that can already be shown to fail in conditions already experienced isn't looking that hopeful. Less of a plan more wishful thinking that it will work "this time"

Arithmetic is arithmetic. But it's the assumptions that get you every time. 

And it is common for posters to argue for different answers being "true" (or another view being wrong). This will usually be an explicable difference - if anyone had bothered to actually carefully check the assumptions used for the particular modelling of A v B around which there is now dissent.

First pass then - you could *reasonably* expect a 3% or 3.5% "draw" on initial capital to work out for a long retirement timeframe  which implies £1.1 - £1.3m for 40k (and the extra 10k from state pension) to reach 50k.

Back testing of that against fairly horrible historical periods - will inform your chances of being successful.  And at this low return level - it has a good success probability.  And it is *very* likely - that for many start dates (when you retire) - this sub 4% level will be drawing less income than you could in fact take.  And so there will be a "pot" at the end.  And sometimes a big one.  And yet with a start date that turns out to be (known only retrospectively) the "worst of times"  - basically the scenario of the huge crash (for the assets you chose) followed by the very prolonged slump - the plan will limp over the line as it has before on similar occasions in the historical record. 

The world could throw some unprecedented future extreme curve balls at just the wrong time for you. And you could pick the "wrong" (for the time) porfolio and make things worse by yourself.  Or could panic in a 1929 scenario.  And so this sort of income from investments and capital is uncertain.

If you google - there is something in the literature/web called the 4% rule which was US invented and based on US markets.

I have pointed you to 3% and 3.5% above for your assumption of 40 years. 

Which is widely considered a more realistic level in sterling and assumes global rather than US only investments (which had a good 20th and early 21st century).  And I assumed 40k for the drawdown income.  

And that the 40k income is indexed to a modest degree. 
It also assumes a middling equities/bonds portfolio - though in quite a broad range.