Is it realistic to retire on a monthly income of £2000 per month with no rent or mortgage to pay?

masonic

[Deleted User] said:

eskbanker said:

OP's choice of using inflation-adjusted pricing was always going to cause some confusion but it doesn't really seem unreasonable to expect people to actually read the thread before posting comments like the ones seen on this page!

I agree I shouldn't have used forecasted inflation adjusted prices but it's actually astonishing the sheer amount of people that are replying with comments who didn't even read the first line.

I even made it the very first line on purpose and in bold so people wouldn't miss it. Seems like most people can't even read on this forum and here's me trying to get advice from them? Maybe I should jump back over to Reddit. It's mostly younger people there but at least they can read.

But I'm almost certain if I asked if £1,150 a month was enough to retire on I would have received comments like "what about inflation, have you taken that into account? Your £1,150 will decrease in purchasing power over time" etc.

It isn't that people can't read, it's that "inflation adjusted" means something different to everyone else. When we inflation adjust figures, we allow for the erosion of value of money by expressing things in today's money. So the nominal future value of savings and investments is shrunk due to inflation. 

What you have done is the opposite, by inflating the value of your expenditure. Communication is always hindered when people do not share a common language with which to describe things.

It doesn't really matter what currency you use whether it's today's money, dollars, 2045 pounds or New Republic Credits, but this needs to be clear, which it was not. It is also a discourtesy to your target audience not to use the currency they are familiar with, forcing them to perform calculations to understand your figures in the currency they use day to day.

Given your subsequent conduct on this thread, might I suggest X as an alternative place to jump if we are not on your wavelength?

Altior

I feel like part of the problem is that it's almost impossible to extrapolate today's costs over 20 years. They are not linear, and nor is inflation. Technology will have advanced. Inflation calculation is broad enough measure anyway, and is not our personal inflation rate. That's why (in my humble opinion) it's quite clunky/jarring to see them predicted that fashion, with somewhat implied accuracy. Nobody rational could have predicted today's core living expenses accurately even 5 years ago. 

boingy

I'll neatly sidestep the arguments about inflation and focus on the big assumption - state pension. None of us know what the state pension will look like 20-odd years from now. Maybe the retirement age will have significantly increased. Maybe there will be part of it that is means tested. Maybe it will have been renamed, reconfigured and, well, fiddled about with.

I've done a similar calculation and I have (currently!) retired based on the results. I think I'm close enough to state pension age for there not to be any bombshell changes but I have pessimistically assumed I'll only get about half of the current amount from age 67. If I was not eligible for any state pension at all then it would put a strain on my finances but I think I would cope.

Of course, the main problem when doing these calculations is the biggest unknown of all - your death date! No-one knows whether their pension has to last 10 years or 50 years. That makes it very tricky to calculate.

My suggestion would be to keep accumulating money, preferably in a pension fund, and review it every year as you approach 55. It's also with mentioning that retirement does not have to be black and white. You could quit your "proper" job and take a part-time one, supplementing your income from pension/savings.  Or your current employer might be amenable to you reducing to 2 or 3 days per week etc. 

peter021072

[Deleted User] said:

All these figures are adjusted for the average UK inflation rate of 2.82% per year for the next 20 years.

I've been messing around with some investing calculators and just trying out some numbers but based on my personal calculations, assuming an average 8% market return per year, I could retire at 55. 

Then if I withdraw 4% of my investment per year that would give me £2,000 per month to live on. 

• I will be living in a 2 bedroom bungalow with a cat and a dog..............

All this is very similar to me, and I live on less than £2000/month.  However, these are all running costs; beware of unexpected costs, particularly around the house or car   Are you knowledgeable or fit enough to maintain or repair stuff?  Also, think about health, do you have an NHS dentist, or need new glasses. Presumably you are happy to rely on the NHS with long waiting times, without recourse to the option of paying for a private medicine in an emergency.
Don't assume your pet insurance will cover you for the bills due to the excess, and these will increase markedly as animals get older. Do you have 3rd party liability insurance if your dog causes an accident?

OldScientist

[Deleted User] said:

EthicsGradient said:

So it'd be a lot easier to talk about these figures if we just left everything in today's money, and said "can you currently retire on £1,150 per month?" And we divide all your OP figures by 1.75.

Your figure of 900/1.75= £515 for "groceries" is still quite high - but you didn't allow anything for clothing, so maybe we say it covers that too. As pointed out, you haven't allowed anything for house and car maintenance, or depreciation on the latter. I would say that running a car and replacing it when needed would put you over this amount. But you might feel that, travelling very little, you won't need a car, and could do with public transport or taxis when necessary. 

I actually was originally going to say that but I assumed every person reading the post would think "oh he has forgot about inflation!!!" And then started correcting all my figures and going off on tangents about price increases of various things etc. 

So I just thought I'd make it clear in my post it's all adjusted so I'm definitely not overlooking anything.

Hoenir said:

[Deleted User] said:

All these figures are adjusted for the average UK inflation rate of 2.82% per year for the next 20 years.

I've been messing around with some investing calculators and just trying out some numbers but based on my personal calculations, assuming an average 8% market return per year, I could retire at 55. 

An investment return of 5% above the rate of inflation is optimistically wishfull thinking I'd suggest. Better to err on the side of caution. Enjoy the exceptional moments of good fortune as and when they arise. For historical performance data the Credit Suisse Global Investment Returns Yearbook is worth a read. Helps provide a more realistic perspective. 

Why is it optimistic? 

Average UK inflation is 2.8%, the MSCI World Index average return is 10%. 

10% - 2.8% is a post inflation return of 7.2%. And you're saying 5% is optimistically wishful thinking? 

That's the entire point of the 4% withdrawal rate after retirement, it's designed to keep your pot from declining in value. 

10% - 2.8% - 4% = 3.2%

So in theory your pot should still continue to grow at a rate of 3.2% despite inflation and despite withdrawing 4%. 

Of course none of this is guaranteed and I know that, that's the nature of investing but all we can do is try to make the best guesstimates based on historical results. 

1) The average returns are over a very long period of time (e.g., since 1900 for the Credit Suisse dataset). Real returns over shorter periods can vary considerably. For example, for equities the worst case historical real returns from 1872 onwards over 20 year rolling periods were about 1.0% for the US (US equities and inflation)  and -1.3% for the UK (UK equities and inflation), while the equivalent for 40 years were 3.9% and 1.7%, respectively. Of course the future real returns over the next 20 years and then the (hopefully) 40 years or more of your retirement are unknown. In the context of historical worst cases, the 5% is probably on the optimistic side. Since it is easy enough to set up in a spreadsheet, it does no harm to model outcomes using a range of different assumptions (as an extreme worst case, I would suggest 0% or -1% real for the 20 year projection).

2) The '4% rule' (SWR), is based on US retirees not running out of money (not preserving capital) over the worst case 30 year historical retirements (it is not only average real returns, but the sequence of returns that affects this value). As mentioned there have been long discussions on these boards as to what the UK version of this  should be with (I think not too controversially) values of between 3.0% and 3.5% being fairly well accepted for a retirement at 65 years old. For retirement a decade earlier, this would probably be in the range 2.5% to 3.0%.

Albermarle

[Deleted User] said:

eskbanker said:

OP's choice of using inflation-adjusted pricing was always going to cause some confusion but it doesn't really seem unreasonable to expect people to actually read the thread before posting comments like the ones seen on this page!

I agree I shouldn't have used forecasted inflation adjusted prices but it's actually astonishing the sheer amount of people that are replying with comments who didn't even read the first line.

I even made it the very first line on purpose and in bold so people wouldn't miss it. Seems like most people can't even read on this forum and here's me trying to get advice from them? Maybe I should jump back over to Reddit. It's mostly younger people there but at least they can read.

But I'm almost certain if I asked if £1,150 a month was enough to retire on I would have received comments like "what about inflation, have you taken that into account? Your £1,150 will decrease in purchasing power over time" etc.

It is a public forum, and like many posters you are looking for free advice from strangers.

So not so astonishing if some of the posts are lets say not fully researched, and/or contain personal opinions.

If you were paying for financial advice it would be different of course. 

Bravepants

[Deleted User] said:

eskbanker said:

OP's choice of using inflation-adjusted pricing was always going to cause some confusion but it doesn't really seem unreasonable to expect people to actually read the thread before posting comments like the ones seen on this page!

I agree I shouldn't have used forecasted inflation adjusted prices but it's actually astonishing the sheer amount of people that are replying with comments who didn't even read the first line.

I even made it the very first line on purpose and in bold so people wouldn't miss it. Seems like most people can't even read on this forum and here's me trying to get advice from them? Maybe I should jump back over to Reddit. It's mostly younger people there but at least they can read.

But I'm almost certain if I asked if £1,150 a month was enough to retire on I would have received comments like "what about inflation, have you taken that into account? Your £1,150 will decrease in purchasing power over time" etc.

You're not exactly doing yourself any favours here with that sort of comment. Reddit is welcome to you as far as I'm concerned. People have taken the time to respond to you, but you prefer to stamp your feet in frustration at people. You are really rude!

pafpcg

[Deleted User] said:

All these figures are adjusted for the average UK inflation rate of 2.82% per year for the next 20 years.

I've been messing around with some investing calculators and just trying out some numbers but based on my personal calculations, assuming an average 8% market return per year, I could retire at 55. 
...........
Am I overlooking anything, are my figures wrong? Like I said nobody can predict 20 years into the future but this is my best shot.

Been there, done that!
As someone who "retired" in their mid-forties, 30-odd years ago, my partner & I calculated that we could live on £4000pa - could we make it work?  Time has shown that we could and, due to circumstances we hadn't anticipated, we now have an income well in excess of our needs. But it could have gone differently...
Some observations:
It is difficult to predict twenty years ahead and you seem to be basing your calculations on reaching a safe destination when you can claim a State Pension in a further 10-15 years hence.  That's at least six or more elections cycles - think of how government policy could change from administration-to-administration.  There could be a government which feels that people with low-incomes are not a priority - we're already seeing that with the freezing of the tax thresholds so that even those receiving just the basic state pension will be subject to income tax.  You might think that income from your ISA will always be tax-free, but will it?  Will a future government impose an upper limit on the amount that can be held tax free? Will the old regime of increased tax on "unearned income" be reintroduced?
In 2045, you could be well into the effects of climate change - if the effects are severe, then expect to see eye-watering amounts of tax having to be raised - a wealth tax as well as income tax may be necessary.  The pot you're relying on may be depleted.
Doing this forward planning for yourself is to be applauded, but don't commit yourself to a rigid plan.  Be prepared to review your plans regularly in the light of ever-changing circumstances.
One suggestion I'd make is to get a quote for an annuity with inflation-linked annual increases.  That should give a clue to how much capital you'll require to deliver the income you think you need, without having to predict rates of inflation.
Finally, a throwaway comment: "two can live as cheaply as one" and then the research that shows that men benefit more from marriage than women!

Linton

[Deleted User] said:

An investment return of 5% above the rate of inflation is optimistically wishfull thinking I'd suggest. Better to err on the side of caution. Enjoy the exceptional moments of good fortune as and when they arise. For historical performance data the Credit Suisse Global Investment Returns Yearbook is worth a read. Helps provide a more realistic perspective. 

Why is it optimistic? 

Average UK inflation is 2.8%, the MSCI World Index average return is 10%. 

10% - 2.8% is a post inflation return of 7.2%. And you're saying 5% is optimistically wishful thinking? 

That's the entire point of the 4% withdrawal rate after retirement, it's designed to keep your pot from declining in value. 

10% - 2.8% - 4% = 3.2%

So in theory your pot should still continue to grow at a rate of 3.2% despite inflation and despite withdrawing 4%. 

Of course none of this is guaranteed and I know that, that's the nature of investing but all we can do is try to make the best guesstimates based on historical results. 

The problem with using average inflation and return figures is that, even if the average is a reasonable guess today, there is a 50% chance that inflation turns out to be higher and a 50% chance that your actual returns turn out to be lower.

You can easily cope with better actual results than you planned but not with worse ones.  So it makes sense to make your plans using pretty pessimistic assumptions.  My retirement plans were based on 3% inflation and 4% (in £ terms) investment returns.

Another reason that relying on historic average equity returns is risky is the volatility of equity investments.  If you withdraw a steady amount from volatile investments when prices are low you will be eating into the core investments you need for future income. So to maintain a steady income you need significantly more capital than a simple average return would suggest.  This would seem especially true in your case when you are proposing to live on a lower income then many people here would be happy with and so presumably have limited scope for reducing expenditure in the bad times.

Finally your calculations assume 100% equity investment.  Many people would lose sleep if not worse during a 40% equity crash as history suggests is inevitable every decade or so.  Could you cope mentally? Or would you sell out in a panic and so turn a paper loss into a very real one?

[Deleted User]

Linton said:

[Deleted User] said:

An investment return of 5% above the rate of inflation is optimistically wishfull thinking I'd suggest. Better to err on the side of caution. Enjoy the exceptional moments of good fortune as and when they arise. For historical performance data the Credit Suisse Global Investment Returns Yearbook is worth a read. Helps provide a more realistic perspective. 

Why is it optimistic? 

Average UK inflation is 2.8%, the MSCI World Index average return is 10%. 

10% - 2.8% is a post inflation return of 7.2%. And you're saying 5% is optimistically wishful thinking? 

That's the entire point of the 4% withdrawal rate after retirement, it's designed to keep your pot from declining in value. 

10% - 2.8% - 4% = 3.2%

So in theory your pot should still continue to grow at a rate of 3.2% despite inflation and despite withdrawing 4%. 

Of course none of this is guaranteed and I know that, that's the nature of investing but all we can do is try to make the best guesstimates based on historical results. 

The problem with using average inflation and return figures is that, even if the average is a reasonable guess today, there is a 50% chance that inflation turns out to be higher and a 50% chance that your actual returns turn out to be lower.

You can easily cope with better actual results than you planned but not with worse ones.  So it makes sense to make your plans using pretty pessimistic assumptions.  My retirement plans were based on 3% inflation and 4% (in £ terms) investment returns.

Another reason that relying on historic average equity returns is risky is the volatility of equity investments.  If you withdraw a steady amount from volatile investments when prices are low you will be eating into the core investments you need for future income. So to maintain a steady income you need significantly more capital than a simple average return would suggest.  This would seem especially true in your case when you are proposing to live on a lower income then many people here would be happy with and so presumably have limited scope for reducing expenditure in the bad times.

Finally your calculations assume 100% equity investment.  Many people would lose sleep if not worse during a 40% equity crash as history suggests is inevitable every decade or so.  Could you cope mentally? Or would you sell out in a panic and so turn a paper loss into a very real one?

For as long as the global stock market has existed, it has always recovered so why would I sell at a 40% loss when I know it will recover? In fact I would pick up more hours and work overtime so I could add even more each month while prices are low. 

However if this happens after I've retired then of course I won't have any money to buy and to make matters worse I will actively be withdrawing 4% per year to sustain my living expenses so that would be a little worrying. 

Two options I could do is maybe only withdraw 2% from my fund and take the other 2% from my emergency fund which would be sitting in a high interest cash isa. I could do this for a year or two until the bear market recovers. 

Another option is to just cut back on spending, I could eat cheaply for a year and cut my grocery bill by a third. 

The probability that the global stock market enters a 20 year perma bear market never to recover is incredibly unlikely. If that were to happen there's probably something very wrong with the world, like a full scale nuclear world war, in which case worrying about my investment returns is probably the least of my concerns.