Saving to allow for early retirement- are we maximising our options?

OldScientist

rundmc-k said:

My wife and I are both 40yr old NHS workers & would both like the option of retirement at 55 or earlier. I do all our finances and I just want to make sure I am doing things "correctly" or at least sensibly, and would be interested to know if there is any advice on if we could do things better.

I am a higher rate tax payer and my wife is lower rate. I'll collate our incomes/benefits for the following:
I don't have a detailed spreadsheet type "number" needed for retirement, but I know that currently we could live comfortably with combined gross £50k. We have no mortgage or dependents, but both of those things could change in the nearish future.

We take our main NHS pension at SPA, which is currently 68. We would be in receipt of well over £50k p.a. from DB pension and SP, even if we were to retire at 50, so I feel that 68 onwards is covered.

We can also draw an NHS DB pension at 60, which would be somewhere in the region of £22k p.a. plus ~£66k tax free lump sum, which works out around £30k p.a. from age 60-68 (almost all tax free).
In addition to that I have paid into LISAs for a few years for both of us and intend to maximise payments into that for the next 10yrs. As long as the LISAs are invested in a non-volatile way nearing age 60, there should be £100k+ in both accounts when accessible, so it feels like 60-68 is covered.

I opened a SIPP a few years ago, and have been trying to invest in that where possible also. Now, the earliest I can access that is 57 (more likely 58 or later I guess), but if 57 is possible, then that could already cover age 57-60 for us.

I am investing in S+S ISAs for both of us, I've had mine 4 yrs & and my wife 2 yrs. I feel if we had £150k+ in each ISA it could potentially cover the years 50-57 if we wanted to be stopping work by then. That seems doable, although the S+S element adds volatility which I am ok with at the moment, but would be less so when approaching 50.

So if you have read all this, many thanks. I just wonder... have I made any mistakes/unwise moves or does that plan seem feasible? Are there any "better" investing suggestions I could be doing for us (I'm not asking for crystal ball stuff, I know that would be lovely).
I know life circumstances could change as I said earlier, mortgage if we move (we're looking), children (we're thinking), illness (hope not), but this is our current situation.

Looks like you've got a solid bedrock of index-linked DB pensions (do the quotes include an estimate of inflation indexing between now and then?), so you're sensible to identify the volatile/uncertain bits as the things needing some additional  thought.

A few things to think about.
 
1) The £66k lump sum at 60. This will be index-linked to aged 60 (unless the quote already includes an estimate of inflation over the next 20 years). After that, historically a drawdown for 8 years using an allocation of 25% equities and 75% cash gave a 'safe' (i.e., no historical failures) index-linked income of about £5.5k (see https://www.2020financial.co.uk/pension-drawdown-calculator/). You might be able to provide more certainty using a fixed-term RPI annuity or an index-linked gilt collapsing ladder, but this will depend on yields when you take the pension and receive the lump sum (real yields of 0% would provide you with the £8k you've calculated).

2) LISA. You have 20 years between now and aged 60 and the real returns on equity and bond funds and cash between now and then is unknown (historically, there have been 20 year periods where real returns have been negative). The only way to get known real returns out of what you already have (but not future contributions) is to invest in individual inflation linked gilts (e.g., 20 year ILGs are currently yielding about 1.8%), but this requires some knowledge. In other words, the contribution of the LISA to your income from 60 to 68 is largely unknown (but see Item 4).

3) SIPP and S+S ISAs. The same comments made about the LISA apply to your SIPP and S+S ISAs too.

4) Required income. You have a headline retirement income figure of £50k (in today's money?). It is worthwhile considering how much of that will be core expenditure (i.e., food, housing, hobbies, travel etc. that you really don't want to be without etc.) and how much is discretionary (i.e., things that you would be willing to temporarily cut back on if necessary). One approach is to try to ensure that the core expenditure is largely matched or exceeded by the more certain income streams (i.e., DB pensions) leaving discretionary income to be covered by the less certain income streams.

noclaf

As a parent (early 40's) of a toddler, do not underestimate the costs of children....even with one child the costs will be substantial quite simply due to the cost of living today, not talking about luxuries just the standard 'stuff' that has gone through the roof in terms of prices over last few years.
Not meant to put you off either, just so you go in eyes fully open to the reality.

QrizB

noclaf said:

As a parent (early 40's) of a toddler, do not underestimate the costs of children....

I love my kids to bits but they're the main reason my FIRE age has slipped from 50 to 57/8.

EnPointe

Emmia said:

Off topic, but as you're both 40, and if you both want kids, then time is evaporating for that to happen.

increasing numbers of 'senile primas' in their 40s 

strawb_shortcake

If you have a child now, at 55 they won't even have started uni, so your £50k may need to be higher to see them through that period from say 58-62.

I currently have 2 in uni, one costs me nothing but the other is around £3k a year (due to my salary and other dependents their loan is much higher). When my youngest goes I'll be looking at much more and expect £6-8k per year expenditure. 

Also if you do have children you may then have reduced hours/salary and increased costs  reducing your ability to save as much for a few years. 

crv1963

rundmc-k said:

My wife and I are both 40yr old NHS workers & would both like the option of retirement at 55 or earlier. I do all our finances and I just want to make sure I am doing things "correctly" or at least sensibly, and would be interested to know if there is any advice on if we could do things better.

I am a higher rate tax payer and my wife is lower rate. I'll collate our incomes/benefits for the following:
I don't have a detailed spreadsheet type "number" needed for retirement, but I know that currently we could live comfortably with combined gross £50k. We have no mortgage or dependents, but both of those things could change in the nearish future.

We take our main NHS pension at SPA, which is currently 68. We would be in receipt of well over £50k p.a. from DB pension and SP, even if we were to retire at 50, so I feel that 68 onwards is covered.

We can also draw an NHS DB pension at 60, which would be somewhere in the region of £22k p.a. plus ~£66k tax free lump sum, which works out around £30k p.a. from age 60-68 (almost all tax free).
In addition to that I have paid into LISAs for a few years for both of us and intend to maximise payments into that for the next 10yrs. As long as the LISAs are invested in a non-volatile way nearing age 60, there should be £100k+ in both accounts when accessible, so it feels like 60-68 is covered.

I opened a SIPP a few years ago, and have been trying to invest in that where possible also. Now, the earliest I can access that is 57 (more likely 58 or later I guess), but if 57 is possible, then that could already cover age 57-60 for us.

I am investing in S+S ISAs for both of us, I've had mine 4 yrs & and my wife 2 yrs. I feel if we had £150k+ in each ISA it could potentially cover the years 50-57 if we wanted to be stopping work by then. That seems doable, although the S+S element adds volatility which I am ok with at the moment, but would be less so when approaching 50.

So if you have read all this, many thanks. I just wonder... have I made any mistakes/unwise moves or does that plan seem feasible? Are there any "better" investing suggestions I could be doing for us (I'm not asking for crystal ball stuff, I know that would be lovely).
I know life circumstances could change as I said earlier, mortgage if we move (we're looking), children (we're thinking), illness (hope not), but this is our current situation.

You have a pretty solid foundation. ERRBO is something to consider for one or both of you. I would also suggest utilise your SIPP savings, especially the HR salary. Also though consider a balance in terms of pension savings, my NHS DB plus SP (when I reach SPA) will far outweigh my wife's DC pension plus SP so although tax wise it makes sense for us to save into my SIPP for us saving into her SIPP is our priority.

Also consider what you are aiming to retire to. Work fills 40+ hours per week, especially with travel time on top, it also provides social interaction and making the grey matter work. Have a plan of what your aims are and what these will cost (in today's money), there's lots of things to consider and finances are only a part of it.

rundmc-k

hugheskevi said:

rundmc-k said:

hugheskevi said:

The main thing I would be considering is your £50,000 target, and how you think it should change (increase) in the future. It looks from the post above that you are assuming that as long as you have that in real terms in all future years you will be fine.

At age 40 you are fairly young, and almost 30 years from State Pension age. £50,000 today is very different to what £50,000 in 30 years will be, even with CPI increases. You may want to give thought to increasing that target income in line with expected earnings growth to State Pension age and by prices thereafter. That would prevent your income being eroded relative to the rest of society each year, which is what would happen with CPI increases.

I'd be making sure I put all higher-rate income into a pension as a priority.

You might also want to consider what each person's income would be in the event of a death of one of you at different points between age 40-70 and thereafter. Survivor pensions can be less than you might think, so it can be important that a premature death of either person would not derail plans.

You say put all higher rate income into a SIPP but will that put me at risk of having too much in the 60+ age region (& potentially having to pay higher rate tax in retirement) and not enough in the 50-60 region?

That is a boost of 85/60=42%. It is very hard to ignore. 

With that sort of incentive, things like using the pension saving to repay a mortgage becomes very worthwhile. The mortgage can provide funds for the period prior to minimum pension age. Even with the interest payable, you end up well ahead. 

If additional saving would put you into higher rate tax the incentive becomes weaker, 70/60=17% but still worthwhile. 

Personally, I will be a higher-rate taxpayer due to pension income in all years from age 55 based on my existing pension savings with no further contributions. Despite this, I am using an offset mortgage like this one with no fees to enable me to continue to make big contributions to pensions, then withdraw funds and reduce the offset in the years just before age 55. That gives me a tax relief boost of 17%. At age 55 the pension lump sum will restore the offset to 100%, thus enabling me to benefit from pension tax relief and also access funds prior to minimum pension age. There is a cost of mortgage interest (limited by using an offset rather than standard repayment mortgage), but also a probable gain from investment return, so the expected cost is trivial, and far smaller than the 17% tax gain.

Also, remember that once you leave service your NHS pension will only increase in line with CPI. You should be fine on the survivor pension position if you were to die in service, the most difficult position would probably be death between leaving service and State Pension age.

That's very interesting thankyou. I know that the SIPP boost at higher rate is very beneficial and I have tried to pay into my SIPP just enough to take me out of the higher rate band the last few years, and then contribute to the LISA after that. I suppose I should at the very least keep adding to that until I would reach the "higher tax rate in pension years" threshold. At that point I wonder would it be better to pay into a SIPP for my wife instead? She would only be projected to have a £5k-ish pension from 60-68 so she would have about £7.5k TFPA available each of those years, so the benefit of a SIPP that could potentially be completely tf on withdrawal would be bigger than continuing to pay into mine? I guess compound interest/dividend reinvestment might have some impact there but I'm not sure to what extent.

I have also never considered an offset mortgage. At present we don't have a mortgage but are likely to have one in coming years, even though it could in theory be quite small if we used savings/house sale to minimise it. I really am not sure of the overall benefit in an offset mortgage vs having as small a mortgage as possible is, but your comment would certainly make me want to find out more about that.

rundmc-k

GunJack said:

Re life insurance, don't forget the death in service benefits included in the NHS pension scheme, may save a worthwhile amount on separate life insurance premiums. That saving can then be invested while you are active members. 

Balancing sipp and ISA savings towards the partner with the lowest NHS pension provision is a good idea.

Yes this is something I need to look into. We have life insurance premiums and I also have a critical illness premium that pays out on death also, plus separate long term & short term sickness covers (I am self employed within the NHS)... so I feel like we are over covered, especially when taking into account death in service benefits, but I need to work out which would be most logical to remove/swap etc, whilst also taking into account what hugheskevi said that leaving service before pension age would remove the death in service benefit

rundmc-k

OldScientist said:

rundmc-k said:

My wife and I are both 40yr old NHS workers & would both like the option of retirement at 55 or earlier. I do all our finances and I just want to make sure I am doing things "correctly" or at least sensibly, and would be interested to know if there is any advice on if we could do things better.

I am a higher rate tax payer and my wife is lower rate. I'll collate our incomes/benefits for the following:
I don't have a detailed spreadsheet type "number" needed for retirement, but I know that currently we could live comfortably with combined gross £50k. We have no mortgage or dependents, but both of those things could change in the nearish future.

We take our main NHS pension at SPA, which is currently 68. We would be in receipt of well over £50k p.a. from DB pension and SP, even if we were to retire at 50, so I feel that 68 onwards is covered.

We can also draw an NHS DB pension at 60, which would be somewhere in the region of £22k p.a. plus ~£66k tax free lump sum, which works out around £30k p.a. from age 60-68 (almost all tax free).
In addition to that I have paid into LISAs for a few years for both of us and intend to maximise payments into that for the next 10yrs. As long as the LISAs are invested in a non-volatile way nearing age 60, there should be £100k+ in both accounts when accessible, so it feels like 60-68 is covered.

I opened a SIPP a few years ago, and have been trying to invest in that where possible also. Now, the earliest I can access that is 57 (more likely 58 or later I guess), but if 57 is possible, then that could already cover age 57-60 for us.

I am investing in S+S ISAs for both of us, I've had mine 4 yrs & and my wife 2 yrs. I feel if we had £150k+ in each ISA it could potentially cover the years 50-57 if we wanted to be stopping work by then. That seems doable, although the S+S element adds volatility which I am ok with at the moment, but would be less so when approaching 50.

So if you have read all this, many thanks. I just wonder... have I made any mistakes/unwise moves or does that plan seem feasible? Are there any "better" investing suggestions I could be doing for us (I'm not asking for crystal ball stuff, I know that would be lovely).
I know life circumstances could change as I said earlier, mortgage if we move (we're looking), children (we're thinking), illness (hope not), but this is our current situation.

Looks like you've got a solid bedrock of index-linked DB pensions (do the quotes include an estimate of inflation indexing between now and then?)
 
1) The £66k lump sum at 60. This will be index-linked to aged 60 (unless the quote already includes an estimate of inflation over the next 20 years). After that, historically a drawdown for 8 years using an allocation of 25% equities and 75% cash gave a 'safe' (i.e., no historical failures) index-linked income of about £5.5k (see https://www.2020financial.co.uk/pension-drawdown-calculator/). You might be able to provide more certainty using a fixed-term RPI annuity or an index-linked gilt collapsing ladder, but this will depend on yields when you take the pension and receive the lump sum (real yields of 0% would provide you with the £8k you've calculated).

4) Required income. You have a headline retirement income figure of £50k (in today's money?). It is worthwhile considering how much of that will be core expenditure (i.e., food, housing, hobbies, travel etc. that you really don't want to be without etc.) and how much is discretionary (i.e., things that you would be willing to temporarily cut back on if necessary). One approach is to try to ensure that the core expenditure is largely matched or exceeded by the more certain income streams (i.e., DB pensions) leaving discretionary income to be covered by the less certain income streams.

The quotes I gave for the DB pensions don't include an estimation of infaltion indexing, just an estimation of the 1.5% compounding, so I know the estimates are incorrect in that respect, but it does meant the actual DB pensions are likely to be somewhat higher.

Re 1)
I don't fully understand this... you are saying that £66k-ish lump sum taken out at age 60 and then used for an 8 year drawdown will likely lose value compared in inflation to the extent that it ends up only being worth £44k?

Re 2) and 3) Yes, agreed I know that while the SIPP/LISA/ISAs are in 100% equities there is a fair degree of risk that they will not ultimately gain value over 15-20 years, but I feel at age 40 I'm still content to tolerate the risk for a few years.

Re 4) These are good points thanks, I am hoping that from age 60 the DB pension will be sufficient to cover all core expenditure. There is also the option to draw it from age 55 if we sacrifice a percentage of it, but I'm not considering that at present.

rundmc-k

noclaf said:

As a parent (early 40's) of a toddler, do not underestimate the costs of children....even with one child the costs will be substantial quite simply due to the cost of living today, not talking about luxuries just the standard 'stuff' that has gone through the roof in terms of prices over last few years.
Not meant to put you off either, just so you go in eyes fully open to the reality.

I do appreciate all the comments people have made about having children and I know they are well intentioned. One thing is for sure though, we are not underestimating any aspect about having children, whether it be financial, physical or emotional  haha. My wife was heavily involved in the upbringing of many of our nieces and nephews, and if anything we are all too acutely aware of the potential impact, partly hence why we don't have children at age 40. We are also well aware of the biology involved with our respective ages. The financial planning in this thread is not in any way meant to suggest that we believe it would still function as planned were we to have children.