Can I retire - a stupidly simple method

valefan67

So I know there are a multitude of retirement cash-flow planners out there that attempt to predict whether your assets are enough to support your retirement such that you don’t run out of money.  There is a whole industry that has grown up around modelling these in cash-flow plans.

BUT, retirement planning would be a simple mathematical formulae if it wasn’t for the two great future unknowns; investment returns & inflation.  

But what if we simply ignore them; or more specifically assume that they are the same (i.e. they cancel each other out).

An example:

Situation:
* I want to retire at age 60
* I will get a full state pension at 67, assume this is £12k
* I have a DB pension of £15k which kicks in at 60
* I have a DC pension pot of £500k that I will drawdown from at age 60
* I want to live off 40k (gross for simplicity) a year, for the next 30 years (until age 90 - fingers crossed )

Can I retire?

Money needed:
* £1,200,000 (£40k x 30 years)

Money I have:
* £500k DC pension pot
* £450k DB pension (£15k x 30 years)
* £276k State Pension (£12k x 23 years)
* TOTAL: £1,226,000

ANSWER: YES 

As I said - I have ignored inflation.
BUT it is reasonable to assume that the State Pension and my DB scheme keep pace with inflation (both currently have this guarantee).
AND it is a pretty conservative estimate that my DC pension pot investments keep pace with inflation (average UK inflation over the last 30 years is 2.82%).

Simple.  Or is this too conservative?

Robin9

I think the challenge is that 40K ...     Once retired there can be more holidays,  more to do around the house -  that new kitchen. As years go by you don't/can't do all that you used to -  you bring in the gardener, the decorator, the window cleaner   ....... car  insurance goes up


That hip needs replacing -  that's £25k each .... ditto your partner ....... 

The Bank of Mum and Dad ..................... 

valefan67

So this is just an “example” - you can tweak the number to whatever you want.  The point is about the method, not the specific figures used.

eastcorkram

You say two great unknowns. Investment returns and inflation. 

Date of death would be handy to know. 

valefan67

So you’ll never get an answer to that - so you have to make an assumption, even pension planning software (or a professional planner) will use a guess that airs on the side of caution (e.g. something a few years more than the average).

LeafGreen

This approach is pretty much what I do when thinking about when I might be able to retire.
If anything, I think it is erring on the side of caution as in theory investment returns should keep up with or slightly outpace inflation over the long term.
I think the main issues are:-
1. Sequence of returns risk - what if value of investments tank in the first few years, even if they recover further down the line.
2. What if you live longer than predicted.
There's not really any way to avoid these risks without going down the annuity route.

Secret2ndAccount

It's simplistic, but as a starting point it's fine.
If you invest the 500k, say a 60% equities / 40% fixed income, or higher equity percentage but gradually reducing, then you could spend more. If you hold the 500k as cash, it's optimistic.

squirrelpie

I think it's a reasonable approximation, as long as you accept its limititations. You need to be prepared to be flexible and cut your income if circumstances conspire. You need to recognize that whatever you choose as your income will constrain what you are able to fund, whether that's enjoyment or medical 'necessities' or whatever. But as long as you treat it as an approximation and are prepared to update it as the years go by, I think it is fine. It's basically what I do.

Albermarle

Do you not have any cash savings at all?

Looking at various other threads on the same subject, most even cautious investors would be thinking that middle of the road/risk investments would grow on average at least 1 % above inflation, hopefully more. 

ali_bear

That is just a current value model. 

Cobbler_tone

I always model in today's money. Making assumptions on growth and inflation are extremely speculative and going to leave you better/worse off depending on what either does.
That is exactly why inflationary proof pensions are so valuable. As you state your DB is then I wouldn't over think it, so in essence you are correct.

7 years of £25k from your DC (in your simple terms) and then £13k for 25 years to take you to 92, which would clear your DC pot and maintain your £40k PA. The reality is though that your £500k will be higher and you'll have to withdraw more over the years. You haven't said how old you are now, so assume you are 60 and have £500k today.
The other reality is that by the time (assuming you get there) you are in your 80's to 90's, your DB and state pension will most likely take of your needs.

The only time I have done it is around the timing of taking a DB pension. Depending on timing and whether inflation is anything from 0-5% it makes a year or two difference on total income. If inflation runs at 5%+ I guess most people have to cut their cloth accordingly.

Most people won't think about it and we read the criticism that approaches like the '4% rule' get. 
Unless you are looking to exit the world with more money than you have today, make sure it supports your lifestyle, a bit of contingency and most people won't be far off. This includes buying the right annuity if appropriate for those without a DB scheme.

P.S. I reckon you'll be OK to get both hips replaced.