Can I retire - a stupidly simple method

Sarahspangles

Modelling in today’s money does imply you are making assumptions about growth and inflation, plus your own lifestyle/health/relationships and longevity. It’s a reasonable starting point, but unless you model for some of the more likely potential scenarios then you’re proceeding at risk of not getting the outcome you hope.

MacMickster

With an income requirement of £40k pa and £27k of that coming from inflation protected DB and state pensions, only £13k pa is required from the pension pot.

In the OP's place I would be considering whether I would be comfortable if things went pear shaped and I felt that I could only take half of that £13k.  If the answer is yes then go for it. If not, then resign himself to having to work for another year or 2 with the DB income being added to the DC pot then do the calculations again.

If the DB pension wasn't there then I think that more in depth modelling is probably called for, but that DB backstop means that the OP's basic model should be okay. There are times when people can get too risk averse at the cost of years of their retirement.

cfw1994

valefan67 said:

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).

I think your logic is perfectly sound 👍
There is, of course, a lot of unknowns, although your date of death is easy to find - just check https://www.death-clock.org/ 🤣  
Looks like I have another 28 years, give or take 🤷‍♂️

Bottom line, spoiler alert, is that we ALL have fewer years left today than we did last year 😱

I have a ludicrously complex spreadsheet now - it was based on yearly data prior to stepping away, now I have a monthly view….but that is kind of a side hobby for me, so that’s okay 🤓

My view is to try to take it easy financially on those first few years, or at least keep a close eye on things 👀

If you get to the end of a year and your net worth is more than the year before, you’re doing okay 💪
Not to say a market collapse couldn’t scupper any of us, but the future is full of uncertainties. 

Be flexible 🙏
Once retired, yes, you will likely want to do more stuff (& you will!), BUT you also have the flexibility to chose to do those things off-peak, cheap time….that is half the fun🍻

Example….a very good pal contacted me some months back ‘cos his son was planning to hike The Camino de Santiago, & would I like to join him on the first 6 days?  

Of course I would….& it snowballed into almost a month away, with us driving down from Caen, seeing MANY sights & staying in cool places, eventually meeting them in San Sebastián & me hiking with them for 6 days (180km, a LOT of crazy hills but some AMAZING memories) 💪

Fun times 🤪

Come and join team unemployable, the water is lovely!

QrizB

MacMickster said:

With an income requirement of £40k pa and £27k of that coming from inflation protected DB and state pensions, only £13k pa is required from the pension pot.

In the OP's place I would be considering whether I would be comfortable if things went pear shaped and I felt that I could only take half of that £13k.  If the answer is yes then go for it. If not, then resign himself to having to work for another year or 2 with the DB income being added to the DC pot then do the calculations again.

You're confusing the model (how big a pot do I need) with the implementation (how do I invest it). OP hasn't said how they plan to manage their funds during retirement.

£13k pa from the DC pot for 30 years is £390k. That's what the model says the OP needs at age 60 to cover that part of his retirement income.

However, at the moment he could achieve that £13k pa by spending £280k on an RPI-linked annuity. So the implementation could cost quite a lot less than the model allows for.

MeteredOut

cfw1994 said:

valefan67 said:

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).

I think your logic is perfectly sound 👍
There is, of course, a lot of unknowns, although your date of death is easy to find - just check https://www.death-clock.org/ 🤣  
Looks like I have another 28 years, give or take 🤷‍♂️

"You will live to be 110 years, 4 months and 24 days old!"

I'm fairly active and fit and healthy for my age, but I consider that optimistic. Otherwise, I need to rework my retirement planning spreadsheet!

squirrelpie

MeteredOut said:

cfw1994 said:

valefan67 said:

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).

I think your logic is perfectly sound 👍
There is, of course, a lot of unknowns, although your date of death is easy to find - just check https://www.death-clock.org/ 🤣  
Looks like I have another 28 years, give or take 🤷‍♂️

"You will live to be 110 years, 4 months and 24 days old!"

I'm fairly active and fit and healthy for my age, but I consider that optimistic. Otherwise, I need to rework my retirement planning spreadsheet!

Yes, it just told me I'm going to die within three years! That will be a big surprise to me and my wife

Triumph13

Many years ago I had a very old-fashioned Maths teacher. One of his favourite sayings was: 'Little boys make big mistakes with big numbers.'  By that he meant that you should always simplify any calculation as much as possible and not just multiply everything up in the way you have - he would have had a fit.  You may not make any mistakes with your big numbers, but you do definitely obscure the position a lot by wrapping everything up with your estimated 30 year lifespan.

A much better approach is to deduct your fixed income from your desired spending and then look at what's left - which will be a much smaller number to work with

By 67 you will have £27k pa of indexed income coming in, leaving a £13k pa gap to be filled by your DC funds.  These start at £500k, but you need to spend 7x12 = £84k of that filling in the seven year gap until your state pension starts.

Your sum is therefore can you get £13k pa gross, from age 60, out of your remaining £416k?  That looks very doable indeed, so you look to be good to go.  How you do it is up to you. 

The simplest thing would be to buy an annuity as Qriz B suggests - that gives you a guaranteed income and you'd still have money left over.  A second option is leaving it invested and going for drawdown.  13/416 = 3.1% which most people would say was fairly reasonable.  Or you can just take your own approach of assuming you keep pace with inflation, in which case it would last for 32 years - so if you live past 92 your income drops to £27k pa.

Hoenir

Buy an inflation linked annuity that provides the guaranteed level of income you require to hit your objective. You can then sleep easy and enjoy any excess funds. . 

ali_bear

If you look at current annuity rates eg Annuity Rates: View Best Annuity Rates from the UK Market using current values you can calculate how long it takes for an RPI-linked annuity to "break even". For someone aged 60 it is about 21 years. 

OldScientist

valefan67 said:

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?

Taking 0% real as the returns on a stock and bond portfolio over a longish period of time (~30-40 years) is a good approximation to the worst values seen historically (e.g., a 50/50 UK stock/UK bond portfolio had annualised real returns over 30 years of -1% in the worst case, 1% in 10% of cases, and 3% in the median case), so is not too conservative on that measure (the 'SWR' assuming 0% real returns over 30 years is 3.3% - not too far from that observed historically for the UK). Over longer periods of time (3% of UK males aged 60 may survive to 100yo, so a 40 year horizon - see https://www.ons.gov.uk/peoplepopulationandcommunity/healthandsocialcare/healthandlifeexpectancies/articles/lifeexpectancycalculator/2019-06-07 ) the return at the worst case goes up (for 50/50 portfolio, about 0% after 40 years) and for shorter periods it goes down (-3% for 20 year periods).

With real yields on long term UK inflation linked gilts around 2%, as others in this thread have already mentioned, you can get more certainty in income by purchasing an RPI linked annuity or constructing an index-linked gilt ladder to provide the long-term £13k shortfall (40k-15k-12k). In the short-term (7 years), the shortfall of £25k (assuming no annuity at 60yo, otherwise £12k) could be provided by a linker ladder or, with more inflation risk, cash.