Pension vs ISA vs current income

boots_babe

HedgehogRulez said:

You’re nowhere near the pot you’d need with that burn rate.
consider working for 12 more years 

Having seen comments on here, I've just knocked together a simple spreadsheet to do my own calcs rather than relying on Guiide. With just husband's workplace pension, assuming he stops contributing in 10 years, and assuming median 6% growth per annum, at retirement the pot would be about £1.976m (in today's terms).

At 6% growth per year, that is ~£119k (today's terms). So as long as he doesn't withdraw more than that per year, it would remain at a roughly static level - of course the more that is taken above that, the pension remaining would start to reduce.

That's probably a massively oversimplified way of looking at it, but I am just wanting to sense-check things to understand the comments on here. Based on the above, I can't understand why various replies are saying the pot will run short, I am clearly missing something significant, please can you set me straight on what I am not factoring in? Thank you

NoMore

boots_babe said:

HedgehogRulez said:

You’re nowhere near the pot you’d need with that burn rate.
consider working for 12 more years 

Having seen comments on here, I've just knocked together a simple spreadsheet to do my own calcs rather than relying on Guiide. With just husband's workplace pension, assuming he stops contributing in 10 years, and assuming median 6% growth per annum, at retirement the pot would be about £1.976m (in today's terms).

At 6% growth per year, that is ~£119k (today's terms). So as long as he doesn't withdraw more than that per year, it would remain at a roughly static level - of course the more that is taken above that, the pension remaining would start to reduce.

That's probably a massively oversimplified way of looking at it, but I am just wanting to sense-check things to understand the comments on here. Based on the above, I can't understand why various replies are saying the pot will run short, I am clearly missing something significant, please can you set me straight on what I am not factoring in? Thank you

Sequence of returns risk (SORR) basically the 6% return is not linear. Some years it could be the pot shrink significantly, if this happens early in the retirement and withdrawing during this period it can seriously affect your ability to continue to draw at the same rate in the following years possibly leading you to run out of money. 

kimwp

boots_babe said:

kimwp said:

Why is your husband contributing to a sipp as well as workplace sacrifice? Aren't they both available at the same time, but the workplace pension is better from a tax point of view?

Absolutely agree he shouldn't be putting more into his SIPP, however he is not allowed to put any more into his workplace pension via sal sac than what he already is.

He started the SIPP a few years ago, as he wanted more control over what the pension is invested in - he's been getting return of towards 20% per year on average - which of course can/will probably go down at some point in the future. 

This was setup before either of us sat down to work out the retirement situation, at that time we were assuming the more in pensions the better. It is only this last few months that I've started to look at it, and quickly realised that he'll have too much in pension and not enough in ISAs. We were about to get on with sorting everything when I was made redundant and my parents became very ill, so it sort of just carried on as it was with the monthly SIPP contributions.

Aiming to get everything sorted out now though.

Gosh, your husband's pension scheme sounds very restrictive. Most people can salary sacrifice into a pension down to min wage.

kimwp

boots_babe said:

HedgehogRulez said:

You’re nowhere near the pot you’d need with that burn rate.
consider working for 12 more years 

Having seen comments on here, I've just knocked together a simple spreadsheet to do my own calcs rather than relying on Guiide. With just husband's workplace pension, assuming he stops contributing in 10 years, and assuming median 6% growth per annum, at retirement the pot would be about £1.976m (in today's terms).

At 6% growth per year, that is ~£119k (today's terms). So as long as he doesn't withdraw more than that per year, it would remain at a roughly static level - of course the more that is taken above that, the pension remaining would start to reduce.

That's probably a massively oversimplified way of looking at it, but I am just wanting to sense-check things to understand the comments on here. Based on the above, I can't understand why various replies are saying the pot will run short, I am clearly missing something significant, please can you set me straight on what I am not factoring in? Thank you

I'm not in a position to exhaustively assess your plan, but a few things-

I was advised (on here, and speaking to a couple of financial advisors), that 6% growth (after inflation ie to put the figures in today's terms) is very optimistic and 4% is more realistic. Also, those percentages are based on 10 years+ investing (riding over peaks and troughs in the stock market), so you are at the minimum for it being sensible to use an average (I think-hopefully others will comment). The market has been peaking for the last period, so maybe a more conservative number would be advisable? (Though noone can tell the future!)

Don't forget if you take out the growth (the £119k), the pot is then not at it's original value in today's terms - I don't know if you have factored this in.

Albermarle

NoMore said:

boots_babe said:

HedgehogRulez said:

You’re nowhere near the pot you’d need with that burn rate.
consider working for 12 more years 

Having seen comments on here, I've just knocked together a simple spreadsheet to do my own calcs rather than relying on Guiide. With just husband's workplace pension, assuming he stops contributing in 10 years, and assuming median 6% growth per annum, at retirement the pot would be about £1.976m (in today's terms).

At 6% growth per year, that is ~£119k (today's terms). So as long as he doesn't withdraw more than that per year, it would remain at a roughly static level - of course the more that is taken above that, the pension remaining would start to reduce.

That's probably a massively oversimplified way of looking at it, but I am just wanting to sense-check things to understand the comments on here. Based on the above, I can't understand why various replies are saying the pot will run short, I am clearly missing something significant, please can you set me straight on what I am not factoring in? Thank you

Sequence of returns risk (SORR) basically the 6% return is not linear. Some years it could be the pot shrink significantly, if this happens early in the retirement and withdrawing during this period it can seriously affect your ability to continue to draw at the same rate in the following years possibly leading you to run out of money. 

There could also be an elongated stock market slump that could last years.

I am clearly missing something significant, please can you set me straight on what I am not factoring in?

Your plan may well work, and your husband may die with a big unused pot. However there is not enough safety factor built in.

Most people on this forum work out their retirement plans, based on something like 0 to 2 % real growth each year. It is probably a bit pessimistic but best to be surprised on the upside, than the other way. 

Albermarle

kimwp said:

Why is your husband contributing to a sipp as well as workplace sacrifice? Aren't they both available at the same time, but the workplace pension is better from a tax point of view?

All pension schemes are equal from a tax relief point of view. With SS, you make some gain on National Insurance.
Also many employers still do not operate SS schemes, so in that case there is no difference at all.

boots_babe

Thanks again for the replies, that has reassured me quite a bit. I am planning to do a variety of models - hence all the playing around I've done with Guiide so far. A central model, then some 'what if' type scenarios, such as shares diving at retirement etc.

From the comments it seems I'm not missing anything in the calcs which is a massive reassurance, so thank you. I have now run the figures with an assumed 2% YoY growth and can totally see why the comments above have bene made. 

I know that the old 'past performance is no indicator of future' is very true, but as a central scenario I feel we should assume something more than 2% - even ignoring the returns we've had YoY over the last few years, you'd get 2% just in cash savings. However I would then consider various what ifs to work out what some worst cases could also look like (including a next to nothing YoY) so we can be prepared hopefully for all eventualities.

It definitely seems as though we need to shift our primary focus onto ISAs now, so will do some playing around with figures on that side of things. Thanks all.

MeteredOut

A worse case is not next to nothing YoY - its a 20-40% drop of equities that could take 10+ years to return to their previous level. If that happens early in a retirement, it can really set you back.

At 2.5% inflation, a £145K gross annual income need today turns into over £185K in 10 years time. This is basde on your original post where you wanted £10K/month. I see you've later reduced that to £80K/year (post tax, so perhaps £100K gross), and that is obviously a big difference.

I personally think an ongoing 6% after inflation alone is very optimistic - we've had it good for a long time. My scenarios includes the option for a 20% equities drop every 10 years, starting the year after I hope to retire. It forces me to think about my equity/bond/cash mix from that point onwards, and also how I'd react to such an occurrence.

I'm sure your both in a good position, but, with such a high spend between planned retirement and state pension, you should consider where you would cut your cloth should there be a crash/correction.

boots_babe

Sorry didn't mean to cause confusion. Our desired income hasn't reduced, on my later replies I was operating only on my husband's work pension. So totally ignoring his other pension, my pension, plus eventual state pension. The £80k was just a medium figure which seemd a good starting point given my own work pension is forecasting £35k per year  - but I will be doing our own calcs on that. It just seemd like a sensible starting point. 

Our ideal would still be around the £10k monthly if possible. In reality we may spend less some months depending on travel etc but I prefer to be cautious and allow spare just in case.

Appreciate your comments and that all makes good sense. Now that I feel that I haven't missed anything in the means of calculating which is reassuring, I can crack on with working out a variety of possible scenarios and see whit it looks like. I think I will abandon Guiide as it already feels better having a spreadsheet where I can see how all the calculations are worked out. I've seen some sheets posted on this forum in the past so rather than reinvest the wheel I'll hunt some of those down.

Many thanks.

Triumph13

I did a quick, back-of-a-fag packet calculation to see what might be a more reasonable expectation from where you are now.  First up, you are going to need to get used to spending a whole lot less anyway, unless you get another job.  Spending £10k a month with only £5.5k coming in is a one way ticket to Queer Street.

The good news is that if you can get used to living on £5.5k a month, then you will quite possibly be able to retire at your planned date with around that level of income.  If you use a more mainstream assumption of 4% real return on investments pre retirement and then buying annuities at 4%, that puts you in that ballpark. Almost all of your tax free cash would be needed to plug the gap until state pension, with probably not enough left over to pay off the higher mortgage you'll need to take out to give you enough to live on from 55 to 58.