Hoping to be able to retire at fifty-five. Am I doing this right?

alexpg_2

Recently a good friend of mine retired in her mid-fifties, inspiring me to think about how I could achieve this for myself. Having not paid a huge amount of interest in the are up until recently I wanted to check if I'm being realistic or if there's a better approach.

Age: 44
Current Salary: £84 k base
Current Group Pension Savings: £170 k
Company Pension Contributory Scheme: 6% Personal 11% Company Pay In
Other (Mainly ISA) Savings: £100 k
Remaining Mortgage: £55 k (Officially seven years remaining, but I have been overpaying)
Average Monthly Expenditure: £2,500 (of which £700 is mortgage)

My current target is to have a million in my pension pot by fifty-five (i.e. by current rules hitting maximum tax free draw down, even if I won't be able to access it till fifty seven). Having played about in Excel I reckon that if I put 25% of my salary into AVCs, and then assume a 3% pay rise per year and growth of 7% it should roughly be there. Do these seem like reasonable assumptions? Although I will obviously receive a take home pay hit, the drop from ~£4,500 to £3,500 should not affect my current lifestyle.

(On top of this I haven't included that we have a bonus scheme which typically pays out 10% and I will be able to up my AVCs even further once my mortgage is completely gone).

Are there any tricks I'm missing here or is my approach perfectly sensible? Is there a better place to put my money if I find that I'm still adding to my savings - does it make sense to wait till February and make one off AVCs to take me to the top of my 40% income band to try and get some of that lovely compound interest? Does it make sense to rush paying off my mortgage, currently at 4.69% (as I have been doing) or allowing it to settle out and putting the money into my pension instead?

Thanks in advance!

Yorkie1

Is that 7% growth on top of inflation, or including inflation?

kimwp

What's your target retirement income?

alexpg_2

Yorkie1 said:

Is that 7% growth on top of inflation, or including inflation?

I'm assuming it to be including inflation

alexpg_2

kimwp said:

What's your target retirement income?

Based on what I'm spending now and including for a moderate amount of inflation I'd say I'd be looking at around 45 k (before tax)

El_Torro

You most likely won't be able to access your pension until you are 58, perhaps older. 

Do you need £100k in cash? Can some of your Cash ISA's be converted to Stocks & Shares ISAs?

I wouldn't bother overpaying your mortgage, especially if you already plan to be mortgage free by the time you are 51.

Currently to get the maximum tax free lump sum from a pension you need to have £1,073,100 in the pot, not £1M. Who's to say if this will still be the same figure in 14 years time? It could be a lot higher, or (heaven forbid) lower. Also rather than taking the lump sum you're probably better off taking the 25% tax free as you draw down. This will allow for continued growth in your pension while you're accessing it. 

You should really be thinking about how big you want your pension pot to be in today's money and make future assumptions based on today's money. There are various free pension calculators online which help you do that. Personally I assume growth after inflation of 2% a year. This is probably  too pessimistic, though better that than being too optimistic and falling short of your goals. 

Cobbler_tone

I’d up that 6% to reduce some 40% tax liability, especially with £100k in ISA’s. Sounds like you have tons of disposable income. 

MEL1981

Great plan..I'm a similar age and also planning on early retirement. You don't mention it but if you are in a couple have you taken into account your partners income or if children are involved? This has changed our plans significantly.

ukdw

Looking at your £2500 expenses per month, reducing to £1800 in 7 years time.

About £1000 of that would be covered by your state pension at around age 68.

So from age 68 you would need around £300k (real terms) left in your pension - 800 x 1.25 (tax) x 12 x 25 (4% withdraw rate).

If we assume DCpension age is 58 - then you would need around 10 (years) x £1800 x 1.15 (tax) x 12 (months) = appx £250k (real terms).

So minimum pension target for £1800 net expenses is around £550k real terms.

Then prior to age 58 you need around 1800 x 12 = appx £22k real terms per year - so to retire at 52 for example you would need around £132k in ISAs.

So the earliest you would be able to retire is when you have got your pension up to around £600k, - plus have enough in ISAs to cover £22k a year up to age 58.

Age 51 or 52 is probably achievable.

I would AVC you salary down to about £50k (basic rate tax band)  - which should leave you enough to cover your current expenses + mortgage, plus once mortgage is paid off redirect mortgage money into ISAs.

HedgehogRulez

I’m the same age (well 46 this month) and same salary (well £83k) and have similar ISA (well £125k held in iWeb) and same mortgage (well….£57k remaining).

However your pension provision seems very low. I’ve just ticked by £830k so I’d really recommend you up your contributions significantly. I aim to retire at 55 also, but do plan to move into a much more expensive property in a couple of years (and pay off the resulting mortgage with my tax free lump sum when I hit 58).

Triumph13

I re-ran your numbers, in today's money, and it definitely looks possible, though I didn't get the same answers as you.

If you put an extra 25% of salary in, that means 6 + 11 + 25 = 42% going in or £35k.  At those contributions a 4% real return on investments  gets you to your £1M at 55.  The extra pension contributions are all from the 40% tax band, so do indeed only drop your takehome by £1k per month, so look very affordable.  If the aim though is to have £1M when you start drawing from it, which I too am assuming will be 58 by then, then you actually only need to achieve 2.7% real growth on average.

As to whether £1M is enough to retire, you'll need to build up enough outside the pension for the first three years, as others have said, but that should be pretty doable on your income / spending numbers.  Your £1m becomes £250k tax free and £750k taxable.  £100k of the tax free fills in for ten years of (taxable) state pension.  If you can get a 4% income from your capital, then adding in state pension gives £42k taxable income and £3.5k tax free (from the remaining lump sum).  An RPI linked single life annuity pays 4.1% at the moment, so that looks eminently doable.

What would I do in your shoes?

1. Up my pension contributions to take me out of 40% tax completely.  That includes paying in the bonus.
2. Take a while to see how that feels.  On your numbers you should still have £800 a month left over on average.
3. Have a long hard think about what you really want.  Your current plan is framed in terms of living on £1.8 k a month (excluding mortgage) now so that you can retire at 55 and live on £3.2k a month.  That is a lot of deferred gratification.  Does that really make sense?
4. Do whatever makes you feel comfortable with regarding the mortgage.  Its interest rate is higher than your required investment return, so paying it off makes perfect sense to me.

Re point 3, the good news is that there seems to be a lot of slack in your plan, so, unless investment returns are truly awful, you should have the option to either increase your spending now, or bring your retirement date forward. The increased contributions in step 1 should put enough into your pension by the age of 50 to have £1M at 58 (3.5% average real return needed).  Your mortgage would be gone and if you are happy to keep spending £1.8k per month, you would have saved enough by then, with your existing ISAs, to see you through at that rate and retire at 50. 

If, on the other hand, you upped your spending now to £2.6k a month (excluding mortgage), your pension would be ready by 50, but you wouldn't have saved anything outside it, so you would need to either keep going to 55 (and probably have a huge pension) or cut back on pension contributions at some point in favour of building ISAs to allow retirement at say 52.

Basically you have three moving parts to decide on:

• Your target retirement age
• Your target spending pre-retirement
• Your target spending post-retirement

You don't need to make firm decisions yet.  Up your pension contributions to maximise 40% relief while you can - scrapping it gets floated pretty regularly.  Play with your spreadsheets and get on with enjoying life and seeing how much that actually costs. At some point you probably reduce the pension contributions in favour of ISAs, but you have a few years to make that decision.  Most importantly, enjoy the journey.