How do you set retirement target?

olb81

I am 44 and only have about 30k in pensions and 200k in property.
Where should I go from here?
I have no savings on top of this.
Do I need an aim for a total pot?
Is the 4 per cent rule still a target eg 250k gives you 10k a year?
Thanks for any help

Exodi

Really it's about coming up with a plan.

This would include what your expected lifestyle might be in retirement (or more specifically, you're annual income requirements).

https://www.retirementlivingstandards.org.uk/

This could be a good starting point for that (though many on this forum critic it because people find their costs are often much higher at the start while they're going on holiday every other month compared to a potentially more sedentary lifestyle when they reach their twilight years.

Another good measure is also to compare it to your current position now. Some suggest the 'two-thirds rule' which says you should aim to have 2/3rds of your current income in retirement. So if you earn £45k p/a now, you want to plan around having £30k p/a when you retire.

These can be quite daunting figures, but remember that the state pension can also do a lot of heavy lifting (currently up to ~£12k p/a).

The 4% is somewhat of a trigger on this forum as it's based on USD denominated performance on US assets. Some might suggest 3% or 3.5% to be more realistic. But really you might want a cleverer strategy with features like guardrails where you might want to reduce spending where asset prices decline.

Ideally you'd invoke the help of an independent financial planner to help with this, as you also want to make sure you're drawing your pension as tax efficiently as possible.

Honestly this is such a multi-faceted question, it's hard to answer without going into walls and walls of text.

Maybe a good starting point might be looking at annuity rates:

https://www.hl.co.uk/retirement/annuities/best-buy-rates

That might give you a better idea of how much you might want to save (but not you can't pass them on to beneficiaries). If you want to preserve capital (as indicated by your suggestion to use the SWR), you would inevitably need to save much more.

I think given your situation, rather than set a goal just yet, I'd focus on saving as much into your pension as possible and review in 10 years.

You shouldn't consider your property in your retirement planning IMO as you'll always need somewhere to live (unless you live in a massive house and genuinely plan to downscale when you retire to release equity).

Alexland

olb81 said:

I am 44 and only have about 30k in pensions and 200k in property.
Where should I go from here?
I have no savings on top of this.
Do I need an aim for a total pot?
Is the 4 per cent rule still a target eg 250k gives you 10k a year?

It depends what age you want to retire, your health at retirement, if you want inflation linked income and your tolerance to the risk of running our of money if you outlive the averages.

When you get to retirement you will need to decide between either buying a lifetime annuity or doing drawdown from a volatile investment portfolio. This decision may also affect how you allocate your portfolio leading up to retirement.

If you do your financial planning based on either the 4% 'rule' (it's not a rule) or lifetime annuity rates (see above HL best-buy table, not that I am recommending them) you won't go too far wrong although of course it depends on what yields assets are offering at the time you retire (and annuities are currently looking unusually attractive, at least compared to recent history) so you may wish to be more conservative in your forecasting than those rates.

You also need to consider if you will get full state pension (check your national insurance record online) and if you have an income gap to fill if you want to retire before SP age which seems likely to keep going up - my guess for your age would be from 70 but who knows.

Also remember with inflation you will need a lot more than £250k at the point of retirement to get £10k pa in current spending power so remember to discount around 3% pa when you see expected asset growth rates if you do all your modelling in current spending power and remember to adjust your target up with inflation each year.

OldScientist

Just to clarify - is the £200k property the one you live in or a second home?

The only thing you can control (e.g., asset growth over the next 20 years is unknown*) is your contributions. The only ways to save more are to spend less or earn more(!). So, a detailed look at your current outgoings might be a good place to start and, consequently, aim for an increase in your pension (and other savings) contributions.

*A quick and dirty method is to assume real (i.e., after inflation) growth rates of 0%**. In which case every pound saved now will lead to a pound (in today's money) in your pension pot. For example, if you save £2000 per year (adjusted for inflation each year) for 20 years you will end up with £40k in today's money in your pot. As suggested above, a 3.0% to 3.5% rate is a useful first approximation as to the payout rate for drawdown. Future annuity rates are unknown and will depend on gilt yields.

** Over historical 20 year rolling periods, UK equities have in real terms returned between -1.3% and 13.6%, long gilts from -4.7% and 8.3%, and a 80/20 portfolio between -1.8% and 12.6%. In other words, 0% is close to the historical worst case scenario. To reiterate, future returns are unknown and could lie outside of the historical range.

Nick9967

I'm coming up to semi retirement and have spent 3 years plus erring on what to do, eventually I settled on "my basic logic" I take very precise current costs/outgoings add an inflation level to each row for 30+ years, per year , specific to those particular costs, worst case for those I can't effect and adjusted to those I can - in addition I lower the cost rows for when they disappear , i.e. mortgage, Uni costs, reduce food costs when kids eventually go etc, target dates to get rid of other costs like CC / debt - I based this all on my start point which is current net income - we have a not extravagant but reasonable level of living. that gives a level of cost required to cover and a level of income to maintain my standards - inflation built into the costs. I then took my pension pots , which aren't huge and mulled over what I needed to get to give me the result I needed -  I could never make it "safe enough" in my own head to use draw down and stay invested - although that was my target for a number of years - I've settled on fixed term annuity for first 25 years - flat, using the tax free part of my pension (which I'll takeout and put in variations of accounts to give it a few%)  as a top up and cash pot, takes me to 84 - gives me plenty with some extra each year which I will stash away in whatever way I feel right at the time - at 84 I have a small second property which will be my stash for the last few years! - in the end I settled on safety and piece of mind.
Of course that might all go to pot if annuity rates drop significantly in the next 10-11 months, i'll keep an eye on it.
In the end i would start with outgoings now , add inflation to each line, take off what will disappear at the relevant year - that should give you what you need ! of course what you want instead of need maybe different.

YellowCarBlueCar

olb81 said:

I am 44 and only have about 30k in pensions and 200k in property.
Where should I go from here?
I have no savings on top of this.
Do I need an aim for a total pot?
Is the 4 per cent rule still a target eg 250k gives you 10k a year?
Thanks for any help

I'm not really clear on the question - are you talking about a target age or a target income?

Income requirements can vary widely, (see the NUMBER thread on this board, or 'How Much to Live On' on the Over 50's Moneysaving board).  For your own number, look at how much you spend now.  That can be done by looking at income each month minus the surplus left at the end of the month for a rough idea, down to a detailed analysis of your spending.
Then take out work-related costs, and add in the additional expenses you'll have in retirement (more heating?  new hobbies? travel?).

The financial target follows from this, depending on how you want to fund your retirement.  Most common options include annuity (out of favour for a while, but rates are good at the moment), and drawdown, where you mention the 4% rule.  There is plenty of reading on here (and elsewhere) on the 4% rule, but it's based on US figures and a 30 year retirement.  Many think a lower % is applicable to the UK, so best have a read and make up your mind.
So you'll need enough to buy an annuity, or provide the withdrawal rate that you're happy with.

Getting to the financial target - the main tools are pensions and ISAs.
Pension - money goes in before tax - so an immediate boost of 20% or 40% depending on your tax band.  Money coming out of the pension is taxable, though you still get you personal allowance in retirement, and 25% tax free.
There is a minimum age you have to reach before you can access it (state pension age minus 10 years going forward I believe).
ISA - you have to contribute from taxable income, but withdraw tax-free.  Accessible at any age.
If you do the maths, then pensions win if you don't need to access the money early.

From my experience (and I have an investment property), property isn't a great pension investment.  Unless it's in a place where demand consistently outstrips supply, then capital growth isn't much better than inflation.  When you come to sell, a sizeable chunk of that growth goes in CGT, so other investments within a pension or ISA will outperform it.  You'll know what the rental income is like for your own property - though after expenses and tax it's often not great.
You also have this issue that you have to realise all of the capital at once (i.e. you can't sell a bit of it), which can leave you with the question of how to reinvest that capital given you can only put 20K pa into an ISA, and £60K (or your earnings if less than 60K) into a pension.

tacpot12

Having a target size of pension 'pot' can be useful, but only once you have worked out what income you want. 

The 4% rule isn't a great rule for many retirees in the UK because of the effect of the state pension and other pensions which many people retiring at the moment tend to have. However, pre-retirement, I think 3.5% - 4% it is fine for estimating what your pension pot could deliver on a long term basis.

I would advise that you work out what annual income you need in retirement as absolute minimum, multiply by 25 (i.e. use the 4% rule), and then factor this for inflation to give you the size of the pot you need. 

Then to figure out how to save a pot of that size, assume 6% annual growth as a conservative figure (note that if you are including your property in your total pot, you might need to factor in a lower growth rate for the property).

Bostonerimus1

Do a budget so you know how much you spend and then adjust it to account for costs that you won't have in retirement - perhaps you won't have a mortgage - and for sources of income you'll have like state pension.

Inflate your adjusted spending to the year you intend to retire. If you take inflation at 3% and plan to retire in 10 years multiply your adjusted current spending by (1.03)^10.

Now work out the pot you need to generate that income. To do that simply divide your inflated, adjusted spending by 0.04 or 0.03 if you are being conservative.

LHW99

If you are already in an employer pension scheme try to increase your contributions, eg every time you get a wage rise, put half into your pension. If you are over the 40% tax rate, try to put enough in to your pension to get you below it.

Make sure you have an emergency fund that is easy to get at, in case the boiler blows or your employer goes to the wall without warning.

At 44, I wouldn't go too detailed on planning, but increasing savings / pension as far as possible is always good - it's the earliest money that has longest to grow. Maybe think about - if I didn't buy a coffee every day / week, could I put that money into savings, how much would it be over a year? Or meal out / so many new clothes / magazine subscription (try the library) etc.

SpeedSouth

I'm the same age as you.  I got to thinking about targets and such about 10 years ago. 

So at that point I took my assumed yearly spend, used a conservative 3% withdrawal figure, so multiplied my required income 33.

What that gave me was a very large number a long way away from what I had at the time.

Turns out my assumed spending was a way off the actual amount, when I completed a years spending budget, so it's worth making sure you have the correct figure to start with.

So what I did was simply try to save/invest as much as I could from that point onwards. Now at 44, I struggle not to get too carried away with planning as it's still years till I can take it.

Turns out my assumed spending was a way off the actual amount, when I completed a years spending budget.

Since I started thinking about it 10 years ago, it's amazing how much money I have increased my net worth by.  Clearly I have that mindset, and earn a half decent salary, but without that focus it would of course be less.  Up till that age I was certainly not a spender, but I'd be convinced if I'd had a focus 10 years prior I'd be in an even better position.

The best method as others have said, is invest/save all you can.  Keep your spending down.

My focus is early retirement rather than an affluent retirement so that helps focus if you have a clear goal.

penners324

A lot depends on how much if any of your pot you want left when you die.

4% will actually leave the pot larger when you die than when you retire