How do you set retirement target?

SVaz

I like using the Guiide platform for retirement planning because you can ‘ringfence’ an amount you want protecting.
I want the equivalent of 2 years worth of care fees protecting for whoever is the survivor of the two of us at age 80, if any - if it’s not needed then our Daughter and Grandson will get it. 

The plan to sell the house rather than use the pension has obviously changed with pensions falling under the IHT umbrella from 2027.   

tigerspill

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

The starting point is to understand your expected spending.
I tracked every penny I spent for a number of years before thinking of retiring.  I had a spreadsheet which I updated every evening.  I still do this as it is now habit and only takes a minute.
This allowed know exactly where all my money went.
I used this as a base line for how much I needed.  This can then be adjusted up for early retirement if you want to travel a lot; or down if that is appropriate.
This then gives you the target to aim for.  I then have another spreadsheet that shows where the money comes from every year until 90 years.  Early on, it was my DB pension (I took at 55); then my wife's DB pension kicked in, Then SP kicks in.  So every year, I need to top these amounts up to what I expect to need.
Then I add some contingency. 
My target is to die with zero.  However, in reality this is difficult due to the level of contingency I have built in.

af1963

Tracking all your spending in detail can be a lot of work, but can reveal potentially useful things like "I am spending HOW much on beer .. ?? "

An alternative that involves less work is just to track all the money you receive ( or had at the start), take off anything you save or invest or have left at the end, and that's your total spending. Can usually be done from old bank statements if you want to look at past amounts spent.

LHW99

Bostonerimus1 said:

FatherAbraham said:

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

Halio Olb81.

How to start?

You should begin by setting a best-guess date for when you would prefer to stop working and to start living off the income that your assets can generate. Having this rough time-frame will let you make a rough plan.

Now to have a time-frame for accumulating wealth to use to generate income to live on when you no longer earn by working. No-one can make a plan until he or she has a target to achieve. 

The next important part is to decide how much expenditure you will want in retirement.  A rough rule of thumb is: about the same as you spend before retirement. While done employment expenses may vanish, you are likely to want to fill some of your free time with non-free activities.

Now you can look at index-linked pension-annuity prices to work or hire much capital you'll need to have available.  Remember that, because of income tax, you'll probably need more income from your capital than your expenditure needs.

The full UK pension is currently a thousand pounds a month, and your state pension age is, what, 68? 69? Thus, if you retire before that age, you'll need to have the future equivalent of £12,000 per year to use, to fill this funding gap.

Please stay away from the "4% rule", it's mythical nonsense, with many supporting wishful-thinkers.

Best regards,

FA

What are your reasons for this statement? Do you mean that 3.5% annual drawdown is right? or that index linked percentage drawdown is inherently flawed?

4% was worked out using US data and assuming a 30 year retirement. I think it allows for not running out of money something like 95% of the time

In the UK, people reckon it should be a lower % - 3.5% or 3% depending on the age you retire.

Having aid that, it's not a bad thing to aim at, as long as you realise it may well be optimistic.

Bostonerimus1

LHW99 said:

Bostonerimus1 said:

FatherAbraham said:

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

Halio Olb81.

How to start?

You should begin by setting a best-guess date for when you would prefer to stop working and to start living off the income that your assets can generate. Having this rough time-frame will let you make a rough plan.

Now to have a time-frame for accumulating wealth to use to generate income to live on when you no longer earn by working. No-one can make a plan until he or she has a target to achieve. 

The next important part is to decide how much expenditure you will want in retirement.  A rough rule of thumb is: about the same as you spend before retirement. While done employment expenses may vanish, you are likely to want to fill some of your free time with non-free activities.

Now you can look at index-linked pension-annuity prices to work or hire much capital you'll need to have available.  Remember that, because of income tax, you'll probably need more income from your capital than your expenditure needs.

The full UK pension is currently a thousand pounds a month, and your state pension age is, what, 68? 69? Thus, if you retire before that age, you'll need to have the future equivalent of £12,000 per year to use, to fill this funding gap.

Please stay away from the "4% rule", it's mythical nonsense, with many supporting wishful-thinkers.

Best regards,

FA

What are your reasons for this statement? Do you mean that 3.5% annual drawdown is right? or that index linked percentage drawdown is inherently flawed?

4% was worked out using US data and assuming a 30 year retirement. I think it allows for not running out of money something like 95% of the time

In the UK, people reckon it should be a lower % - 3.5% or 3% depending on the age you retire.

Having aid that, it's not a bad thing to aim at, as long as you realise it may well be optimistic.

That's a reasonable comment on "the 4% rule".  It's hardly "mythical nonsense" as suggested by one poster.

enthusiasticsaver

As others have said you need to determine what income you will need in retirement.  This could be similar to your current income less any savings you normally make (and mortgage assuming that will be paid off on retirement).  Remember to take into account any savings you might make on not having to commute to work or buy work clothing etc etc and also bear in mind that most people spend more at the beginning of retirement as they often travel once they have more free time and are reasonably fit. 

Having determined on your annual income you then make a plan to procure that income whether it be by pension, stocks and shares isas, part time job or downsizing your house. Most of us have more than one source of income so remember if you are eligible for a full state pension then when you get to NRD that will kick in.  Both my husband and I used small SIPPS to top up DB pensions for 8 years prior to our state pensions paying out and aimed to clear them using our personal allowances to minimise tax paid.  Now our state pensions are paying out we use stocks and shares isas to top up our income on top of our DC/DB pensions and state pensions. So try and work out an income plan bearing tax in mind also. 

Alexland

LHW99 said:

In the UK, people reckon it should be a lower % - 3.5% or 3% depending on the age you retire.

I think it very much depends on the contents of your portfolio and the reasonableness of asset class valuations.

I had for many years been planning a conservative 1/35th (2.9%) draw down because I both planned to retire early and was expecting a negative real return from the circa 10% cash and 20% bonds I would need to hold to avoid sequence of return risk.

Now with changes in economic conditions a portfolio with a high proportion of long dated inflation linked gilts (locking in those future yields) should comfortably support 4% especially for someone retiring at a normal age.

kempiejon

Alexland said:

LHW99 said:

In the UK, people reckon it should be a lower % - 3.5% or 3% depending on the age you retire.

I think it very much depends on the contents of your portfolio and the reasonableness of asset class valuations.

Quite so, I live in the UK but invest in assets, debt and equities globally, I've got equities from Mexico, the USA, Australia, Europe and Asia in my holding. My investment has been inching up at 8% year on year averaged over several decades. Looks like 4% would have been sustainable for my portfolio who knows abut the future. Past couple of years I'm making more >10% but I've been lucky with the timing of some asset balancing.

4% might be doubted or USA centric but we have to start somewhere.

ex-pat_scot

LHW99 said:

Bostonerimus1 said:

FatherAbraham said:

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

Halio Olb81.

How to start?

You should begin by setting a best-guess date for when you would prefer to stop working and to start living off the income that your assets can generate. Having this rough time-frame will let you make a rough plan.

Now to have a time-frame for accumulating wealth to use to generate income to live on when you no longer earn by working. No-one can make a plan until he or she has a target to achieve. 

The next important part is to decide how much expenditure you will want in retirement.  A rough rule of thumb is: about the same as you spend before retirement. While done employment expenses may vanish, you are likely to want to fill some of your free time with non-free activities.

Now you can look at index-linked pension-annuity prices to work or hire much capital you'll need to have available.  Remember that, because of income tax, you'll probably need more income from your capital than your expenditure needs.

The full UK pension is currently a thousand pounds a month, and your state pension age is, what, 68? 69? Thus, if you retire before that age, you'll need to have the future equivalent of £12,000 per year to use, to fill this funding gap.

Please stay away from the "4% rule", it's mythical nonsense, with many supporting wishful-thinkers.

Best regards,

FA

What are your reasons for this statement? Do you mean that 3.5% annual drawdown is right? or that index linked percentage drawdown is inherently flawed?

4% was worked out using US data and assuming a 30 year retirement. I think it allows for not running out of money something like 95% of the time

In the UK, people reckon it should be a lower % - 3.5% or 3% depending on the age you retire.

Having aid that, it's not a bad thing to aim at, as long as you realise it may well be optimistic.

"it may well be optimistic" following the "allows for not running out of money something like 95% of the time".
Frankly 4% is ridiculously pessimistic.

IF you can flex your spending in retirement, primarily to swerve any early sequence of returns experience, then you will struggle to spend it all.

The only scenarios where 4% fail are generally those where you retire immediately into a sustained depression /recession. Obviously you don't know this at the time you pull the trigger, but if you can flex your spending (or go back to some sort of part time earnings) to avoid the first 2-3 years running the pot down too far, then you're good to go.

Second point. Yes historically US returns are 4.5% long terms, whereas UK have historically been 0.5% lower.
So what?
Invest in a global tracker, and you will benefit from global returns rather than the pedestrian UK ones.

Yes, it's not perfect. 
No it doesn't give you 100% certainty.
Yes it will be wrong for your personal lived experience.
Yes it's possibly too late once you have pulled the trigger- you probably can't or won't want to return to your old job or any job, if you belatedly find you need / want more money in retirement.

But

Perfection is the enemy of the good.
Heuristics (shortcuts) like the 4% rule allow a general approach, that's a really good starting point.

You can be cavalier if you have a large pot, and are able to absorb the weft and weave of the stock market through your early retired years. Less so if the pot is small, with little wriggle room to adapt to market conditions.

IF you are so worried, that a 95% or greater chance of certainty is still not sufficient, then frankly you need to be thinking about annuitising rather than drawdown, as your attitude to risk is so pessimistic as to make Chicken Little blush...

ex-pat_scot

... and breathe. ...