Help with calculations!

landgirl100

Hello all you people who can work out pensions! I'm trying to find out if I can afford to retire early (I'm 57 now). I'm in the NHS pension scheme and I've had a quote which gives me a pension of around £12000 per year and a lump sum of £36000. I've also got £80000 in savings.
What I want to calculate is how much of my savings do I need to invest to take my monthly total to £1400, which is my projected outgoings. I've tried to do a spreadsheet working out the interest on my savings (currently varying between 5.5% and 6.5%) and the effect of tax, but I'm not sure I'm doing it right. Should I expect to be using the capital as well, in which case the interest would be reducing? I'd like to use some of my savings to make some home improvements (a bit of comfort for my old age!) but I'm scared to spend the money in case I don't have enough.
I do still have a mortgage of around £35000 but I have this amount offset against my mortgage (this is in addition to my savings). Does it make any difference when I pay this off?
A lot of questions, I know, but surely it should be possible to plug the numbers into a spreadsheet so I can make the right decisions? Or should I just go and see an IFA and let someone else do the hard work?
I'd be interested to hear any thoughts on my situation.

dunstonh

If you use your savings, you cannot draw the interest paid in full otherwise you are destined to lose money in real terms which can hit you financially hard later in retirement.

A couple of things to note that interest rates will typically fluctuate and at times will be as low as 3%. You have considered tax so thats good. Lets use a rate of 5% as a guide. You pay 20% tax on it so the net interest is 4%. You need to make sure your money keeps up with inflation so deduct 3% and that means you can draw £800 a year from your £80,000.

If you dont go with inflation proofing then that £80,000 would be worth around £52,000 in 10 years. If you did draw £4000 a year now then the interest in 10 years will be worth around £2600 in 10 years time.

chesky369

Have you received an estimate of your state pension?

landgirl100

Yes, I should get the full amount at 61 years and 4 months, which is 4 years and 4 months away.

chesky369

Do you know how much that will be and will you be entitled to any SERPS?

johnllew

If I was in your position, I'd probably go for early retirement.

Your NHS pension will be approx £900 per month net of tax, index-linked.

Your savings will be £80000 + £36000 LS = £116000. At 5% net of tax, your interest will be £483 per month. £900 + £483 will be not far short of your £1400 outgoings. In 4 years, you'll be getting another £300+ net per month NIRP.

I'd consider making as much of my savings as possible in the meantime; perhaps stick what you can afford in a fixed rate bond: you can get 7% fixed for 3 years at Bradford & Bingley = 5.6% net. Pump as much as you can into Cash ISAs each year; not only will you save tax but it may help you avoid your Age Allowance being restricted when you reach 65.

whiteflag_3

landgirl100 wrote: »

Hello all you people who can work out pensions! I'm trying to find out if I can afford to retire early (I'm 57 now). I'm in the NHS pension scheme and I've had a quote which gives me a pension of around £12000 per year and a lump sum of £36000. I've also got £80000 in savings.
What I want to calculate is how much of my savings do I need to invest to take my monthly total to £1400, which is my projected outgoings. I've tried to do a spreadsheet working out the interest on my savings (currently varying between 5.5% and 6.5%) and the effect of tax, but I'm not sure I'm doing it right. Should I expect to be using the capital as well, in which case the interest would be reducing? I'd like to use some of my savings to make some home improvements (a bit of comfort for my old age!) but I'm scared to spend the money in case I don't have enough.
I do still have a mortgage of around £35000 but I have this amount offset against my mortgage (this is in addition to my savings). Does it make any difference when I pay this off?
A lot of questions, I know, but surely it should be possible to plug the numbers into a spreadsheet so I can make the right decisions? Or should I just go and see an IFA and let someone else do the hard work?
I'd be interested to hear any thoughts on my situation.

If you can find a financial planner that uses Truth Software you will be able to get your question answered.

Truth Software allows you to plan your life and allow you to live the life you want to live now ( which is presumably why you want to retire early?) while giving you the piece of mind that you are not going to run out of money( which I presume is the reason you are unsure about retiring early?)

landgirl100

I won't get SERPS.
Johnllew, that's the right answer! It sounds OK, doesn't it? I'm already doing the cash ISA thing but I was only looking at savings accounts for the rest, not fixed rate bonds. I'll go off and investigate.
Whiteflag, I am concerned about running out of money, and also not being able to spend when I want to. There's no point retiring if I have to spend the whole time worrying about my finances! The Truth software sounds interesting. I'll ring around the local IFAs.
I think the decision is made, I just need to get on and sort out the details. Thanks for all your help!

jamesd

landgirl100, Johnllew gave the "you get poorer over time" answer because that answer used savings. You also seem to be fixed on using savings and getting poorer as a result.

The pay off the mortgage answer is that you don't pay it off in a lump, you invest the money and use the investments to pay it off at the end of the mortgage term. This is because investments on average will grow more than the mortgage interest. If necessary you choose investments that produce income and use that to pay the mortgage interest.

For the home improvements, using investments, increasing the mortgage is the way to go. Same reason: investments will grow on average faster than the mortgage interest, so you lose money by taking money out of the investment pot.

Using investments you can calculate on around 5-6% income after inflation, before tax. So your 151k (36k + 80k + 35k) could produce 7550 a year, 629 a month at 5%, long term without you getting poorer due to inflation. Or 9060 a year, 755 a month at 6%.

Everything possible should be going into cash and S&S ISA tax wrappers. You can use investments that produce capital growth instead of income outside the ISA.

To see how you or an IFA might use a mixture of different investments to protect capital while producing growth, consider this example:

30% BlackRock UK Absolute Alpha
20% Cru Investment Portfolio
20% Invesco Perpetual Monthly Income Plus
20% Invesco Perpetual Income
10% Neptune Global Equity

The chart shows how the volatilities differ and why so much is in the more stable ones (colors are red, blue, yellow, green, gray in fund order).

That's just a fairly simple example to show you how you set the proportions of the different investments so that the stable growth ones mean you won't lose capital if the less stable ones lose all of their money (which is really unlikely - those two examples are some of the best around). You can vary the proportions at any time to reflect how you think the stock markets look and how much protection you want.

Hungerdunger

jamesd wrote: »

To see how you or an IFA might use a mixture of different investments to protect capital while producing growth, consider this example:

30% BlackRock UK Absolute Alpha
20% Cru Investment Portfolio
20% Invesco Perpetual Monthly Income Plus
20% Invesco Perpetual Income
10% Neptune Global Equity

jamesd - I notice you have made this suggestion four times over the last two days; in this thread, and also here, here and here.

The fact that you post it so often suggests to me that it is more of a recommendation than an example, particularly when one of these posts was to a lady of 76, who most people would be extremely wary of advising to invest in shares, especially in the current climate. I thought that recommendation were discouraged in these forums.

Can you clarify whether you have any vested interest in promoting these investments, or is it that you genuinely see them as a low-risk way to make a lot of money?

EdInvestor

I'd say early retirement is quite do-able but IMHO you do need to look at ways of getting up to half your savings invested in ways which will deliver (preferably tax free) income and enable inflation-beating long term growth.

You should invest 7.2k p.a in the stocks and shares (not cash) ISA every year and look at a mixed portfolio of dividend/interest paying funds such as equity income, bond and property unit trusts.Share dividends BTW are tax free for basic rate taxpayers so you can hold them direct and use the ISA for bond and property funds.

Use a discount broker which will rebate charges such as www.h-l.co.uk
(Plenty of useful info on the website about popular funds).

A bit of time learning about investing for income now will pay off very well in the long term. Even at very low rates like 3%, inflation will halve the purchasing power of your savings in 20 years - and anyone who can remember the 1970s will be aware that inflation can rage at 25% p.a. - which would decimate your money completely.It's importnat to learn how to manage this risk.