Pension (probably done to death)

[The Selfish Gene]

good people of the finance sub forum.........

about 20 years ago, I did my Financial Planning exams (1, 2 and 3) the basic ones.

I remember (as they were geared at selling tied products in those days) a diagram with a man on a pushbike and how much harder he had to pedal the further up the hill he was.

The point being...............the later you start it, the harder it is.........

Fast forward 20 years............and the question I have is.........

Is there a good calculation for knowing how much to be putting away at 43........assuming a retirement at say 65?

I'm looking for how to factor how much I will need in 22 years, versus what % of my monthly money I should be putting away etc.

yes I'm sure I'll be in trouble for not having a pension pot to speak of at 43 but I do have a number of properties which were intended to be sold as pension when I'm 65 :-)

Are there any simple equations to help me start putting away some monies?

thanks in advance

[Gary29]

Pension 'done to death' - Pun intended??

There are loads of calculators

Eg: https://www.hl.co.uk/pensions/interactive-calculat...

[The Selfish Gene]

well that's quite painful.........do we agree that we need 2/3rds to live on in pension age?

I better start putting some chunks in!

[mike9009]

This calculator paints a slightly rosier picture on my stats.

https://www.moneyadviceservice.org.uk/en/tools/pen...

It assumes you need a 50% income upon retirement and includes the state pension too. The HL calculator always panics me, but I suppose they are trying to sell SIPPs so take a slightly pessimistic view on things.

I look at things three fold, quality of life now, mortgage overpayments and pension, and try to balance these to the best of my ability. Mortgage should be paid in five years - then leaving only two things - so pension contributions 'should' go up, but Uni funds for the kids will no doubt dent that (depending on how generous I feel! )

Gawd knows what will happen over the next 25 years though (investment performance, state pensions, inflation, earnings, ill health, mortgage paid off, supporting kids still etc., etc.)


Mike

[stongle]

The Selfish Gene said:

well that's quite painful.........do we agree that we need 2/3rds to live on in pension age?

I better start putting some chunks in!

No it's nonsense. If you are on atypical PH salary of 180k p.a. you don't need 120 in retirement. I'm going to forego coke and high end brass for Werthers originals and fly fishing at 57 to help; but reckon I might still have quite a few figs left to blow on an 11 year old Volvo D70 to get all beardy about.

In all seriousness, on an average salary yes 2/3rds (or more) is a good target and obviously depends on when you plan to retire. At 5% drawdown you'd probably need 300k+ to last out life (and concurrent reinvesent). Of course you do have some investment risk here, you could buy an annuity which would need a high starting amount.

At 40/50k (inflation adjusted) pension income I'd suggest you cut your jib accordingly. That should provide a very reasonable retirement income, unless you have to fly first class. A pot around 750-800 should last out life. Ideally with decent investments you'd only be slowly chipping away at the entire pot. And you should need less the more you p1$$ yourself anyway.

I've assumed the state will still be handing out weekly beer tokens to get to the annual incomes. Bit of an assumption, true; but very politically risky. And my numbers are just in head on the train sidicks will correct me in a heartbeat.

I don't know why they don't say calculate pension requirement as 66% of annual spend after work and saving costs. You don't need to save 30%+ when near death unless you are a miser of the highest order.

[stongle]

mike9009 said:

This calculator paints a slightly rosier picture on my stats.

https://www.moneyadviceservice.org.uk/en/tools/pen...

It assumes you need a 50% income upon retirement and includes the state pension too.


Mike

That calculator allows almost no investment growth in current pots. Obviously growth is not a given, but seems a whole scare industry exists prompting over provisioning......

Of course investments can go down in value so pension planning should be treated with less risk appetite.

[soupdragon1]

Some say a good rule of thumb is that you should half your age, and that's the % of salary you should start putting away now (assuming starting from zero)

[Testaburger]

stongle said:

No it's nonsense. If you are on atypical PH salary of 180k p.a. you don't need 120 in retirement. I'm going to forego coke and high end brass for Werthers originals and fly fishing at 57 to help; but reckon I might still have quite a few figs left to blow on an 11 year old Volvo D70 to get all beardy about.

In all seriousness, on an average salary yes 2/3rds (or more) is a good target and obviously depends on when you plan to retire. At 5% drawdown you'd probably need 300k+ to last out life (and concurrent reinvesent). Of course you do have some investment risk here, you could buy an annuity which would need a high starting amount.

At 40/50k (inflation adjusted) pension income I'd suggest you cut your jib accordingly. That should provide a very reasonable retirement income, unless you have to fly first class. A pot around 750-800 should last out life. Ideally with decent investments you'd only be slowly chipping away at the entire pot. And you should need less the more you p1$$ yourself anyway.

I've assumed the state will still be handing out weekly beer tokens to get to the annual incomes. Bit of an assumption, true; but very politically risky. And my numbers are just in head on the train sidicks will correct me in a heartbeat.

I don't know why they don't say calculate pension requirement as 66% of annual spend after work and saving costs. You don't need to save 30%+ when near death unless you are a miser of the highest order.

Regarding your last paragraph - I’d always assumed that the oft-quoted 66% represents 100% of outgoings after savings/costs that won’t exist upon retirement.

Either way, it’s a very broad brush, and absolutely irrelevant to my situation/plan.

I’m a much bigger advocate of retirement outgoings x 30, and adjust that for inflation to get a pot size and work out savings from that starting point.

[anonymous-user]

How much you need in retirement is a moot point that is probably deserving of its own thread.

I'm not sure the 66% of a person's salary is a good rule of thumb. Many people at retirement will need to be thinking what they need as a couple. Often, due to taking a career break to raise their family etc, many women will have saved less into their pension at retirement age than their partner. So you may need to consider whether that applies in your own circumstances. As an example, for my wife and I, we have an approx value after tax we would like to achieve each month to afford the things we would like to do in retirement (even thought that is maybe 20 years away).

You mention in your original post that you own several properties, so I'm making an assumption that you are likely to be a higher rate tax payer with reasonable levels of disposable income. In this situation, I would be paying the maximum I could possibly afford into a pension. And I really do mean the maximum. If for no other reason than to gain the higher rate tax relief for as long as it might be available.

[anonymous-user]

Testaburger said:

I’m a much bigger advocate of retirement outgoings x 30, and adjust that for inflation to get a pot size and work out savings from that starting point.

This is pretty much the way I am thinking too.

[stongle]

Testaburger said:

I’m a much bigger advocate of retirement outgoings x 30, and adjust that for inflation to get a pot size and work out savings from that starting point.

40k retirement income for 1.2m pot, is very conservative planning. At that size I'd not think annuity returns are the best use of a pot or represent good advice. To even get to that level of pot would require some level of financial prudence.

I think you set the bar too high (pot requirement), you actually discourage saving and perpetuate poor financial planning / live for today attitude. We should be teaching about investment planning and risk return not blanket generalisations that could do more harm than good.

[anonymous-user]

stongle said:

40k retirement income for 1.2m pot, is very conservative planning. At that size I'd not think annuity returns are the best use of a pot or represent good advice. To even get to that level of pot would require some level of financial prudence.

I think you set the bar too high (pot requirement), you actually discourage saving and perpetuate poor financial planning / live for today attitude. We should be teaching about investment planning and risk return not blanket generalisations that could do more harm than good.

Whether the factor is 30, or more likely 25, isn't really the point.

If you assume it is 30 you are giving yourself a little more leeway.

[Testaburger]

stongle said:

40k retirement income for 1.2m pot, is very conservative planning. At that size I'd not think annuity returns are the best use of a pot or represent good advice. To even get to that level of pot would require some level of financial prudence.

I think you set the bar too high (pot requirement), you actually discourage saving and perpetuate poor financial planning / live for today attitude. We should be teaching about investment planning and risk return not blanket generalisations that could do more harm than good.

My main point was using multiples of desired income as a target, rather than a percentage of income during one’s working life.

Alter the multipliers as you see fit based on your appetite for risk.

I wholly intend to be conservative. If I leave some behind then so be it. Im not missing out on my current lifestyle to achieve such a figure.

Good luck teaching the general populace about financial planning without using ‘rules of thumb’.

[red_slr]

I think 30x is a good way to do it too. Personally I don't factor in SP.

Its also worth looking at estimated growth, not in terms of actual growth but in terms of do you need to factor it in to get to your goal?

For me I *need* growth of around 3% till I am late 50s for my SIPP to hit what I want from it. My contributions alone are not enough. IYSWIM.

I think 3% is possible, certainly on track so far that said I am almost 20 years into payments.

[stongle]

Testaburger said:

Good luck teaching the general populace about financial planning without using ‘rules of thumb’.

True, which is a travesty.

[LeoSayer]

Testaburger said:

I’m a much bigger advocate of retirement outgoings x 30, and adjust that for inflation to get a pot size and work out savings from that starting point.

Agree with this.

You need a target in order to derive a meaningful savings plan that you can measure against as time goes by.

In the absence of a target, contribute your age halved as a % of your salary is one way but that's not a retirement plan.

[TwigtheWonderkid]

soupdragon1 said:

Some say a good rule of thumb is that you should half your age, and that's the % of salary you should start putting away now (assuming starting from zero)

Yes, it was always said pay in half your age a the point you start. So 15% of salary for your working life if starting at 30. So 21.5% for the next 22 years if starting at 43.

Not sure it works these days though with low interest rates and limited growth.

[soupdragon1]

TwigtheWonderkid said:

Yes, it was always said pay in half your age a the point you start. So 15% of salary for your working life if starting at 30. So 21.5% for the next 22 years if starting at 43.

Not sure it works these days though with low interest rates and limited growth.

For sure - maybe even more needs to be put away for some people. Very broad brush rule of thumb of course, lots of individual variations within. Some might not need to go as high as that.

An anecdotal note: when looking at my current DC pension, the unit price growth is over 50% for the last 30 months which is pretty darn good. Can't expect that sort of performance all the time but since moving from FS pension to DC pension, I've been impressed with the performance. Medium risk at this point (only 41 years old) and will slide that risk down gradually as retirement approaches. Currently putting away 15% of my salary, despite having the FS since early twenties - its more than I probably need to put away, but better too much than too little.

[red_slr]

TwigtheWonderkid said:

soupdragon1 said:

Some say a good rule of thumb is that you should half your age, and that's the % of salary you should start putting away now (assuming starting from zero)

Yes, it was always said pay in half your age a the point you start. So 15% of salary for your working life if starting at 30. So 21.5% for the next 22 years if starting at 43.

Not sure it works these days though with low interest rates and limited growth.

I always thought it was half your age *each year*

So at 20 pay in 10%
At 40 pay in 20% , 50 pay in 25%
etc

[Zigster]

Obvious point, but a lot depends on your expectations of future investment returns (and salary growth and inflation, etc).

I tend to be quite optimistic about future investment returns (in excess of inflation) but most online projectors will use more pessimistic assumptions than I would.

I just created a simple(ish) model which looks at this. Assuming:
salary £40k (only increasing in line with inflation)
current age 30
retirement age 65
annual investment returns/inflation 6%/2%

Paying 15% of salary from now until retirement would result in a pension fund of about 10 or 11 times salary. Drawing down 4% of that each year in retirement would give you an income of a little less than half of salary.

Other assumptions and circumstances are available but I think the 50% of salary thing still seems broadly to hold at younger ages, although it probably wouldn't if you were looking at buying an annuity on retirement. It might be more of a challenge at older ages (starting at 40 and paying 20% only came up with a replacement ration of about 33% in my model). I've ignored the Basic State Pension but that would be a big part of retirement planning for most people.

What replacement ratio you need also varies by individual. If I take my post-tax income now, but knock off:
mortgage payments, school fees, commuting costs, holidays during school holidays, medium to long-term savings, etc,
I would probably be able to have a similar lifestyle on quite a bit less than half my current income.

Does that sound about right to the rest of you (esp the likes of GingeR)?