Pension pot: how much is enough?

RandallFlagg

spark240 said:

thomasross20 said:

@RandallFlagg what fund is that???? Seems too good to be true!?

Indeed.....do you have the stats to back that up?

Yes - follow the link in the OP, scroll down for 20 years performance of this fund averaging 16%

https://citywire.co.uk/funds-insider/fund/asi-uk-smaller-companies-retail-acc-gbp/c7751?periodMonths=12

RandallFlagg

LoFi said:

The returns on that fund have clearly been exceptional - it's a massive outlier even in its segment. However, it's a high-risk fund, and Morningstar rates its sustainability as below average even when compared to other funds of a similar risk profile. None of that means it's going to go tits-up, but as most people approach retirement, they tend to move capital into lower-risk funds (typically with a higher proportion of bonds to shares) to achieve more stability (often at the cost of growth).

It's also worth noting that the first chart you posted has an annual draw proportional to the fund's performance in that year (or possibly some combination of recent years - it's hard to tell) - would you be comfortable significantly decreasing your income in a bad year? If not, work it out again with a constant draw.

You also don't appear to have factored in inflation - even at a conservative 2.5%, you'll need £57K/pa in 2040 to be equivalent to your current £35K/pa.

I've also seen the 4% figure used as a benchmark for a safe drawdown rate (including some suggesting it's too aggressive, and 3.5% is safer). I'm not an IFA (or anything like that), but I'd assume there's a reason that figure is the consensus - you're proposing just under 10%.

I'm naturally very cautious financially, and don't want to put a dampener on your plans, but personally, there's no way I would bet my security in old-age on averaging 16% returns (and low/no inflation) for the rest of my life.

The fund has performed at 16% average over 20 years. I'm not most people and will not be going low risk in retirement but there will be contingency funds of up to £90K also invested to make further gains which will be available to help a bail out if required.  

My table shows drawdown as consistent at £35K escalating 2% a year to cover inflation until state pension kicks in at age 67 for me & wife, then it reduces but still with 2% escalation.

I'm not a cautious person. No risk no reward, life's for living by the seat of your pants. As Reggie Perrin's boss CJ used to say "I didn't get where I am today etc."

Snap

Annuities are mental, not a chance I'd buy one. On the example of a 1mill pot, drawing 40k a year, all you need is a few percent growth PA and your pot is protected. And that only really applies if you plan on leaving an inheritance. Inheritances are nice, but never forget you have earned the right to live well off you money. There is only so much you can do for your kids, and they have a lifetime to build their own futures.

ESBlonde

A subject very close to my current ambitions.

In my case I will be 62 later this year and retire, I might go part time before. Given all the unstable trading in the world and the Brexit etc. You should expect the current good returns to become stagnent for a year or two in the early part of your retirement, thats just prudent.

There is a reason that IFAs have to use the 4-7% annual returns on your fund, it's what is usually achieved on the conservative side. I suspect you don't have the 20 year guarantee and experience says nobody does.

Also you are not required to take your 25% tax free in a single lump. You could take say 2% tax free each year and then draw say £20k meaning your tax liability is in the region of £1500 a year and netting you better returns. After 12 years you would only have 1% left and then none the following year (it's a cumulative 25% not a value). Once the state pensions kick in (also taxable) it would help aleviate the higher tax sums and lack of tax free income.

The average life expectancy for your generation is about 84, so you need a fund that will comfortably last 30 years plus if you retire at 55 and live statisticly long! Delaying the start date makes the subsequent years better financially. My BIL is now 72 and my sister is 56, both fully retired and have just downsized to a nice seaside bungalow. they are both active and each work 1-2 days a week in a friends 'retro/junk' shop a week for pocket money.

On a personal note, I found that being financially able to retire has given me a much better perspective on my work. I do the job well, but can tell anyone and everyone where to stick it if they get up my nose. It's quite liberating in and of itself.

jellyroll

Will taking the defined benefit pension early restrict your contributions in the defined contribution scheme to £4k pa from then on?   If so, is that an issue for you? (My understanding is that within the same scheme, there would be such a limitation but not sure if it applies across these two different types of scheme).

RandallFlagg

jellyroll said:

Will taking the defined benefit pension early restrict your contributions in the defined contribution scheme to £4k pa from then on?   If so, is that an issue for you? (My understanding is that within the same scheme, there would be such a limitation but not sure if it applies across these two different types of scheme).

No, I checked it with PensionWise, the money purchase annual allowance does not apply when drawing from a DB pension. It only applies when drawing from a DC pension.

MtB

I think you'll find that all IFAs are required to work retirement funding calculations that provide an income for you until you are 100 years of age. 

There was an article in the Guardian a few weeks ago berating the 4% rate being offered by one annuity provider. The article went on to point out that the provider's shares (listed in the FTSE) were currently paying a dividend of 7%, so readers would be better off buying their shares rather than their annuities.

RandallFlagg

MtB said:

I think you'll find that all IFAs are required to work retirement funding calculations that provide an income for you until you are 100 years of age. 

There was an article in the Guardian a few weeks ago berating the 4% rate being offered by one annuity provider. The article went on to point out that the provider's shares (listed in the FTSE) were currently paying a dividend of 7%, so readers would be better off buying their shares rather than their annuities.

If that's true then that's a nonsense. I don't expect to need much money at all after 80 if I'm still alive. I will have dementia, be pissing the bed, won't remember my PIN and won''t be able to find my way to the shops to spend it anyway

Brocco

a few suggestions that may be worth considering:

• all UK taxpayers have an annual capital gains tax allowance of £12k per tax year that is rarely used by most people - you can therefore make realised profits of £24k each year between the two of you. It's worth considering structuring your investments so that you have the possibility of making use of this valuable allowance which could be used as a tax efficient 'income' supplement 

• invest as much of your available capital into income generating ISA's as income from an ISA is not subject to income tax. You can each invest up to £20k per tax year into ISA's

• think about diversifying your investments (but not overly) - leaving performance expectations on one side, it makes good sense not to have all your eggs in one basket (anyone who invested with Neil Woodford knows this only too well)

• consider investing some of your capital with an investment manager or fund who have capital preservation as part of their formal investment objective (the vast majority of managers/funds do not have such an investment objective) and who can flexibly invest in a wide range of asset classes to exploit prevailing investment conditions  

• consider investing some of your capital with an investment manager or fund with proven expertise in equity income investing and a long track record of generating a growing income year-on-year 

NelsonP

Interesting thread this one, along with the other thread on taking a big mortgage in mid life. I really need to do some financial planning! 

We did the North Coast 500 a few years back. 5 families in 4 vans, two of whom were widowed a few years before. It was a fantastic trip for everyone and highly recommended.

RandallFlagg

Brocco said:

a few suggestions that may be worth considering:

• all UK taxpayers have an annual capital gains tax allowance of £12k per tax year that is rarely used by most people - you can therefore make realised profits of £24k each year between the two of you. It's worth considering structuring your investments so that you have the possibility of making use of this valuable allowance which could be used as a tax efficient 'income' supplement 

• invest as much of your available capital into income generating ISA's as income from an ISA is not subject to income tax. You can each invest up to £20k per tax year into ISA's

• think about diversifying your investments (but not overly) - leaving performance expectations on one side, it makes good sense not to have all your eggs in one basket (anyone who invested with Neil Woodford knows this only too well)

• consider investing some of your capital with an investment manager or fund who have capital preservation as part of their formal investment objective (the vast majority of managers/funds do not have such an investment objective) and who can flexibly invest in a wide range of asset classes to exploit prevailing investment conditions  

• consider investing some of your capital with an investment manager or fund with proven expertise in equity income investing and a long track record of generating a growing income year-on-year 

Thanks Brocco - the capital gains allowance was not something I was aware of, I will need to investigate this.

As for the ISAs, I am saving in a S&S ISA for my rainy day fund but the problem is that the money is put in is from earmings after tax where contributions to my pension are salary sacrifice so not taxed and my company pays in 13.5% extra in lieu of the NI contribtions so putting money in the pension is more advantageous, nonetheless I'm doing both with whatever is left after I smash the mortgage with overpayments.

Investment diversirty is something I will be looking at and monitoring over the next couple of years.

jellyroll

NelsonP said:

We did the North Coast 500 a few years back. 5 families in 4 vans, two of whom were widowed a few years before. It was a fantastic trip for everyone and highly recommended.

I read this and was wondering how it fitted in to the thread discussion. Then I realised.....Scottish Widows....

NelsonP

RandallFlagg said:

thomasross20 said:

"What do I want to do with my life" is a brilliant question. So many work hard to achieve some sort of goal, e.g. some sort of financial independence but what after that? Are you really going to be ok playing guitar 8 hours a day or watching Netflix all the time? I didn't take part (I'm 35!) but we had a retirement class recently and it was largely focused on these issues and less on the money side of things.

I have plenty planned. Road trips around the UK staying in AirBnB to see places and towns I want to see, bird watching, model train exhibitions, a huge list of books to read, a million recipes to cook, become a magistrate, volunteering, The North Coast 500, join the gym, the list goes on...

@jellyroll ;;
Ha ha. Not that clever. @RandallFlagg has it in his retirement bucket list.

rsvmark

I have been reflecting for a while and decided to make a transition and become financially independent from the family firm. I’ll obviously help out when required but I’m going to buy a nice quiet place abroad and split our time between there and here. This will allow me and Mrs RSV to raise the family to appreciate the family business but allow us to look at the next chapter and see what we want to do including some charitable work.

hopefully see you all soon
ttfn

jellyroll

rsvmark said:

I have been reflecting for a while and decided to make a transition and become financially independent from the family firm. I’ll obviously help out when required but I’m going to buy a nice quiet place abroad and split our time between there and here. This will allow me and Mrs RSV to raise the family to appreciate the family business but allow us to look at the next chapter and see what we want to do including some charitable work.

hopefully see you all soon
ttfn

Did you consult with the CEO first? She might get pissed.

RandallFlagg

To answer my original question - how much is enough?

I've worked it out - £426,000

Nitefly

Blimey - are you planning to live to be 150 or something?  

RandallFlagg

Nitefly said:

Blimey - are you planning to live to be 150 or something?  

No - 90 at best.

I have done some research on "sequence risk" and "pound cost ravaging" (Google them). This is the risk of hitting a stock market downturn in the first few years of retirement when using drawdown. The impact of a couple of years of negative returns in stock market equities on your pension fund can have a dramatic effect on the longevity of your pot as you draw down. 

I took the 22 years history of gains/losses on the pension fund I am (ASI UK Smaller Companies Pension Fund) in and plotted it out 22 times starting at a different year each time to see what size pot would survive the 22 years. In 19 of the 22 scenarios the pot grows to in excess of £1M with a steady drawdown but in 1 year it drops to just £11K in the 22 years. This 22 year history includes 2 crashes, the 2001 9/11 and 2008 banking collapse.

What I found was a perfect demonstration of "sequence risk". Hitting a stock market downturn while drawing drown say £34K a year (inflating the drawdown 2% a year) really affects your funds ability to regrow when the markets return. I found that £426K survived all of the 22 scenarios after drawdown & fund management fees.

Interestingly, I also found that the year after a double digit percentage decline in your fund due to poor market returns, if you don't withdraw any money the year after then it makes a massive difference to the outer years and the pot grows to exceed the starting amount.

So, I think you need to enter drawdown with a contingency set of funds to draw on after a bad year of returns. We plan to have 3 sets of contingency funds. My wife's pension pot is £32K now and will be available to draw on in the first couple of years of retirement - we'll keep that undrawn plus I am saving in a Stocks & Shares ISA (invested in different sectors/equities to my pension) and a cash ISA as well. These will be our get of jail funds if the markets crash. Last gasp emergency is to release some money from the house as equity release but I don't expect to have to do that.

If we have a good few years of pension growth I reckon I can be done in 4 years ready to retire. Trouble is everyone is talking about an imminent stock market double digit correction as we've had a bullish 10 years and are due one because social media say we are!

Certainly stocks like Tesla & Apple are soaring and must be due a reset soon:

WiresDreamDisasters

Is there a n00bs guide to this sort of stuff? AKA "Ensuring your future for dummies who thought they were going to die by the age of 16... and then 20... and then 25... and then 39.... but who cling onto this mortal coil and are only just now learning that the future is a real thing: vol 1"

???

Like literally.... the dumbest of the dumb. What is capital.... how can you use capital.... etc... etc....

RandallFlagg

WiresDreamDisasters said:

Is there a n00bs guide to this sort of stuff? AKA "Ensuring your future for dummies who thought they were going to die by the age of 16... and then 20... and then 25... and then 39.... but who cling onto this mortal coil and are only just now learning that the future is a real thing: vol 1"

???

Like literally.... the dumbest of the dumb. What is capital.... how can you use capital.... etc... etc....

Start with some simple questions and research:

1) Do you have a pension?
2) What type of pension is it - Defined Contribution or Defined Benefit?
3) How much is in your pension pot?
4) How much do you pay into it a month?
5) How much does your employer pay into it?
6) Does the pension management company have a website that you can log into to check your fund?
7) What fund or funds is your pension invested in and what companies/stocks are in the investment portfolio (the fund factsheet will tell you this)?
8) Does the website offer a retirement planning projection tool?

Start there and you're on your way. 

Go on Google Finance and type in some company names (like I did above) and take an interest in how the prices move up and down on things like the FTSE100, FTSE250 etc.