Question No.3

"How Much of a Pension Pot Would I Need For a Comfortable Retirement?"

Our Response

There's absolutely no simple answer to this question.

The answer will be different for every person.

But, statistically, we're all living longer.  So that fact alone must be factored in.

But the question is really best answered with a question.

And that question has to be about lifestyle.

What kind of lifestyle do you want?

"At What Age Do You Want To Retire?"

Let's start with age.

How old will you be when you retire?  55, 60, 65, 66, 67 ...?

The younger you are now, the younger that you think you will retire.

But the truth is, non of us really know the answer, but you can plan.  Let's assume, for the moment, that you, like us, are average kind of people.

You're not some company director on some fantastic salary with fantastic bonuses who may be able to retire young.  But rather, you will carry on until the state retirement age.

Ah, now that used to be 65 (for men and 60 for women) but what with people living longer, and not a lot of money left in the government kitty, that's now been bumped up to 67 (and 65 for women).

Who knows?  It might be 70 before you retire.

But we'll go with 67 as a retirement age for Joe Blogs or 65 for Jane Doe.

If you really are stupid, or have lived a happy-go-lucky life, then perhaps all you will have to fund your retirement is a paltry state pension.  But if that's the case, you probably wouldn't be reading this, would you?

Even so, it's never too late.  Even if you're in your 60's, it's late, but you can still start.  You could do very well if you give it just 10 years.

So, you will have your paltry state pension PLUS whatever pension you've built up, PLUS, whatever other savings you may have.  And, for this example, you are 'retiring' at age 67.

What other assets do you have?  Have the kids fledged home?

No point, in my opinion, rattling around in a 4 bedroomed house just you and your spouse.  We know we wouldn't.

And we didn't. We down-sized to a two bedroomed apartment just outside of a beautiful city. It's all we need. We think to release the equity in your home, by downsizing, is a cracking idea. (btw: we don't consider Equity Release Schemes as a good idea at all).

Whatever age you may be now, perhaps you will retire at 67 and perhaps you will have other 'investments.' It's hard to calculate what these may be worth. so ...

...let's take a worst case scenario.  You don't have ANY other assets.  Which means you will be dependent on your Pension Pot for living when retired, after age 67 (in this example).

Now this next bit is a little sombre.  We don't like to mention it but it is a sad fact of life.  And it is this ... how long are you going to live?

Of course, non of us know this, but, actuaries spend a lot of time working out the probabilities.  The table below gives us a rough guide.

Life Expectancy Table

"What Do You Want To Do
When You're Retired?"

OK, so perhaps we now know how old we will be on retirement, where you want to live, and what other assets you have in addition to your Pension Pot. And, perhaps, just maybe, how long you are going to live (see table above).

Let's say you are a male aged 35.  Then according to the actuaries list, your life expectancy is another 41.23 years.  That is, the probability is you'll live to 76.23 years.  If you make it through to 67, then you are estimated to live another 14.68 years.  That is, up until 81.68 years. 

We're sure these figures will change in another decade or so, but the general idea is there.

So, using the example of a 35 year-old male, living to 76 ish (or beyond) you can start to estimate how much moolah you will need.

You will be retiring at 67 with an estimated 15 years left. That's 180 months.

What lifestyle do you want in those 15 years?

Clearly, when you were employed you had a mortgage, maybe school fees, family holidays, two or even three cars.  Your salary was a modest one (remember you're a Mr. or Mrs. Average).

Now you're retired.  What do you plan to do?

Perhaps a vacation or three.  How many times a year? 

Perhaps you have an expensive hobby you'd like to pursue.  Something you've always wanted to do but never had the time, or the spare money.

But now you can.

Armed with all that you want to do, you need to estimate how much, per month, you will require on top of your state pension.  In fact, forget your state pension, it's that punitive.

What we did (because we've been retired for several years now) is calculate how much we needed just to live comfortably.  And this figure came out at a nice round £1000 per month. 

Yes, we could live quite comfortably with that kind of income. (Remember, you've still got your state pension on top of this).

But that £1000 wouldn't give any money for luxuries like vacations etc.

So we came up with a figure of £1500 per month.  And anything more than that would be a bonus.  That extra £500 per month would quite nicely pay for our trips abroad - of which we still like to do.

Now, if we were to work on 180 months (as a minimum) then we reckon we would need 180 x £1500 which equates to £270,000

But ... current rules state that you can take a 25% tax free sum before you even think about draw-down.  Draw-down is a fancy term for withdrawing money from your Pension Pot, as little or as much as you like.

So, in our little example above, we would have to generate also that 25% tax free money that is allowed (it would be silly not to take it.  The words 'tax free' give that one away).

Therefore, we would require a Pension Pot in the region of  £270,000 + £90,000 that would equate to around  £360,000.  Nice figure.  But ...

... there's is tax to pay (at 20% or 40%).  The good news is (in this example) it is only payable on the £270,000.  We're average folk, so let's work with the 20% figure.  That's £54,000.

Wow! That's a lot of moolah.  But don't forget, as you were saving for your Pension Pot you were given a tax allowance, so with the 25% tax free payout, overall it's a gift.  Anda generous one at that.

Back to our example.  £270,000 minus £54,000 equates to £216,000.  Over 180 months that equates to £1200.  A shortfall on the £1500 estimated.  (We'll let you do the maths to work out what sum is required).

As it happens, we have had designed our own Pension Pot Calculator.  See below.  It's self-intuitive so play around a little and put in some numbers that give you an outcome of the figure you have calculated (in our example above, £360,000).

Pension Pot Calculator

Go to Pension Calculator

"What Would You Do With an Extra  £90,000?"

A £90,000 tax free lump sum.  It's like winning the lottery. 

Don't be too amazed.  In our example above a 35 year-old could very easily amass that amount by salting away less than £100 per month.

90 grand to spend on anything you want and a pot still worth close on 300 grand.  You've got it made.  You're in clover.

But you gotta start early to be able to do that.

What would you do with your little windfall?

Take a cruise around the world?  Buy a new car?  Give some to the kids? 

Wow!  You really have got it made.

"Let's Wrap It Up"

You now not only have a good idea how much of a Pension Pot you'll need, but how much you'll need to put aside each month.

In the example given above, less than £100 per month.

Not much is it?  But consistency is the key.

And don't forget the tax advantages of all those contributions.  A basic rate taxpayer contributing £80 per month would have £100 credited to his Pension Fund.

90 grand tax free and a substantial pot of money to draw-down as you please.  Oh, to be young again!

Footnote

As a newbie, you may want to read the other "Frequently Asked Questions" on this website.  Doing so, will give you a good introduction to running your own DIY Pension.

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