Step by Step help

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You and Your Plans

The age you choose to retire is when you expect to need additional income from pensions and investments, it need not be when you expect your State Pension. You can retire at any age you can afford to, but taking income from pensions is restricted to a minimum age of 55. (It is expected to increase to 57 in 2028). You can start with age 65 to see the effect and change it as you go along. Your State pension age will be automatically calculated to the nearest year.

An expenditure reminder pdf will be available to use and download soon.

Retirement Income

Regular spending is anything you expect to be consistent each year. For example all your home running costs and direct debits, food and general shopping, eating out and annual holidays.

You will find it helpful to have a second pot of set-aside money for extras that are not regular, like changing your car, special holidays and anything unexpected. If you don’t keep detailed records of what you spend, use the Which? magazine report as a guide, until you have an accurate record. The 2020 Which? magazine survey, shows the average net income in retirement to be £25,000, and £40,000 for a more luxurious lifestyle.

If you look up your life expectancy it will give you an average for the UK, but because you’re probably not average it’s not a good guide and you could easily live longer. This money has to last, so the default is 95 for you to carefully consider. If you choose to put a younger age then make sure you have savings to resort to in case you run out. Unless of course you are in poor health and have a limited life expectancy.

The planner calculates your State Pension age to the nearest year, but you can check you exact date here:

https://www.gov.uk/state-pension-age

Check if you have a full state pension, or whether you have any missing years that you may be able to top up. A State Pension Forecast can be applied for here:

https://www.gov.uk/check-state-pension

Investment

The important thing here is the difference between your projected inflation rate and projected growth rate. 2.5% inflation is approximately what the Retail Price Index (RPI) has been for 10 years from 2011. If you were to use equal rates, i.e. 2.5% inflation and 2.5% growth, then the real value of your money in let’s say ten years time will be the same. In other words it should buy the same basket of things as is it does now. In reality of course your personal rate of inflation will be different to the next person, simply because your spending habits are different to the way Government measure inflation. That’s why you should re-visit Income Planner to make these corrections.

If you deposit your money in a bank account earning 1.5% p.a. and inflation is 2.5%, the real value of your money will fall, so in ten years time your money will buy less, meaning you have lost money.

If you invest the money there is more chance that you will get a higher annual growth than inflation. The planner defaults to a +1% differential above inflation, projecting 1% above inflation, real growth. Many good medium risk investment portfolios have achieved more than this over the past ten to fifteen years, you just have to remember that past performance is no guarantee for the future.

Of course there is more to investments than projected growth and inflation rate, see here for more on investments and understand the difference between Deposit and Investment.

The default growth rate, also the percentage income drawn is 3.5% per annum, which you can change of course. If this seems low to you the I mean it to be and if you want to be more cautious make it 3%. Many of the financial articles I read, quote rates of 4% to 5% income withdrawal. Now this maybe the average achieved by a good managed fund times in a the good times. This is a net rate after any costs have been deducted.

If you look at historically advertised growth rates you may have to allow a cost margin of 0.5% to 0.75% off this rate depending on the the way your investment is structured. In which case the gross rate could be 3% to 3.5%.

If this seems low to you, I mean it to be..

Result so Far

This example shows Simon age 68 and Serena age 65, they have just retired.

Simon’s age is shown here, because when you input your details the age of the first one will appear on your graphs.

Blue bars (always at the bottom), show fixed guaranteed incomes, in this case they show their combined state pensions. The first year only shows Simon’s state pension, Serena’s is due the following year when she is 66.

You will also see that because Serena is younger and they have the same life expectancy of 95, Simon’s state pension stops three years earlier because she outlives him and she will only receive her single state pension.

Orange bars (always at the top), show the top up incomes they should draw each year from their investments to make up to their annual retirement income, in this case £40,000. In the first year the blue bars’ income value is Simon’s state pension of £9,339 and the top up needed is £30,661, making a total of £40,000. Each year their income need increases by 2.5%. The second year their top-up income reduces to £21,855 because Serena has her state pension. When you hover over the actual graph these figures are shown for each bar, every year.

These figures will change each year, how much they change depends on amongst other things, investment performance and your spending expectations.

So it is important to revisit Income Planner every year so you stay on track.

The green bars show the value of their joint investments, in this case reducing to zero because they are over-drawing income and their capital will not last until their chosen lifetime age of 95.

In this case they have other savings to fall back on and they also have equity in their home that may be accessible.