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Q&A » Retirement
2 questions...
(1) What would a 40 year old woman need to invest/save in to guarantee an income of £15,000 per year if they want to retire at 60? Please ignore the state pension and final salary pension schemes.
(2) How much would they need to contribute each month?
I was asked these questions recently but could not think of anything that was guaranteed.
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212d6 y64 want equivalent of 15K in today's money when you are 60 ... or just 15K when you are 60 ?
One way to guarantee this is to save this amount now in cash ... into a high interest saving account/bond. She'll have to keep abreast of inflation too.
But then she'll have to live for as many years as she's saved for and no longer ... hopefully no less as she'll waste these years saving too.
Otherwise you're looking at something that is not guaranteed but at the risk of stock markets and the like.
Posted on 13 March 2010 |
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0The goal is £15k per year at 60 in todays money.
So only cash can guarantee this?
Posted on 13 March 2010 | Love 0 loves
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272The only way to get a guaranteed income is to buy an annuity. Anything else is not guaranteed - even if you have half a million in the bank it will eventually be whittled down, although you would have to live until about 120 for this to happen and with interest rates lower than the amount you wanted to withdraw, which is unlikely if you're only taking £15,000 (3% of the total) each year.
According to the annuity calculator at http://www.find.co.uk/pensions/annuities_centre/annuities-calculator, a 60 year old woman would need a pension pot of around £231,000 to buy a £15,000 a year annuity at the current best rate on the market. So by the time you are 60, you will need £231,000 in a pension or other savings vehicle.
If you want it absolutely guaranteed (i.e. no risk at all) the only way to do it is in cash. Assuming that savings interest rates will average around 4% over the next twenty years (low for the next few years but then rising back to their recent average of around 5%), you would need to invest £635 per month for 20 years to have a lump sum of £231,000 at the end. Bear in mind that if you do this in a pension fund, you will receive tax back on your initial contributions, so the total amount would be around £508 per month from your net take home pay for a basic rate taxpayer. If you invest in shares, you would expect higher levels of growth - around 9% after fees is the long term average. In this case, you would only need to invest around £360 per month over 20 years to get a lump sum of £231,000, or around £288 of net take home pay. Of course with this being invested in shares there is no guarantee that you will actually get this amount of growth, or indeed any growth at all.
If you want to rely on these figures for your own retirement, you need to consider the following:
1. As SoftwareBear points out, £15k a year in 20 years will not be worth as much as £15k a year now.
2. The example above will not increase with inflation, so the £15k a year will also get lower in real terms. You will need £450,000 to buy a £15k a year annuity which increases in line with retail price inflation, so almost twice as much.
3. Annuity rates may be different in 20 years time. £231,000 may not buy you as much annual income by then, as longevity rates may have increased.
4. If you invest in a pension, then even your 'cash' investments are not fully guaranteed - they may fall in value in particularly tough times like over the last couple of years. The only way to be absolutely guaranteed is to save in regular savings accounts, but then you miss out on the tax refund on contributions. But you can still buy an annuity with cash from outside your pension fund.
5. If you invest in regular bank accounts, keep less than £50k with any one institution to ensure you are protected under the compensation scheme.
6. Your £15k a year will be taxable even after you retire, so it won't be £15k a year net. Taxes may well have risen by then as well.
I hope you can follow that - with all the confusing rules and potential pitfalls, is it any wonder people don't like investing in pensions any more! There is one other options, which is not guaranteed, but is arguably simpler.
You buy two properties each of which cost £625 a month to rent and take out repayment mortgages on them both. Over the next twenty years you repay the mortgages and are left with two properties each of which rents for £7.5k a year. This option is harder work, but you are unlikely to have to pay £500 a month to cover any repairs or mortgage shortfalls. In addition, the rent is more likely to go up with inflation, and so you won't be left with a falling net annual income. This option is obviously not for anyone, but some (me included) find it easier to understand, and arguably safer, than pensions where you don't always have much control over your investments.
Posted on 13 March 2010 | Love 1 love
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272Ok, sorry, you posted your reply whilst I was writing my answer. To get £15k a year in today's money, you need to consider what the inflation rate will be over the next twenty years, which is a bit of a shot in the dark for anyone! I would assume 4% retail price inflation per annum. You might want to sit down for the next bit.
So in 20 years £15k today would be around £32,800. So you would need a fund of £545,000 to buy an annuity paying £32,800 a year. That means you need to save £1500 per month in cash at 4%, or £850 per month if you invest in shares and earn 9% per month.
Even worse, if you want the amount to continue rising with the retail price index each year, you will need a pension fund of £930,000. That's £1450 per month in shares at 9% a year, or if you want the risk free option it's £2550 per month in cash at 4%! Suddenly it's not so hard to see why so many people's pensions are failing to provide them with the income they wanted / expected.
Posted on 13 March 2010 | Love 1 love
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804It is not so difficult to work out as expressed above, although no-one previously has referred to the likely improvements in longevity.
To allow for longevity, find out how much an Index-Linked annuity of £15,000 per annum for a woman of 57 would be. 3 years improvement in 20 would seem about right.
You would then need to invest in Index-Linked bonds, such that the cost would be funded, but allowing only for the interest margin over RPI, if any.
By investing in I-L stock and annuity, you can effectively take the effectas of inflation out of the calculatio, which is just as well because it would be almost impossible to guess correctly.
Mike
Posted on 13 March 2010 | Love 0 loves
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0Thank you SoftwareBear, Swarbs and MikeGG1 for responding.
MikeGG1, where can we find more information about index-linked bonds? And would £1500 per month give £15k per year in todays terms?
Posted on 15 March 2010 | Love 0 loves
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1There are an increasing number of retirement planning solutions that aim to offer guarantees, both in terms of capital and future income values. Many will offer a better home for your money than cash.
There are two things you will need to be aware of, however. Firstly, if you want guarantees, you will pay for them. Either you will have to sacrifice growth potential (e.g. by investing in cash) or you will be asking someone else to bear the risk, which they will not do for free. There are schemes offered by reputable, financially strong organisations whereby you benefit from any growth while they guarantee against any losses, but you should expect to pay around an additional 1.5% a year for the guarantee.
Secondly, putting a solution together to guarantee you a future income is likely to involve more than one
Posted on 05 April 2010 | Love 0 loves
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1Saving/investment/ pension product, which means plenty of research, & planning along with ongoing servicing. You won't get all the answers you need online; you are going to need the help of a good IFA - and I do mean independent.
Again that advice won't come for free. You should expect fees to be fair relative to the work involved, but if you expect to pay nothing for advice you will get advice worth nothing.
It's definately worth exploring, there are some very good solutions out there.
Posted on 05 April 2010 | Love 0 loves
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