What is a big enough pension pot?

[1400spincycle]

I’m just turned 50 and weighing up my options.

I currently work in the public sector but began this second career in my mid 30s and have since had breaks for DCs been part time etc. Therefore my public sector pension is currently only at about £4,000 a year from age 67

My other source of funds is a lump sum from an inheritance of about 700,000 which I am hoping will allow me to retire early. I am married and we have paid off our mortgage. Is this sum, honestly, enough for a reasonable pension?

Ive been exploring the online calculators but finding it all a bit confusing.

I find the Aviva retirement calculator helpful for exploring different options, but with that nest egg you might benefit from a financial advisor.

But the answer mainly depends on how early is early retirement.

If your inheritance is guaranteed, then it should be enough to live off. DH and I only have 4 small pensions between us of £9,000 per annum plus DH state pension of just over £11,000, but we have inherited £450,000. £100,000 has already been spent over 5 years, but we’ve had a new second hand car and some building work. I get my state pension in 3 years. I retired at 59 and DH was 63.

What is your DH’s pension situation?

Is your inheritance more or less guaranteed?

say you are 55 and you might want to live to 95 then 700000 would be 17.5 k a year ( this would roughly go up in line with inflation as interest would get added to the remaining capital )

a 4% return a year would be 28k ( since you are taking the interest this doesn’t go up but the capital remains )

then you have your 4k and have you checked your state pension ?

and attack from the other end - how much do you need ? What do you spend in a year now and what might you want to add?

we worked out what we were spending then added some for fun now and care / support later and then looked to see if that was less than the lowest estimate of how much money we might have

Will you both have full state pension?

I would suggest starting by calculating what income you think you will need (use something like the MSE budget calculator). Then deduct £28k from that (assuming 2 SPs and 1 DB pension). Then work out how realistic that you can generate that with your £700k (which will almost certainly increase over the next 17 years if invested). You can gradually move this £700k into a SIPP and ISAs.

Rule of thumb is that a safe withdrawal rate is 4% increasing with inflation.

If you have a lump sum of £700k, couldn't you use that to generate an income without using the capital? i.e. rather than dividing it by the number of years you might live, a 5% return on a £700k investment would give you £35k a year, which would then be topped up with whatever pension you get when you reach retirement age.

Different people have different ideas of what constitutes a 'reasonable pension'.

It might help to work out what you are spending on a monthly basis today, and then extrapolate how you think it may change (e.g.more time for holidays, less commuting costs) when you retire.

Do you already have this inheritance?

£2 million

This https://www.retirementlivingstandards.org.uk/ is quite helpful to help understand things.

That’s significantly underestimating growth. I had a 350k inheritance several years ago. I take 3k a month and have done since the start and the capital continues to grow and is at around 425 now.

@SunnyViper
That sounds like something I am looking for to make the most of a recent inheritance.. what kind of account/ investment is it please?

Look at the guiide calculator. Although it is aimed at those with a defined contribution pension rather than a defined benefit one, it is helpful as it allows you to include other investments.

You need to work out how much you need net per month and how much you want to hold for savings for big expenses.

I personally wouldn't be comfortable with that amount to be able to retire at 50. Late mid 50s maybe.

As others have said for that amount a financial adviser would be helpful not just with investing but also the forecasting. I would also be very pessimistic on returns and aim for safer returns, so when you retire you do not have to worry about money.

you need to work on long term averages / which is where the able to take 4% and assume capital stays intact comes form - it’s always best to be conservative when planning such a big step - over 10% isn’t what most people achieve in the long term

It is a medium risk portfolio with St James Place. There is an ISA, and ISA feeder with a mix of bonds and stocks and shares.

Please be careful with people like St James. Do your homework.

Thanks both

If you can pull together a spreadsheet with all your outgoings, you can see how much you need. Create columns for each year. Don’t forget to include an allowance for house maintenance etc

then put in your pension at the point you can take it, and your state pension (check your forecast).

thus will show you what income you need to achieve either through pension, state pension or from investments (your inheritance)…

you’ll need to fund more now that you would at 67 so may have to reduce capital but it will give you a good idea.

you haven’t mentioned DH/DP arrangements but same approach can work for you both- I did this before reaching out to a financial advisor for their views on how to manage our various pensions and investments.

and don’t forget you don’t need to maintain your capital forever - why would you need £700k left to pass on ….

Oh to inherit that amount! You are so lucky. My DPs decided to release the equity of their house and there is nothing. I’m glad they used their mo ey but it’s around now that I’m in my 50s that I feel it.

OP wouldn’t be in this position if someone else hadn’t had £700k left to pass on! Being prudent with money and leaving something substantial for subsequent generations can be life-changing for them and generally if people have been recipients of that then they try to do the same for their descendants also.

@SunnyViper 4% is the figure that's generally considered a safe withdrawal rate if you want to increase what you take in line with inflation (and don't forget fees)- lots of articles on this eg Spending in Retirement: Beyond the 4% Rule | Charles Schwab and discussion about whether the 4% is too high or too low. Yes we've all had double digit growth for the last however long but that's because we're in a bull market. The idea is that you withdraw at a rate that leaves you ok whatever the market is like, which inevitably means when things are good you'll be taking less than the rate of growth.

I’m aiming for £1m in my pot, and DH’s will probably have maybe £200k (though he plan to retire very early and so maybe won’t have that much).

But the fact that is an achievable pot is reflective of my current income and lifestyle which I want to maintain to some extent into retirement, which has a much bigger capital need.

I would need to pay tax on £1m out of my pension though, so £700k already in my account would be give me the same level of comfort.

This is worth repeating. OP - make sure you understand the 4% rule thoroughly - I love that article, but make sure you understand the basics first.

4% is an accepted rule of thumb for estimating how much you can take - allowing for increasing what you take with inflation to keep the same spending power - such that it will last 30 years. ( Ie in 30 years time, the capital will all have gone too.)

People on here have talked about taking only the returns, but they often underestimate the significance of inflation over the length of time you are retired for.

Inflation is currently 4%. If that holds (not showing signs of going down) to buy the amount that £10k buys you today:
n 10 years - when you're 60 - , you'll need £15k
in 20 years - when you're 70 - you'll need £21k
in 30 years - when you're 80 you'll need £32k
In 40 years - when you're 90 - you'll need £48k.

Or to put it another way, if you think "I need £10k per year on top of state pension', and you use that number without considering inflation, when you're 90 (1/3 of women willl live to 90) then you'll only have £2k per year spending powerr, not £10k.

So back to the 4% rule: if you start taking £28k per year now, adjusted for inflation to keep the same spending power, you would expect that by the time you're 80 the money will be all gone. (The large majority of people currently aged 50 in the UK will live past 80).

It definitely doesn't seem enough to retire immediately aged 50. It probably is enough to retire a bit early - exactly how early depends on what your DH's pension provision is, as well as the standard of living you hope for.

https://www.retirementlivingstandards.org.uk/

What have you done with the £700k just now? I'd say that your priority just now should be investing that appropriately, based on your retirement timeframe. You should definitely speak to a financial advisor.

To give a very rough idea, if you invest the £700k now, then I'd expect it to allow you and your DH to retire aged 60 in 10 years time on a 'moderate' retirement (see the link above) if he has no additional pension savings.

If he does have a pension, then that either gives you more in retirement or else allows you to retire earlier.

That's a very, very rough estimate, and obviously depends hugely on market returns as well as inflation!

Why anyone would retire early when they can still contribute to a public sector pension with the massive benefits that confers is a bit mad. £4000 a year is not much but it could be so much more! Plus the lump sum would grow too.

£700,000 is a great inheritance but I would teke advice on investment and not touch it for 10 years. Any draw down arrangement needs to be based on potential growth, so I’d let it do that for 10 years and then reevaluate. DH is 72 and we are just starting to draw down from a much bigger pot. It’s much bigger because we gave it time to grow.