RETIREMENT PLAN - THE SPREADSHEET YOU NEED TO MAKE YOUR LIFE EASY

27 January 2023

PUT IN TO TAKE OUT

What is the one number you'd really like to know for a happy retirement? Yup, it is how much should I tuck away each month - not percentages or formulae, just the number please?

THIS NOTE IS ABOUT

Financial planning is boring but unavoidable. So start here. 

Plus, a note on how to build a neat and tidy spreadsheet.

GOAL

people typically aim for somewhere between half and two-thirds of their final salary as their retirement income. 

NEEDS

By the time they retire, many people have paid off their mortgage, and their children are financially independent, so their expenses are lower. 

RESOURCES

The state pension should also cover at least a portion of needs, while the same level of gross income goes further because you are no longer making National Insurance and pension contributions. 

POT SIZE OBJECTIVE

First, work out how much you need after the state pension. You could multiply your planned expenditure in retirement by 25, which should give you the size of pot you need to be able to safely withdraw 4 per cent a year. 

For example, if you estimate you will spend £25,000 a year on top of the state pension, you will require a retirement fund of £625,000. 

 (Not included here is your investment strategy, ie how you make best use of your resources to achieve your goal...wow, is that complicated! 

 But at least, make a start by knowing where you are today, where you want to be, and how much to "pay yourself" each month to get there.)

Unless your investments perform poorly or you live to a very old age, following this 4% rule should enable you to leave some of your pension pot to your children.

FORMULAE

A good way to amass a sizeable pension pot is to contribute half your age as a percentage of your earnings every year when you start making contributions – 10 per cent of your gross salary when you are 20, increasing to 15 per cent when you are 30 and so on, including employer contributions.

People who leave retirement saving until later in life may need to work for longer or to release equity from their homes.

 ("Downsizing" is where you sell up and move to a smaller property. This releases equity which can be used, as we get older, for medical care.)

BUILD YOUR SPREADSHEET

Where are you today with your savings plan and where do you need to be? Use compound interest. Here are the basic steps (spreadsheet columns) and inputs for the calculations. Then compound up, year by year, from now to retirement. Et voilà, you've made your plan!

1. Needs - eg 2/3 thirds of final salary

2. Resources - state pension

3. Size of pot required

4. Spreadsheet scenarios - annual savings, number of years, rate of growth.

 

Four key adjustments to keep in mind when you build your spreadsheet.

5. Returns - on long-term average, the stock market has returned 7% a year. The future is less rosy, count 4%, with dividends re-invested, from your investment strategy.

6. Inflation – your withdrawals will need to increase in line with inflation to maintain the same living standards through retirement. 

7. Income tax - tax applies to your retirement income, so work out both the gross and net annual income you want to aim for.

8. Fees - remember to account for fees :   investment, platform and drawdown fees will eat into your returns.

(NOTE ON HOW TO BUILD A SPREADSHEET THAT WORKS

A well designed spreadsheet has three parts : header, detail, working storage.

Header - a very few rows to setup and summarise the results. The title of the sheet, the input parameters and their starting values, summary results.

Detail - the columns work left to right across the process, from beginning to end, each column doing rolling calculations - the rows are runs of the process eg one line for each year.

Working storage (optional) - maybe you need to do intermediate calculations for a step, but they'd clutter the detail line ... so put these sub-steps off the page to the right.)