How much money do you need to retire

[minstrel]

lol, yeah but my disclaimer did say "no flaming me for my idea" hah!... I think looking from a small business / contractor viewpoint is it maybe an idea which is never even considered by many people? In comparison to the other options (which I've not yet fully explored), it certainly seems like a workable option to fund a good retirement... wondering if there's any government small print out there stopping this type of operation though.

I don't think this is any more tax efficient than a pension - in fact it is considerably worse.

If you keep the money in the company you will have already paid 22% Corporation Tax.

If you make company contributions to a pension you avoid the 22% CT, plus at retirement you can take 25% of your pension fund as a lump sum tax free.

Also consider that dividend distributions in your retirement will have a 10% tax credit which effectively reduces the higher rate threshold.

If you have a strong dislike to pensions for some reason then your idea could be worth persuing. I just don't see it being the most tax efficient route though.

[ASB]

I don't think this is any more tax efficient than a pension - in fact it is considerably worse.

If you keep the money in the company you will have already paid 22% Corporation Tax.

If you make company contributions to a pension you avoid the 22% CT, plus at retirement you can take 25% of your pension fund as a lump sum tax free.

Also consider that dividend distributions in your retirement will have a 10% tax credit which effectively reduces the higher rate threshold.

If you have a strong dislike to pensions for some reason then your idea could be worth persuing. I just don't see it being the most tax efficient route though.

I'm not sure it is necessarily considerably worse. Provided you keep under the higher rate threshold when extracting the dividends then there will - currently - be no further tax to pay on them.

If the contributions are paid into a pension fund then 75% of them are taxable at the basic rate when benefits are paid out. This is not necessarily a huge difference overall. Also this tends to get towards the forced annuity route.

Thus there may be more flexibility with retaining the cash in the company and retirement relief etc. could swing the tax balance. But there are risks too. Being classed as an investment company and getting taxed at the full CT rate, changes to the taxation of dividends, changes to retirement relief etc. It seems to me likely that the regime will get less charitable in this area.

From a simple view of max pension per source pound personal contributions probably just beat company contributions in most cases. But flexibility of use of the fund becomes an issue.

[IR35 Avoider]

The house you live in is not an asset - it is a cost center. As asset is that which produces income after costs have been taken out. Having your own house may be a necessity, but it is not an asset I would put towards my cashflow projections, because I will not be selling it or renting it out for income.

Eh? All I was saying is that you would have to pay for your house, out of money you earn.

I think I know which writer you got that idea from - I can see the point he was making, strictly speaking he's wrong, but as a way of thinking about things to prevent people kidding themselves into overspending I guess it might be useful.

I try to spend as little as possible now - with the support of my wife. I probably go through about £20k a year on everything ex-tax (bills etc right down to eating out and holidays). Like I said, £5k is the upper target, and it would be nice to have it. £3k is likely and will do for the interim. You have to aim high.

If I count the mortgage I spend about 22K a year before holidays, subtract the mortgage (which I treat as negative invesment income rather than an expense) and the extra car costs that come from commuting, add in holidays, and I hit 15K. If your 20K include mortgage/rent then we're not so different. I wonder why you think you need up to three times as much money if that's what you live on at the moment?

You need to consider the effect of compounding in your calculations.

I did. It would take you a lot longer, or you'd have to save a lot more, without compounding, or if the investment return were lower.

In addition, look at the option of re-investing positive cashflow from one asset into another one. For example, imagine you had 2 BTL properties, with 1 completely mortgage-free due to your hard work. You could use the rental income from that house to pay off the mortgage on the other one, in addition to your own payments. Continue onto next property or into another asset class. Long term, this works great.

This doesn't make any difference to the calculations. I assumed all investment income was reinvested anyway, and I assumed you made the maximum return you can reasonably count on.

there was a time when I also thought that £15,000 was enough.

My £20,000 target for income will theoretically have to be upped if children arrive. I say theoretically, because I've only been talking about my own finances. In practise my position is better than I have described, because the wife works, and contributes, and saves, and I haven't counted her contribution/savings/income from savings as part of my figures.

[IR35 Avoider]

but what seems like a lot of money now will seem like peanuts in 20 years. The problem is it isn't just inflation, average salaries rise quite a bit faster than inflation

This is a very good point, something that I only came across for the first time over Christmas.

Happiness (to the extent it is generated by money) depends mostly on your earnings relative to your peer group. You need to be able to afford the things they can. If like me you're planning to be retired 40-50 years, you have no way of knowing what future goods and services you're going to want. If I'd retired in 1960 in Britain I wouldn't have anticipated satellite TV, car ownership, double-glazing, central heating, mobile phones, foreign holidays, internet and dental implants might be essential in my future.

For a long retirement, you need to plan to keep up with the annual growth in employment earnings, not just the rate of inflation.

[electronicfur]

I think only you yourself can figure out how much you annual income you need to retire on, as everyone is different.

I have personally been building up a HYP, High Yield Portfolio, instead of a traditional pension. Used the yearly ISA allowance, and then any extra outside.

See http://www.fool.co.uk/Investing/guid...Portfolio.aspx for more info on the HYP approach.

The advantage of the approach for me is that after the initial share pick it doesnt require a lot of time, and it's aim is to build up an annual income that rises at more than the rate of inflation. Additionally it means I'm not restricted by government pension rules, dont have to worry about what they will do to those pension rules in the future. Also I can access my money when I want, and don't need to buy an annuity with it when I do choose to retire, but can just live off the annual income, keeping the capital intact.

Now that I am contracting I am considering building up the HYP within the company. One thing I still need to investigate at the moment is what it means if the company HYP is earning income and I am out of contract for a period. Will the company get classed as an investment company?

Cheers,
EF

[Lockhouse]

One thing I still need to investigate at the moment is what it means if the company HYP is earning income and I am out of contract for a period. Will the company get classed as an investment company?

If out for a "long" period. Yes. The usual HMRC subjectivity rules apply.

[IR35 Avoider]

I have personally been building up a HYP, High Yield Portfolio, instead of a traditional pension

Just me being pedantic, but a pension and HYP (or any other form of investment) aren't alternatives to each other. A pension is just a wrapper for any investment portfolio that carries with it certain advantages and disadvantages. It is easily the best for minimising tax (it beats ISAs even for people who are basic-rate taxpayers all their lives) but it means you can't get the money until you're old and you will be forced to take three-quarters of it as an annual income during your lifetime.

I think you could run a HYP within a pension to age 100 or whatever you live to, though from age 75 it would have to be switched into and run within a self-directed investment-linked annuity. (Not sure if there's more than one company offering complete freedom to invest in shares in this type of annuity, so you might not have a lot of choice over the charges you pay. Most interesting products of this kind I've come across were from Merchant Investors and Prudential, but the I think the Prudential one only allowed you to invest in funds.)

[electronicfur]

A pension is just a wrapper for any investment portfolio that carries with it certain advantages and disadvantages. It is easily the best for minimising tax (it beats ISAs even for people who are basic-rate taxpayers all their lives)

Well I used the term traditional pension as that is the most common pension arrangement, within the pension wrapper; whilst the most common HYP arrangement is outside the pension wrapper.

I'm not sure how good a HYP within a SIPP would be. The fact you are forced to buy an annuity means the capital of your pension pot is important and the HYP strategy concentrates on growing income, rather than capital.

Also the pension wrapper doesnt always beat the ISA wrapper. See http://www.telegraph.co.uk/money/mai...n03.xml&page=1

[moorfield]

I think only you yourself can figure out how much
See http://www.fool.co.uk/Investing/guid...Portfolio.aspx for more info on the HYP approach.

Hmmm.... don't think it's a foolproof though, according to digital look Northern Crock shares are currently yielding 40% but I can't imagine there would be many takers for those !

[wantacontract]

I am thinking:

House paid off
Car Paid off
£20k per year for me
£12k per year for wife

Retire at 45-48........

bit lamo this last comment, but hoping to inherit some decent money from mom and dad.....

something which i would have never thought about when i was younger and full of pride.....