How much money do you need to retire

**malvolio** · 1 January 2008, 17:20

Work it backwards. You'd need to aim at investing sufficient to pay £15k in interest each year without depleting your capital. So using a 6% base rate, you'd need £250k. But assuming inflation means that the value halves every 10 years, you should probably aim for double that at least.

The real answer is to have as much as you can!

**IR35 Avoider** · 1 January 2008, 17:29

The minimum I need to pay my bills is probably about 10K or 11K, with owning a cheap car and inexpensive holidays I reckon 15K is about right.

This also assumes no unexpected future expenses. For example, I know someone who faces the last 50 years of his life wearing dentures because he can't afford the circa 30K it would cost for implants to replace his teeth, which he has just lost during an operation to remove a non-malignant tumour from his mouth. There is no insurance you can get that covers you for implants.

Having originally decided that 15K was about what I needed to live comfortably, I have just upped my target to 20K just to have some spare capacity to deal with the unexpected. The idea is to still to only actually spend 15K during a normal year.

The usual investment rule is to multiply the income you need by 25, so 25x15=375K and 25x20=500K.

Having said that, I'm following an investment strategy in terms of which I currently expect an overall real return of 5.7%, meaning I would only need 351K in total to generate 20K per year. This high return became possible within the last couple of months because property investment trust share prices fell by 40% during Q4 of 2007. The nine I monitor are currently paying a median dividend yield of 8.1%, but I'm wary of the gearing levels on the highest-yielding ones. (One of them is on a dividend yield of 20%, but that's because it's in danger of breaching banking convenants on its borrowing, and will be forced to sell properties into a falling market.)

Everyone and his dog is saying that you would be mad to pile into property in the way that I am now, though if the aftermath of a 40% crash doesn't turn out to be a good time to have bought, I'll be surprised. Also note that I'm only talking about closed-end funds whose share price is set on the stock-market; unitised funds such as are available within pension schemes may be overpriced at the moment. Their values are set by surveyors reports, and have only dropped 15% since the peak. Unlike closed-end fund shares, their prices aren't discounted to take account of fears of further price drops in 2008.

I noticed recently that the ETF that tracks an index of high-yielding shares (ETF ticker=IUKD) is giving a dividend yield of 5% on an ungeared portfolio of British shares. That would be a less controversial choice than piling into property in the way I have, and would mean that you only need 15K/5%=300K or 20K/5%=400K to retire. (I assume that dividend income and capital values would increase by enough to compensate for inflation.)

The yields available on closed-end property funds and high-yielding shares make this one of the best times to be investing for several years. During 2007 I actually had significant losses on my investments, though these were more than offset by new funds I added, but if I look at my investments in terms of the level of income they will support rather than capital values, the current high yields mean I'm 70% better off at the end of the year than I was at the start, even though the increase in capital values was relatively small. (For this to happen I had to have the luck/judgement to have money mostly in unitised property on 1st January and switch into closed-end fund property between the crash and 31st December.)

**chris79** · 1 January 2008, 21:19

I had an alternative idea for a pension, how about this (don't flame me if it's wrong or sh*t, it's just an idea I had)...

Instead of paying big money out your limited co. and thus incurring tax on it etc, why not just build up say £250k-500k (as discussed above) in the business account, on this basis you can then pay yourself a salary out of the company funds utilizing your annual personal allowance in the process every year. Obviously the key to this is to get the funds invested at an interest rate of 6% or so in order to keep it in line with inflation, but according to my calculations even a paltry figure such as £250,000 should be enough to give you 25+ years worth of salary at todays equivalent of £15,000 a year (before tax).

The added bonus with this is that you can decide to retire when you want, rather than waiting until a specified age like in a pension scheme. The more money you have, the more you can withdraw every year, and the less you withdraw every year, the longer your pot will last... etc. The only part I'm unsure of is whether there are problems if your company has not traded or done any transactions during the time you do this? (Just a thought)....

I did a quick calculation in Excel to show how this would work... The bank balance has the interest added on for the year, then has the salary deducted. The Salary increases every year at an inflation rate of 2.5%.

Year| Bank Balance| 6% Interest award| Yearly Salary| inflation rate
1 £250,000 £15,000 £15,000 1.025
2 £250,000 £15,000 £15,375 1.025
3 £249,625 £14,978 £15,759 1.025
4 £248,843 £14,931 £16,153 1.025
5 £247,620 £14,857 £16,557 1.025
6 £245,920 £14,755 £16,971 1.025
7 £243,704 £14,622 £17,395 1.025
8 £240,931 £14,456 £17,830 1.025
9 £237,557 £14,253 £18,276 1.025
10 £233,534 £14,012 £18,733 1.025
11 £228,813 £13,729 £19,201 1.025
12 £223,341 £13,400 £19,681 1.025
13 £217,060 £13,024 £20,173 1.025
14 £209,910 £12,595 £20,678 1.025
15 £201,827 £12,110 £21,195 1.025
16 £192,742 £11,565 £21,724 1.025
17 £182,582 £10,955 £22,268 1.025
18 £171,270 £10,276 £22,824 1.025
19 £158,722 £9,523 £23,395 1.025
20 £144,850 £8,691 £23,980 1.025
21 £129,561 £7,774 £24,579 1.025
22 £112,756 £6,765 £25,194 1.025
23 £94,327 £5,660 £25,824 1.025
24 £74,164 £4,450 £26,469 1.025
25 £52,144 £3,129 £27,131 1.025
26 £28,142 £1,689 £27,809 1.025
27 £2,021 £121 £28,504 1.025

[edit] Ok, the formatting screwed up on the copy/paste, but you get the idea [/edit]

[edit2] Another thought is you can also sell your house once this has depleted (assuming you paid your mortgage off), so if you have a house worth £250k assuming there is no house crash etc, you can simply rent a small flat/bungalow and use this for another 25 years or so.. by then you could be 65 and the state pension might pay your rent... All in all perhaps a pension plan good for 50 years doing what you want with your life?[/edit2]

[edit3] Another thought, you could always just keep topping it up once every 5 years doing some random part-time work, if you could get it and your skills hadn't become defunct.. it could be looked at as at least a part-timers pension, giving you the freedom to do what you want, work when you want, etc.. isn't that everyone's dream? [/edit3]

**Bumfluff** · 1 January 2008, 22:24

Originally posted by IR35 Avoider View Post

The minimum I need to pay my bills is probably about 10K or 11K, with owning a cheap car and inexpensive holidays I reckon 15K is about right.

This also assumes no unexpected future expenses. For example, I know someone who faces the last 50 years of his life wearing dentures because he can't afford the circa 30K it would cost for implants to replace his teeth, which he has just lost during an operation to remove a non-malignant tumour from his mouth. There is no insurance you can get that covers you for implants.

Having originally decided that 15K was about what I needed to live comfortably, I have just upped my target to 20K just to have some spare capacity to deal with the unexpected. The idea is to still to only actually spend 15K during a normal year.

The usual investment rule is to multiply the income you need by 25, so 25x15=375K and 25x20=500K.

Having said that, I'm following an investment strategy in terms of which I currently expect an overall real return of 5.7%, meaning I would only need 351K in total to generate 20K per year. This high return became possible within the last couple of months because property investment trust share prices fell by 40% during Q4 of 2007. The nine I monitor are currently paying a median dividend yield of 8.1%, but I'm wary of the gearing levels on the highest-yielding ones. (One of them is on a dividend yield of 20%, but that's because it's in danger of breaching banking convenants on its borrowing, and will be forced to sell properties into a falling market.)

Everyone and his dog is saying that you would be mad to pile into property in the way that I am now, though if the aftermath of a 40% crash doesn't turn out to be a good time to have bought, I'll be surprised. Also note that I'm only talking about closed-end funds whose share price is set on the stock-market; unitised funds such as are available within pension schemes may be overpriced at the moment. Their values are set by surveyors reports, and have only dropped 15% since the peak. Unlike closed-end fund shares, their prices aren't discounted to take account of fears of further price drops in 2008.

I noticed recently that the ETF that tracks an index of high-yielding shares (ETF ticker=IUKD) is giving a dividend yield of 5% on an ungeared portfolio of British shares. That would be a less controversial choice than piling into property in the way I have, and would mean that you only need 15K/5%=300K or 20K/5%=400K to retire. (I assume that dividend income and capital values would increase by enough to compensate for inflation.)

The yields available on closed-end property funds and high-yielding shares make this one of the best times to be investing for several years. During 2007 I actually had significant losses on my investments, though these were more than offset by new funds I added, but if I look at my investments in terms of the level of income they will support rather than capital values, the current high yields mean I'm 70% better off at the end of the year than I was at the start, even though the increase in capital values was relatively small. (For this to happen I had to have the luck/judgement to have money mostly in unitised property on 1st January and switch into closed-end fund property between the crash and 31st December.)

IR35AVOIDER unrelated question, how do you manage your funds, do you have buy them through one provider or multiple providers ? Im looking to start investing some of my £ but I would prefer to be able to access and view everything in one place, Im not sure if Im being unrealistic wanting to do this.

**ratewhore** · 2 January 2008, 10:39

Originally posted by KentPhilip View Post

(one holday a year, 5-year old car, pub twice a week, cinema once, full internet etc).

That is the lifestyle of someone who works. If you intend not to work again, how will you fill your time in a manner that won't cost more money? Daytime telly?

**ChimpMaster** · 2 January 2008, 15:56

PS -

Good point made by RW. Think about how you would want to spend your life once you have all the time in the world.

And £15,000 will not get you very far at all these days. Think about income tax, council tax, all of your bills, essential costs (food/petrol etc), and the rest ... and there really isn't much more than a few £ left to spend each month. What about having a wife and kids? - ££££££££££££.

Furthermore, money supply growth is running at around 14% in this country (much the same as the US) and hence the widely quoted CPI figure of 2.x% is another Labour joke.

I'm thinking more like £5,000 as a monthly semi-retirement fund. I know it's not easy but I'm giving myself a bit of time... maybe another 10 years or so. £3,000 is probably more realistic. But then again, I don't plan to completely retire - just "choose" to work. And I also have an expensive wife/family to take care of.

Consider a range of investments - always max out your ISAs each year (cash ISAs but preferably funds in ISAs), property (yes yes when the time is right), cash in high deposit accounts, premium bonds, stocks paying good dividend yields (pick up RBS or LLOY during the next correction). The choice is yours, i.e. pick what you're comfortable learning about.

Buy, invest, in cash-flow positive assets. Re-invest (in new assets) the yield that these assets throw off. Continue until you have a good portfolio producing more cash than you spend on average. It takes time - and I for one am not of the more patient sort.
EDIT: And the important point about this is that you never lose your assets - you just spend what they yield. If you eventually want to sell the assets, so be it - but my idea would be to pass them down through the generations (which you cannot do with a pension).

**IR35 Avoider** · 2 January 2008, 19:45

Originally posted by Bumfluff View Post

IR35AVOIDER unrelated question, how do you manage your funds, do you have buy them through one provider or multiple providers ? Im looking to start investing some of my £ but I would prefer to be able to access and view everything in one place, Im not sure if Im being unrealistic wanting to do this.

I have a dealing and ISA account with Selftrade and a pension account with SIPPDEAL. I could have had the pension with Selftrade as well (with Sippdeal as the administrator) but it would have cost more. I also have various other smaller pots of money.

What I do to monitor things is set up a spreadsheet that shows where everything is, automatically fetches up-to-date prices for the securities I own from the web, and summarises data across different accounts, so I always know where I stand. As I don't trade often, it's not really a problem having several accounts.

**BrilloPad** · 2 January 2008, 19:51

go on deal or no deal and win £250k

**kingshuk** · 2 January 2008, 20:06

Originally posted by chris79 View Post

I had an alternative idea for a pension, how about this (don't flame me if it's wrong or sh*t, it's just an idea I had)...

Instead of paying big money out your limited co. and thus incurring tax on it etc, why not just build up say £250k-500k (as discussed above) in the business account, on this basis you can then pay yourself a salary out of the company funds utilizing your annual personal allowance in the process every year.

Very interesting thought. Not sure whether IR will have any problem with the idea of company not trading for years but still remaining active. Essentially the company will be used as a pension pot with all the money invested in high interest accounts/shares etc. Do you then become an investment company?

Another problem is the NI of course. When you take money out of a conventional annuity there is no NI. May be paying dividends instead of salary is the way to go

How much money do you need to retire