Author Topic: Help with FIRE Maths  (Read 1956 times)

StiffUpperLip

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Help with FIRE Maths
« on: June 17, 2016, 04:54:01 AM »
Maths help needed!

Iím struggling to determine how Iím doing as my employer pension is defined benefit and my brain is starting to hurt as I try to work out what this means in terms working out the additional sum I need to invest to be FI.

Pension is worked out using the following formula ((1/80)*no. years reckonable service)*(final salary) = annual pension, plus ((4/80)* no. years reckonable service)*(final salary) = lump sum on retirement.  Retirement age set at 60years, which will be from May 2043.

My pension statement at March 2016 states that if I left the scheme at 31st March 2016 I would be entitled to an annual pension of £ 6319.21 plus a lump sum of £25276.83.

Each month Iíve worked out I pay in just over £225, and from my workings, accrue £56.48 per annum from age 60 which sounds too good to be true!  Obviously all numbers are in todayís money, the pension would increase with RPI if I left the scheme now and this scheme includes a significant employer contribution in addition to my own.

Iím struggling to work out how to work this into calculations for FIREÖ Can someone with a better maths head than me help me to work out the investments I need to make to supplement this pension and how I work back from this to determine when I can RE?

I can pay for additional years in the DB pension but would rather not have all my eggs in one basket, so am thinking of investing via a SIPP/ISA combo for tax advantages.

So far I have a £10k emergency fund, no credit other than mortgage but only around £500 available to invest per month due to not having finished punching myself in the face over expenses.  I think if I could get a handle on the numbers for projecting FIRE this would act as additional motivation and also give me something concrete to show the hubby to help get him on board.

Anyway, I know Iíve rambled on a bit but any help would be greatly appreciated!!!  My brain hurts even trying to explain the problemÖ  (wanders off to make restorative teaÖ)

tarheeldan

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Re: Help with FIRE Maths
« Reply #1 on: June 17, 2016, 05:15:59 AM »
Fun spreadsheet time!
Set it up so it recalculates the lump sum and the payment stream based on your FIRE date input.

And calculate your projected non-pension stash at retirement using nominal (not real) returns so 9 or 10% instead of 7%, say.

Then apply 4% rule to stash and lump sum.

Then adjust for X years of inflation between now and the retirement date so you can compare to your current expenses (or FIRE expenses in current dollars)

ETA: Assumes there's no other RPI adjustment in the pension calculations I didn't see. Other variable if your final salary.
« Last Edit: June 17, 2016, 05:20:45 AM by tarheeldan »

Mother Fussbudget

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Re: Help with FIRE Maths
« Reply #2 on: June 17, 2016, 10:42:25 AM »
To do this, we need to know your projected post-FIRE monthly / annual budget number. 
How much per month do you expect to spend in FIRE?

StiffUpperLip

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Re: Help with FIRE Maths
« Reply #3 on: June 17, 2016, 11:29:14 PM »
I'm running two numbers at the moment, £2500 if I don't buy/build a house beforehand,  and £2000 if housing is paid for. I'm planning to keep house savings in parallel to retirement funds til this decision is made. Current (underwater) mortgage is £673 for a family home.

I've got a 1 and 4yr old so they will likely be making their own way by the time I get to FI, starting late and wanting to punch my younger self!

gldms

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Re: Help with FIRE Maths
« Reply #4 on: June 18, 2016, 12:36:24 PM »
Based on your numbers, you are 33 years old and your annual salary is £54220.80.   You are not a late starter.  Your monthly pension contribution of £225 means that this pension scheme only requires that you contribute 5% of your gross income for the DB pension.  That's great, as 7 % is more typical.  Your projected pension of £6319 means that you must have worked for your employer for 9.3 years or that you started working there when you were 24 years old. 

My first bit of advice is to accept that this pension scheme will not exist in 5 years. You won't lose the defined benefits that you've earned so far, but they will shut it down and put further contributions into a defined-contribution scheme.  I'm in the USS scheme (which is very similar) which now caps further pension growth to be based on career average salary (or £50,000 whichever is smaller) and requires a 7.5% monthly contribution.

The rest of my advice depends on when you want to retire:

If you are willing to retire at age 60 (or 55), then my second bit of advice is that you do everything you can to make additional pension contributions to bring your taxable income down to £42000 a year.  This is a no-brainer if you can afford it.  Do this before paying off your mortgage.  You will get an immediate 67% return on your investment (via tax relief) and a normal investment return (4% after inflation?) thereafter.  Even if you can only afford to bring your taxable income down to £50,000 you will qualify for £120/month or so in child benefit!   If your pension has an associated AVC scheme, contribute to that as the whole AVC pot could be tax free upon retirement.  Figure it like this: if you commute the DB lump sum (usually a good idea as the commutation rates are above 4%), then the total tax-free AVC pot you can have will be 8 x (your annual pension).

Buying added years is a good investment if you start out young as you are... With time, it becomes less useful.

Do not put the money into an ISA as you get no tax relief on the contributions.  Only use an ISA after you use up your annual allowance or bring your taxable income into the 20% band (or if you want to retire before age 55 as discussed below).

If you keep on working at your present salary and without any extra defined-contribution pension, you'll have a pension of £24618 (or £2000/month) at age 60.  So, this is about what you need if your housing is covered.  Hence, you'll be fine if you can stand to work for 27 more years.  You can draw the pension at age 55, but probably with a stiff actuarial reduction.  However,  any money you  put in a defined-contribution (AVC) plan would not be subject to an actuarial reduction.   That DC money is what will free you up to retire at age 55.   Now, if you want to retire even earlier than 55, then you need to pick an age and we can do the maths to see how much you need to save up (outside of a pension scheme) given that you will have a pension (albeit, reduced) kicking in at age 55 or 60 and NI at age 66.   Remember that ER money is harder to save as it doesn't get any tax relief.  Anyways, a great tool is CFireSim. Have it calculate "Maximum initial spending" based on different savings amounts that you start with and enter when various pensions kick in..

According to the simulations of CFireSim using a 95% success rate, if you want to RETIRE RIGHT NOW with an income of £2000/month, you will need to have a savings pot of £600,000.  This is a worst-case as it  assumes that your husband has no income, pension or savings to contribute.  So, we need more info to really see when you can quite this stressful job.

StiffUpperLip

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Re: Help with FIRE Maths
« Reply #5 on: June 21, 2016, 12:47:04 AM »
gldms - thanks so much for this information, I had no idea that child benefit was based on TAXABLE income not gross!!!  I was hoping to aim for ~45 as a retirement age if I can get my ducks in a row, but was getting bogged down trying to work out if that's feasible.

I'll happily take your advice and am going to throw some money at AVCs, at lease enough to get my taxable under the 50k mark.  My husband works part time so as to be flexible for the kids as he earns significantly less than I do.  The bonus with this is that he can work pretty much anywhere while my field is niche especially at my level.  We're planning to move closer to family as soon as I can get a different job but this may take a while to find the right job/benefits/salary in the right location.  I had been trying to get a transfer with my current company (mainly due to the benefits package) but this isn't working out, yet...

Our savings this year are tight as I've just returned to work following maternity leave, we're hoping to sell our house this year as its a very slow market here and want to be in a position to move once I find a new job, and we're currently in a short-term overlap where we have both kids in nursery (eldest starts school in September so it's only a couple of months...) 

Moving closer to family will reduce childcare costs also and once both kids are in school I'm expecting to feel like I've had a massive raise!  Which will be immediately diverted (invested) so I don't feel it - if you know what I mean!!

gldms

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Re: Help with FIRE Maths
« Reply #6 on: June 21, 2016, 02:19:49 PM »
Yes, I get CB and my gross income is much higher than £50K.  By my reckoning, you are in a perfect spot: your gross income is £54000 a year.  DB pension contribution brings it down to £51300.  If you now contribute £1301 to an AVC, your income will drop below £50,000.  However,  it will only cost you £780 (or £65 a month!) because of tax relief. You'll then get about £120/month for CB.  Hence, save £65 a month from your net salary in your pension; Her Majesty will then top that up by £43 and, furthermore, give you £120 now in CB! In other words, there's £163/month sitting on the table that you have been ignoring.  Apply for CB now and get back 3 months CB retroactively.  Make the AVC payments before April 2017.

OK, now, what about ER?  If you work until aged 45 at the same income, then your pension eligibility at aged 60 would be £14910/year. (Note: everything I estimate is in today's £; your pension is probably index-linked,  as is NI, so we can ignore inflation).  Your national insurance at aged 66 would be £4902/year.  If you want to retire at age 45 with an income of £2000/month, you'll need a savings pot to tie you over until the pensions kick in (you'll also need some savings to make up the shortfall in your pensions when they do kick in..).  Using CFireSim, I calculate that you will need to have £450,000 outside of your pension to yield an income of £2000/month (in todays £) when you retire at age 45.  You have 12 years to save this up!  That's £2012/month assuming you invest your monthly savings in something that yields 7% return above inflation (i.e., something like a 80% stocks/20% gilts allocation).  The big problem is that you need to save this outside of a pension (hence, no tax relief) otherwise you would not be able to access it before aged 55.  Qualifying my earlier statement, this money should go into an ISA.

So, I'd ask the following questions:

1. How much could your husband contribute to this savings plan?
2. Do you really need £2000/month when you retire at aged 45?  You will have teenagers at home, but will your husband continue his part-time work?

If you are willing to retire at age 55, it gets A LOT easier: first, all the of the savings you'll need can go into an AVC pension and receive tax relief.  Your workplace pension (if everything continues as it currently is...) will give you an income of £21000/year at age 60, NI would give you £7369/year at age 66.   For an income of £2000/month,  you will need £250,000 in savings at age 55.  For this, you'll need to save about £410/month from now on.  However, this can go into your AVC pension and, consequently,  will cost you only £246/month from your net income given your tax bracket.  The one snag is that not all of the £250,000 will be tax free when you withdraw it; only about £168000 will be.  However, if you put the rest in drawdown scheme, then your tax rate will be at your marginal rate of 20% as you take it out.

Age 55 seems like an eternity away, but it will come sooner than you know it.  You'll be shocked.

My biggest piece of advice if you want to retire early is that you do everything you can to keep that marriage together!  With two small children and a demanding career, it's very easy for the marriage to get stale and for resentment to build up. Don't let that happen!  Spend time alone together and keep dating each other.   Make sure you share with each other your goals and expectations.  By all means, move closer to your family if you can.  You need the support.  Good Luck!

StiffUpperLip

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Re: Help with FIRE Maths
« Reply #7 on: June 22, 2016, 04:27:34 AM »
Luckily our marriage is tootling along happily, largely due to our complementary differences if that makes sense...  I'm very career focussed and manage all the accounts and household finances.  He's much more the homemaker so works part-time with little real ambition to climb the ladder, he's great with the kids and does all pick-ups, drop offs at nursery etc. and because his work is much closer to home/nursery/school he can attend the majority of events.  We've found a true balance in the household work, not really a 50-50 split as I also work on side-hustles and he does the majority of the cooking etc. but a balance isn't always 50-50, its what works for us without causing any bitterness or disharmony.

His focus is that he wants to travel and make the most of time with the family, so that's a good balance with my fire for FIRE, and keeps us working toward similar if not identical goals.  He's likely to continue in his part-time work in some form or another as he really enjoys the interaction and I'll likely find future income streams also but would prefer the security of having our basic costs covered.

I've watched my mother be unable to retire well into her 60's due to circumstances not entirely of her own making (although she hasn't a real handle on her money or her investments - actively managed funds with a IFA that she doesn't understand and was thinking of taking it out to see what happens with the EU referendum then maybe put it back in?!?!?!) so I suppose that influences my need for financial security.