Key Post Retirement planning - My experience

Gordon Gekko

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I was asked to share my own experiences/thoughts which I’m happy enough to do. For the avoidance of doubt, none of it is rocket science so please don’t expect anything revolutionary.

I started by creating a spreadsheet which details our current income and expenditure (including discretionary spending). I then identified the items that will fall away over time and the years in which they’ll fall away. I inflated each expenditure item by 2% a year when assessing the amount of income we’d need in retirement.

I added a decent sum to the projected expenditure to cover holidays and changing cars etc.

I took the cost of good nursing home or home care and also inflated it at 2% but at that point added in additional rental income and took out the fun spend.

I provided for the amount of money we’d like to have available to help our kids out.

I assumed that markets would deliver, on average, 5% per year net of costs in pension structures and 3% net of costs and taxes in personal accounts. Our investments are 100% in equities and we monitor the fees.

I inflated salaries by 1% per year but didn’t include more meaningful increases.

My findings were that we could switch to 4 day weeks at age 50 and 3 day weeks at age 55 with a view to then retiring at 60.

The money to help the kids and the ‘jam’ for the holidays and capital expenditure like changing cars etc do add quite a few years to our working lives.

All in all though, I found the exercise very useful.
 

Wollie

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Hi Gordon
Very interesting and thanks for sharing. I've tried something similar, but get stuck with projecting how long we're going to live after retirement. I don't want to buy an annuity (terrible value, I think), but neither can I plan on living for the 'average' lifetime, since I can't assume that someone will look after me if I live longer than that. Have you allowed in your spreadsheet that you could live a very long time?
 

Gordon Gekko

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Hi Gordon
Very interesting and thanks for sharing. I've tried something similar, but get stuck with projecting how long we're going to live after retirement. I don't want to buy an annuity (terrible value, I think), but neither can I plan on living for the 'average' lifetime, since I can't assume that someone will look after me if I live longer than that. Have you allowed in your spreadsheet that you could live a very long time?
Hi Wollie,

That depends on your definition of a ‘very long time’ I guess! I went with 90 for the purposes of the exercise.
 

Wollie

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That seems very risky. I've just googled the cost of an annuity and discovered (from pensionchoice.ie) that the cost of a life annuity for a 65-year old male from Irish Life is 27 times the amount of the yearly annuity. Irish Life are presumably allowing for a positive return on investments. Therefore they expect a 65-year old male retiring at the present time to live beyond age 92 on average, longer again for someone under age 65 at the present time, allowing for future medical advances. Therefore, your approach means that the risk that you'll run out of money before you die is well more than 50:50. I don't fancy that prospect.
 

mtk

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Thanks Gordon for insights .I have done this too.
I see you assume you always beat inflation with inv return which could be optimistic.
I assumed inv return=cost inflation= pension increases and I dont do any inflation factoring which is conservative( except for medical expenses ( insurance etc.) . i know its a big simplification too but it makes calcs easier.
I am intrigued by nusring home fees -when do you assume it kicks in ?
 

Gordon Gekko

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That seems very risky. I've just googled the cost of an annuity and discovered (from pensionchoice.ie) that the cost of a life annuity for a 65-year old male from Irish Life is 27 times the amount of the yearly annuity. Irish Life are presumably allowing for a positive return on investments. Therefore they expect a 65-year old male retiring at the present time to live beyond age 92 on average, longer again for someone under age 65 at the present time, allowing for future medical advances. Therefore, your approach means that the risk that you'll run out of money before you die is well more than 50:50. I don't fancy that prospect.
There’s a flaw in your analysis; you’re assuming that in my model, the last cheque I write at age 90 bounces. The plan wouldn’t be to time running out of cash, it’s that income covers expenditure.
 

Gordon Gekko

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Thanks Gordon for insights .I have done this too.
I see you assume you always beat inflation with inv return which could be optimistic.
I assumed inv return=cost inflation= pension increases and I dont do any inflation factoring which is conservative( except for medical expenses ( insurance etc.) . i know its a big simplification too but it makes calcs easier.
I am intrigued by nusring home fees -when do you assume it kicks in ?
Hi mtk,

I don’t think it’s optimistic at all to expect an all equity portfolio to beat inflation over a decent time horizon.

I assumed that some sort of care fees kick in at age 85 which I think is conservative but who knows. We’re both pretty healthy, touch wood, and we keep fit and don’t carry any weight.

But like every plan, it might be of little use if life punches you in the face!l

The thing with nursing home fees is that they’re tax deductible and likely to stay that way. And, whilst they’re expensive, once you’re there you don’t spend a whole lot much on anything else. And there might also be Fair Deal if you’re stuck.
 

Wollie

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There’s a flaw in your analysis; you’re assuming that in my model, the last cheque I write at age 90 bounces. The plan wouldn’t be to time running out of cash, it’s that income covers expenditure.
I'm sorry if I misunderstood. Are you saying that the plan after retirement is that investment income each year will be enough to cover outgoings, so that you won't be eating into your savings at all, even at age 90?
 

Brendan Burgess

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Hi Gordon

An interesting exercise.

How have you factored in your home?

If you reach 90 and run out of money but still have a home worth €500k in today's money, it will probably keep you going for 10 more years.

Have you factored in inheritances? It would probably be bad luck to do so, but sometimes I am surprised by people who really fear the future but they know that at some stage they will inherit their a good lump from their parents.

Brendan
 

Gordon Gekko

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I'm sorry if I misunderstood. Are you saying that the plan after retirement is that investment income each year will be enough to cover outgoings, so that you won't be eating into your savings at all, even at age 90?
Yes, that pension income and investment income will cover outgoings.
 

Gordon Gekko

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Hi Gordon

An interesting exercise.

How have you factored in your home?

If you reach 90 and run out of money but still have a home worth €500k in today's money, it will probably keep you going for 10 more years.

Have you factored in inheritances? It would probably be bad luck to do so, but sometimes I am surprised by people who really fear the future but they know that at some stage they will inherit their a good lump from their parents.

Brendan
Hi Brendan,

No, we haven’t factored in either.

We view the house as a backstop but don’t include it.

We also don’t factor in inheritance; some has been received already so there might very well be generational skipping.
 
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mtk

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The thing with nursing home fees is that they’re tax deductible and likely to stay that way. And, whilst they’re expensive, once you’re there you don’t spend a whole lot much on anything else. And there might also be Fair Deal if you’re stuck.
yes and also currently average stay is under 2 years if memory serves me correctly ( is that good or bad?!) so relatively immaterial (except to your heirs) as its the long term items that matter.

I ignored house too and other last resort items eg rent room. inheritance is n/a - we were poor!
 
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Wollie

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Yes, that pension income and investment income will cover outgoings.
So, if I understand you correctly, you're assuming that from a certain age (age 90, or possibly earlier, say mid-80's?), the state pension plus the return on your pension savings will cover your outgoings each year. This seems a very sweeping assumption, in contrast with the precise calculations in other areas.
 

Brendan Burgess

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We view the house as a backstop but don’t include it.
You must include the house in any long-term financial planning.

It's very likely that by the time you retire we will have a functioning life-loan system so you can borrow against it.

If you have enough to live a very comfortable life anyway, then it's surplus to requirements.

But let's say at age 60, you would like to help your children to buy a house, but decide not to because "the spreadsheet says no!" , then you should adjust the spreadsheet to include the house.

Give your kids the money. And then if you need money when you are 110, borrow on the security of the house.

Brendan
 

Gordon Gekko

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So, if I understand you correctly, you're assuming that from a certain age (age 90, or possibly earlier, say mid-80's?), the state pension plus the return on your pension savings will cover your outgoings each year. This seems a very sweeping assumption, in contrast with the precise calculations in other areas.
Hi Wollie,

I don’t really understand your question.

The whole thing is based on the projected income covering the projected expenditure right from inception, not from a certain date.

And for some of it, income is obviously dictated somewhat by returns.

Gordon
 

Gordon Gekko

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You must include the house in any long-term financial planning.

It's very likely that by the time you retire we will have a functioning life-loan system so you can borrow against it.

If you have enough to live a very comfortable life anyway, then it's surplus to requirements.

But let's say at age 60, you would like to help your children to buy a house, but decide not to because "the spreadsheet says no!" , then you should adjust the spreadsheet to include the house.

Give your kids the money. And then if you need money when you are 110, borrow on the security of the house.

Brendan
Hi Brendan,

We exclude it to be prudent but it’s obviously more than helpful to know it’s there.

We want to stay there, we don’t want lodgers, and we don’t want to depend on some sort of life loan product that isn’t there now, so that’s the basis for excluding it.

We want the plan to enable us to exclude it I guess.

Gordon
 

Wollie

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Hi Wollie,

I don’t really understand your question.
Maybe we're at cross purposes. I thought that, like me, you set up a spreadsheet to estimate what your pension fund will be worth by the time you retire, and then allow for drawings from the fund in retirement. My first question was how long you assumed you'd be drawing from the fund. You replied that you assumed you would live until you were 90. I came back, saying that insurance companies assume that we'll live, on average, beyond age 90, so assuming you die at 90 or earlier would be quite risky. Your answer to that question:
There’s a flaw in your analysis; you’re assuming that in my model, the last cheque I write at age 90 bounces. The plan wouldn’t be to time running out of cash, it’s that income covers expenditure.
left me puzzled.
I still don't know what your spreadsheet assumes happens once you get to 90.
 

Gordon Gekko

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Okay, these aren’t the figures, but the nub of what I’m saying is that at age 90 our income will be €11,000 a year and our expenditure will be €10,000 a year. So if we grab the harp and jump up onto the cloud at age 90, 91, or 95, it won’t really matter.
 

Wollie

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I'm still trying to get my head around this. Are you saying that the investments remaining in your pension account when you reach age 90 will be generating an income of €11,000 a year, which means that you're assuming that you'll still have (say) €220,000 (11,000 divided by 5%) in the account at that age? Most importantly, you'll have to kiss goodbye to all that lolly when you grab the harp and jump on the cloud.
 
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Gordon Gekko

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I'm still trying to get my head around this. Are you saying that the investments remaining in your pension account when you reach age 90 will be generating an income of €11,000 a year, which means that you're assuming that you'll still have (say) €220,000 (11,000 divided by 5%) in the account at that age? Most importantly, you'll have to kiss goodbye to all that lolly when you grab the harp and jump on the cloud.
I’m saying that our various income sources should generate €11,000 at a point when the expenditure is €10,000. It’s not all an investment pot. State Pensions, a DB, and rents are elements of the plan.

I don’t understand the point about kissing goodbye to the lolly. The whole point of the exercise is to have the income / capital base to deliver what’s needed per reasonable estimates.
 
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