Saturday, 8 March 2014

The Target

What exactly am I working towards?

After the basics have been taken care of (food, shelter, comfort and so on) money has tremendous potential to buy free time. This, more than luxury goods and expensive holidays, is what is becoming increasingly important to me, especially as I get older and the responsibilities of children and the challenges of building a career have declined (they're still there, of course, but not so all-encompassing).

Until recently normal retirement age for women was 60 and, in the public sector, where I work, it was sometimes as young as 55. However, times have changed and my normal retirement age is now 66. Those years between 60 and 66 years are very precious to me and I don't want to spend them doing a job that my heart really isn't in any more. I have other things I want to do, and places I want to go.

I have already made a small start this year by reducing my working week to 4 days, but my ultimate aim is to leave work at 60 and have enough savings to be able to defer taking my pension. Taking it at 60 would be possible but it would be very expensive in the long run because it would be reduced by around 27% (costing me around £3,000 per year for possibly as long as 25-30 years - maybe up to £90,000).

In order to get round this I need to somehow accumulate enough to fund those years from savings.

I have worked out that I will need around £15,000 extra per year on top of the other income that I will have at the time (rental income, small pension from previous job) to replace my salary and allow me to live to around the same standard as I do now. So the total target is £90,000 - coincidentally exactly the same as I will be saving by deferring my pension. So, every pound I manage to save now, I will eventually give back to my future self in addition to buying that future self the freedom to spend time doing what I want.

I currently have around £40,000 in my S&S ISA that I will be growing as much as I can with monthly saving (min £300 per month - hopefully nearer £700). Using a compound interest calculator I got the result shown below. I need to reach an average annual interest of around 4% to hit target.

How will my investments grow over time?

Use this calculator to see how much your money may be worth in the future given an expected rate of return.
After 6 years, you would have £91,268

* you may leave either the lump sum or monthly payment empty but not both.
Calculations are indicative only. The calculation is based on compound interest, capitalised on an annual basis and does not take into account taxation.

Apparently the stock market historically returns somewhere between 4 and 8% above inflation over a 30 year period. My timescale is much shorter (5-8 years) but I have to remind myself that I won't be needing the whole £90,000 sitting in a bank account as cash on the day I stop work. Some of it will continue to grow throughout the period until it is needed. So it may shrink in real terms, but not by as much as a simple calculation suggests and it will not all be subject to the same "time in the market" averages as that I take out on day one. Some of my money will be in for 12 -15 years.

I think it's doable.

The biggest challenge lies in making this happen without reducing the value of now. I don't want to be saving so hard I can't enjoy the present. A fine balance. Enter spreadsheets and budgeting software...

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