There's two parts to this calculation.
- Working out how much money we will need
- Working out where it will come from.
As far as the first figure goes I am working on the principle that we will want to maintain our current lifestyle. This makes the calculation quite simple as I know what we're spending now, so I know what we will need going forward. Things do become more complicated if you throw in the issue of changing needs as we move from early to later retirement (as mentioned in my previous post) but, for the moment, I'm happy to work with a figure that reflects our current outgoings minus what we are currently putting into ISAs and pensions. This comes to around £36,000 gross pa.
The second part of the calculation is what I've been concentrating on this week and I think I've finally bottomed it out.
In order to bring our income up to the £36,000 mark during the years between when I'm 60 and when I'm 66 I need to generate a pension of £7,500 pa using my FSAVC and SIPP. By keeping the pension at this level I hope to avoid paying tax on it and then draw the rest of the shortfall from the ISAs.
Up until this week I was presuming that it would be a simple matter of gradually selling some of the funds to supplement our income and I hadn't really considered the potential of taking income from funds in the form of dividends. At the moment I am firmly in the growth camp and always buy the accumulation versions of funds and reinvest dividends. (To be honest but I am still a little hazy about the differences between an "Income" and a "Growth" fund and where their fundamental differences lie - more reading needed.) However I understand that it is possible to take between 3 - 4% pa from a capital sum before it starts reducing. This means that if we have £125,000 in the ISAs in 5 years time we will be able to take £5,000 pa without reducing the capital. (Keeping the ISA capital intact is desirable but it is not essential as when both our pensions are in payment when I am 66 we will have a total income of £42,500 which should be more than adequate.)
So the targets that come out of this for the next 5 years are:
- Pump up the ISAs to £125,000 - pay in at least £750 per month (presuming 6% growth).
- Pump up my SIPP to £23,000 - pay in at least £310 per month (incl tax relief) (presuming 4% growth)
- Pump up my FSAVC to £23,000 - pay in at least £55 per month (incl tax relief) (presuming 4% growth)
You notice I slipped in that little word "presumimg"? That of course is the tricky bit and I'm well aware that this is where things could go very pear-shaped despite all my planning.
But I do feel better for having done it.