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How to create a simple retirement plan

There was a period in my life when I couldn’t bear to think about retirement planning. I didn’t know how to do it. I didn’t think I could afford it. I only knew the problem grew worse with every day I ignored it.

So I blanked it out. It was a big, self-inflating ball of worry but it was invisible. Like a personal climate change problem, I pretended everything was hunky-dory by shutting off the voices of doom in a soundproof part of my brain.

If only I knew how easy creating a workable retirement plan could be!

First things first: It’s vitally important to define your investment goals. Without knowing your destination, you can’t work out how to get there.

A large-scale, life-altering project like investing for retirement may seem too abstract, distant, and difficult to deal with. Yet it can be done quite quickly by stringing together a few logical steps and employing a retirement calculator to crunch the numbers.1

Creating your retirement plan

Before the calculators can whir, we need to sketch out our retirement vision and the key factors that will make it happen.

  • My vision – To build an annual income that will sustain me and my nearest and dearest once we can no longer work.
  • Target – The annual income I need to live on in retirement. Another way of approaching this is in terms of total pension pot.
  • Time horizon – e.g. I want to retire no later than age 65.
  • Contribution level – Most calculators ask for the percentage of income that will be fed into your pension funds, but ultimately this comes down to how much cash you can save.
  • Expected rate of return – What growth rate might we get from the mix of assets we choose for our portfolio?

To make my retirement plan a little more tangible, I’ve taken to thinking of it as my very own financial farm:

Grow your own retirement.
  • My target income is the crop that I’ll be harvesting in the years to come.
  • My contribution level is the seed that I sow.
  • The time horizon is the length of the growing season.
  • The expected rate of return is the effect of the financial sun, rain, and soil upon my crop.
  • I can even throw on fertilizer to increase the expected rate of return by choosing a riskier asset allocation.

Over the rest of this Special Retirement Week On Monevator! I’ll look at how to turn the factors above into raw numbers that you can feed into a retirement calculator.

As we go, we’ll look at each issue in turn (and magically the four bullet points below will be updated with links, too):

Subscribe now to get each new part emailed to you every morning.

Creating a retirement plan is worth the effort

Your investment goals face no bigger threat than the prospect of you giving up part way through.

By investing some time in your plan, before you invest any money, you will make your goals more tangible. You get a sense of what mission accomplished will look like, and can then draw a deep breath and take on the challenge.

After a while, you will savour your progress, relish defeating your demons, and turn a mental block into an empowering positive in your life. (Honestly!)

Take it steady,

The Accumulator

  1. Beware that results can differ depending on which calculator you use. Use them as a guide to planning only, always check the assumptions used by the calculator, and appreciate that reality could turn out very differently. []
{ 33 comments… add one }
  • 1 Denis Mtchell August 6, 2012, 12:27 pm

    I think possibly you have missed a step or maybe you should expand on your vision.

    I think you need to approach it on the basis of what you want to do in retirement and then apply a cost to this.

    You go someway towards this in the step My Vision but I feel that you need to focus more on this and then work out how much this would cost and then work backwards from there.

  • 2 The Accumulator August 6, 2012, 1:34 pm

    Interesting Denis. Is this something you’ve done in your own retirement planning? It seems like this might be one way of trying to determine how much income a person might need/want in retirement. My own approach is simpler, as you’ll see in the next post, because I think retirement planning needs to be simple at the outset. It’s pretty difficult for anyone under the age of 40 to imagine what retirement looks like.

  • 3 Denis Mtchell August 6, 2012, 1:49 pm

    I’ll come clean.

    It’s what I do in my day job.

    You’re right it does take a lot more effort to plan for retirement “properly” and age is a significant factor on how seriously it is considered. However, just because something is difficult doesn’t mean it shouldn’t be done properly.

    I think that things may be changing with the financial crisis we find ourselves in and people may start to take it more seriously when they realise it is up to them and that the system cannot and will not keep them in the manner they have become accustomed to.

    I think retirement planning has to be done more on a holistic basis. That is all assets and sources of income/capital need to be considered. By this I mean are they likely to inherit? Can they downsize? Can they release equity from their property? How much is their business worth? These are just some of the options that you need to consider. I know you might say that some of these factors aren’t guaranteed but what in life is guaranteed? In many cases these option may be available but be ignored because they aren’t guaranteed. However, it is a more realistic approach to retirement planning but it all starts from identifying what life at retirement looks like to you and then it needs to be costed.

    Here endeth the sermon. Amen

  • 4 RetirementInvestingToday August 6, 2012, 8:51 pm

    Hi TA

    Interesting that you’re having a Special Retirement Week. I look forward to all the posts to come as “Early Retirement” is the key focus of my investing. I’ve just run a significant cost analysis on one of the tools readers may use to reach that retirement – SIPP’s. The aim is simple. Minimise expenses and taxes as much as physically possible enabling that special day to come that bit sooner. One of very few free lunches in the investing world.


  • 5 ermine August 7, 2012, 8:32 am

    One of the keys to retirement, and early retirement in particular, is controlling your costs. The big win here seems to work out as not buying too much house, and getting to own that house outright before you retire. A decent alternative that Monevator seems to subscribe to is running a portfolio that is enough to pay the rent; it’s getting rid of the cost of this large fundamental needs that matters. How you do it isn’t important. It’s a very large running cost that has high costs of defaulting. You can eat ramen for a few months, but fail to pay your mortgage/rent for a few months and you have big problems.

    It’s transformational how much you can then save. It would cost me about 7k a year to rent my house, so once I had discharged the mortgage that was 7k net I didn’t need to earn, which was about 11k a year I could save tax-free without any attendant loss in lifestyle.

    Although I never used it as such, the income from my HYP ISA was also building to be able to reduce my need for earned income. Earned income is the most susceptible to tax in the UK and the more you can reduce you need for your earned income the more of it you get to save for yourself, rather than paying for other people’s lifestyles 😉 Most people will have a higher income and a higher need for income in their working lives than when retired, so the tax situation works to their favour.

  • 6 The Investor August 7, 2012, 9:29 am

    @ermine — Good points, especially now they come from one who has actually done the deed. 😉 Just on my own situation, I wouldn’t say I subscribe to the idea that it’s really a sensible alternative to invest to pay the rent rather than to buy a house — for me, it’s just turned out to be the lesser of two evils after my foolish mistake not to buy when I was in the midst of doing so back in the early 2000s and the subsequent escalation of house prices to bonkers levels by 2008/2009.

    If I didn’t live in London (or perhaps even the South East) I’d probably look to buy now, to be honest.

  • 7 SemiPassive August 7, 2012, 10:21 am

    I don’t have a crystal ball, but I think working as a fulltime employee until 65 will become increasingly difficult as job security and duration continue to face headwinds.
    I think a more realistic plan is to aim for some kind of phased retirement. For instance to clear the mortgage by your early 50s at the latest and aim to go into some kind of semi-retirement as a first step.
    Reducing your living costs will be crucial to this as Ermine mentions.

    With no mortgage and perhaps taking some form of pension income from 55 to cover basic living expenses you would be a lot closer to financial freedom, and able to pursue some form of part time business or form of self employment (eg short term contracts) on your own terms.
    I just cannot envisage still being in my current vocation at 65 and then just retiring overnight to potter in the garden.

  • 8 Neverland August 7, 2012, 10:26 am

    @ Accumilator

    That retirement calculator you are linking to is a bit optimistic with gross returns at a median 7%, a high 9% (I wish!) and a low 5% per annum

    The crucial question of assuming too high returns from investments is what has done/is doing for final salary pension schemes and endowment policies

  • 9 Neverland August 7, 2012, 10:30 am

    @ semipassive

    “I don’t have a crystal ball, but I think working as a fulltime employee until 65 will become increasingly difficult as job security and duration continue to face headwinds.”

    Ironically I think the financial plans of most of the UK non-benefit, non-public sector population, such as they have one, now involve working full time until they are nearly 70…

    …I wonder how that is going to work out? 🙁

  • 10 The Investor August 7, 2012, 10:55 am

    @Neverland — A later post in the series will reinforce the sensible note of caution you raise here. That said, I don’t personally believe is unrealistic as a top-end expectation, being around or slightly under the long-term average from the UK equity market. Most probably wouldn’t make it their median expectation, but I think it’s fine as a ‘best case’ scenario. Best to model for less than best, though, of course.

  • 11 The Accumulator August 7, 2012, 5:44 pm

    @ Neverland – I explain in an upcoming post why most calculators use that return. It essentially matches the long term historical average you’d expect from the UK. Some think future returns will be lower: http://www.cbsnews.com/8301-505123_162-57487221/should-you-listen-to-bill-gross/?tag=cbsnewsMainColumnArea

    Whatever return you decide to use (and it will be influenced by your asset allocation) I would leave plenty of room for error.

  • 12 The Accumulator August 7, 2012, 5:47 pm

    I’d be quite happy to work part-time in my ’60s. Doing nothing would lead to rapid deterioration in my case. I fear having to work full-time into my 70s and hope I can do enough, early enough to stop that happening.

  • 13 Neverland August 7, 2012, 6:57 pm


    You obviously hadn’t seen this:


    The rates of return on these calculators are pretty flawed in the current worldview

  • 14 The Accumulator August 7, 2012, 10:29 pm

    @ Neverland – Thanks for drawing this to my attention. The report behind that press release is fascinating and well worth a read (See point 2 – Notes for editors.)

    The 7% nominal return matches the historical performance of a 60:40 portfolio. It’s the best long-run view we have of the markets through a century of thick and thin.

    The projection rate you refer to is based on a forecast for the next 10-15 years. The next 10-15 years is a pretty short timeframe for most retirement plans.

    The previous forecast was made in 2007 and the one before that in 2003. It’s up to you whether you want to base your expected growth rate on the historical record or frequently revised forecasts.

    Whatever you do, it should take into account your actual asset allocation (rather than an industry average) and be based on the understanding that the reality will turn out differently.

    As an illustration of the transience of future return projections, the authors of the FSA-commissioned report recommended a middle growth rate of 5.25% – 6%. FSA then put out a figure of 5% for consultation.

  • 15 Neverland August 7, 2012, 10:53 pm


    “The projection rate you refer to is based on a forecast for the next 10-15 years. The next 10-15 years is a pretty short timeframe for most retirement plans.”

    You are assuming the person in question is under the age of 40…

    …if you’re older that its the majority of the time you have left to build up a fund

  • 16 The Accumulator August 7, 2012, 11:25 pm

    Most 40-year-olds will have approx 25 years. Big difference. Note I say most, not all.

  • 17 The Investor August 7, 2012, 11:33 pm

    Personally, as the last of the equity believers ( 😉 ) I wouldn’t give any more weight to predictions of 5% nominal returns for the next 20 years being made after a 12-year down market for equities than I’d have bet my house on the 12% to 15% returns being talked about by many in 1999.

    The low yields on government bonds complicate matters, I concede, for those following bond-heavy 60/40 strategies over shortish (5-10 year) time horizons. If you buy ten-years yielding 1.5%, then fair enough, you’re clearly going to get a very measly return from that component. Perhaps your equities will save the day, however, given the rampant bearishness about them.

  • 18 Neverland August 8, 2012, 10:31 am

    @Accumulator, Investor

    Actually I was planning to retire to my beach hammock at 55

    In the era of financial repression 7% returns from a conventional balanced portfolio is unrealistic, the FSA seem to agree with me

    The last period of financial repression lasted from the end of the second world war to the early 70s as far as I can work out

    I think you will find this would cover most of your “30 year time horizon”

    I would love to be wrong but I am pretty sure I am not 🙁

    The options for people in your generation are probably as follows:
    – work until 70 because you will probably live that long
    – extreme retirement saving (30% of income or so) and retire at 55-60
    – a high risk investment strategy (i.e. forget bonds)
    – relative poverty in retirement

    Your perception is skewed because the generation you see retiring now born in the 1940s and 1950s are actually the generation who are getting the full benefit of unsustainable pensions and inflated prices of the assets they own all caused by 300 year low interest rates

    I’m afraid you won’t be that lucky, sorry

  • 19 The Accumulator August 8, 2012, 1:42 pm

    As always Neverland, I’m just not as certain of the future as you are.

  • 20 The Investor August 8, 2012, 1:55 pm

    @Neverland — Thanks for the further elaboration. Time will tell. 🙂

  • 21 Arif Rabbi September 9, 2012, 2:44 pm

    This a great post about retirement plan and a nice post discussion is going over it through responses. Yes its a tough job to plan your retirement by yourself with this economic recession age where no money plants are going to grow big easily although you sow the seeds properly where you have to think about this things after all these years of hard work both physical and mental. If you are about to fall from a sea of tension which was your work life to the ocean to plan the retirement then what is all about the retirement for. I think this should be planned by the planner who are not retired yet and its the time to rest in peace for the retirement period.
    Cheers 🙂

  • 22 Jonathan April 13, 2013, 7:01 am

    I liked the analogy with a farm, a crop and harvesting very much.

    However, fertilizer isn’t investing in riskier assets. Fertilizer is investing in less-risky assets which offer better guarantees, in return for an upfront price.

    Fertilizer takes a lot of risk out of farming, and it costs a great deal.

    I could invest my retirement portfolio in index-linked bonds, and come close to guaranteeing my retirement pot’s real size in advance — but I can’t afford to pay the high price of that security. I could come close to guaranteeing the yield of the seed I sow on the farm — but I can’t afford to pay the high price of the fertilizer needed.

    As a farmer of limited means, who hopes to become wealthy, I must eschew expensive fertilizer (for the most part), and sow crops in virgin land, whose quality is unknown. It’s a risky strategy, and some fields will yield nothing, but others, which I bought cheaply because of their riskiness, will provide an enormous return on investment. I hope.

    Only the wealthy and secure can afford to buy fertilizer. The rest of us muss pioneer into the unknown wilderness, and tame it for agriculture, as our ancestors did in the prehistoric times.

    There is a risk of starving to death.

  • 23 The Accumulator April 13, 2013, 2:11 pm

    Lovely comment, Jonathan. I guess my brand of fertiliser is more of the experimental type that I try to buy on sale. And what virgin lands have you set your sights on?

  • 24 Jonathan April 14, 2013, 9:10 am

    Sorry if my analogy was a little opaque.

    We have a spectrum of investment choices. The safest choices are the ones which cost the most, precisely because there’s little risk, This is like buying a well-run farm whose fields have been improved through the years. The soil is fertile and well irrigated. Many risks have been mitigated. Such a farm is so expensive that a poor hobbit cannot afford to buy one large enough to support his family.

    Out there beyond the Shire’s boundaries are the unknown lands, where agriculture is risky. Risks haven’t been mitigated; many things are an unknown quantity — but a poor hobbit can buy lots of that land, because it is risky and therefore cheap. Many hobbits investing “out there” will do okay, but a few will find that all their risky bets fail, and that their attempt to improve their position has simply made them even poorer.

    The “virgin lands” I referred to are equities, which are risky but cheap (for the expected return), compared to gilts or other state bonds. The latter are the safe, tamed farms, which come with almost-certain guarantees of return, and are priced accordingly.

    For what it’s worth, this is all inspired by recent thinking about risk-pricing, and in particular the way in which the UK’s “lifetime allowance” for taxation-deferred pension funds is unfairly set at the same level for defined-contribution and defined-benefit scheme members. Those of us who have to invest to pay for lifelong income in retirement can find that we’re blocked from making contributions one year, because we hit the limit, yet a stock-market crash the next can halve our pension income. Defined-benefit-fund values don’t have this level of volatility, and yet they are permitted the same lifetime allowance as DC folk.

    A defined-benefit-scheme member who hits the lifetime cap is far more likely to retire on a “full” pension than a defined-contribution investor, for the former’s level benefit is highly unlikely to decrease. However, income-tax regulations make no allowance for the extra risk borne by the DC investor, and thus there is a systemic bias towards defined-benefit schemes.

  • 25 The Accumulator April 15, 2013, 5:44 pm

    Your analogy wasn’t opaque. I was just prompting conversation and I’m glad I did because I love the idea of Hobbits venturing out into the badlands of equities. They better watch out though because those virgin soils are familiar territory to wily goblin traders who’ll palm them off with unproductive land if they’re not careful.

    I hadn’t thought of the divide between DC and DB in those terms before. I have a DC pension, and I suppose I mostly think of DB as a fast-disappearing historical relic, with me on the wrong side of the demographics. Would you prefer DB tax breaks to be reduced in favour of more for DC?

  • 26 Jonathan April 15, 2013, 6:02 pm

    After writing what I did about DB/DC lifetime allowances, it later occurred to me that the actuarial assessment of a DB “pot” size ought to take the risk-free nature of the pension-investment into account, so there may be nothing to see here. Hence, I’ve calmed down a bit.

  • 27 Ralph March 13, 2014, 7:55 pm

    I like this article and the comments so far.

    I find the vision of retirement for me was not a plan but an approach. A youngun maybe should start out by investing 10% (if he can) and as quickly as possible s/he should raise it to 15% and when s/he gets ahead put even more. I don’t think its appropriate to die so that you might be able to retire 40 years from now. But, you gotta watch how high you live on the ‘hog’ so that you won’t afford things that are expensive or not really wanted that bad in direct contradiction to building up for the future when you can’t work for what ever reason. What reasons? Sickness including mental health, layoffs, just tired of the workplace. I think some people are blessed with a job they love with folks that are great to be around and some are totally cursed with a job they hate and folks that are demeaning and overly critical. And many degrees in between. Sometimes a nice job turns into a bad one and if you have not saved for it, you have to stay with it until you can find a better one.

    It is my opinion that if one saves ~15% of his annual salary and invest it reasonably aggressive then at some point with a little luck between 55 and 65 he will be able to leave his employment with a similar standard of living.

    If you love your job and the folks, why retire? There is nothing more fulfilling than great work with great people!

    But if you are planning, you have to consider if your plans make sense. I guess that happens when you calculate your contributions. If you plan for too high an income then you may have to take on extra jobs. However, I’m not one for giving up living now to live later on. “Don’t wear yourself out getting rich”, King Solomon.

    But sometimes, you find yourself being discontinued from your position and if at an older age, it becomes retirement because your skills are not appreciated as those of the younger generations. [And it is not that you can’t do a better job] Or maybe, your company that you are miserable at offers an early retirement and only if you’ve saved up can you take the opportunity. Then we want to be like the ant that stores up food for the winter. Because, unless someone stomps on us, winter will come. So prepare for it.

  • 28 AJ April 3, 2014, 8:50 am

    @Ralph Responding to the above

    If you love your job and the folks, why retire? There is nothing more fulfilling than great work with great people!

    Really? NOTHING more fulfilling than great work? I’m pretty sure I can find lots of things!! I think that shows a severe lack of imagination 🙂

  • 29 James Reinl August 12, 2016, 9:35 pm

    Dear guru. I started (passive) investing via your excellent advice and really appreciate the site. On pensions, can you explain a bit more on how pension investing is different from regular investing? What products/funds does it involve buying into? I’m a 40-y-o freelancer, irregular income. My strategy is to live frugal, throw whatever I have spare into index trackers and Vanguard funds. I guess that, in 15 years, I’ll do the math and see when I might be able to retire. Obviously I don’t have the best plan, but what would be a couple of directions to move in to make it better? Thanks as always!!

  • 30 ray January 21, 2017, 4:23 pm

    I am late to the party, very late as I have retired. But I am making progress on the portfolio. BTW this is the most useful weekly email that I get, truly brilliant an oft overused word these days! So this week I bought all my investments together on a spreadsheet and found that I had 71% bonds, 17% equities (mostly global etfs, some even smart!!). But I have 13% in SIPPs in cash. Great! This came as a bit of a shock as I worked out that I would feel good on a portfolio of 75-80% fixed income. But I am not taking income at the moment and unlikely to for a few years(2-5 depending on when my dear wife decides to retire). The issue is that equities are at historic highs. So would you invest at the moment and if so where? Thanks again to investor, accumulator and all the posters who have contributed to my education.

  • 31 The Investor January 21, 2017, 8:13 pm

    @ray — I replied to your comment on the fund transparency article where you also left it. See it here. Please don’t leave the same comment in multiple places, I understand you’re hoping to make sure it gets read but it does clutter up the site. Thanks!

  • 32 decumalator March 4, 2017, 1:59 pm

    How do you avoid lifetime allowance charges (BCE5A) if you are on the cusp of the limit or are likely to reach the limit in your retirement?
    Consider this scenario. I have fixed LTA protection. I am 70 have already used 20% of my LTA by taking a defined benefit pension and an annuity (BCE4) but also have uncrystallised SIPP pension that will reach the LTA if it grows by 4% per annum by the time I reach 75.
    Option 1. I do nothing and I am hit with the LTA charge at 75 through BCE5A.
    Option 2. I crystallise regular amounts through Uncrystallised Fund Pension Lump Sum (UFPLS)(BCE1) for 5 years and keep my remaining LTA above my uncrystallised fund.
    Option 3. I crystallise a substantial amount and defer drawdown until after I am 75 (BCE1) when both the drawdown fund growth and uncrystallised fund are subject to LTA charge.
    What are the consequences of the three options?
    Assuming I am successful in avoiding a charge at 75 what happens when I take benefits afterwards?
    What should I be careful of after I am 75 relating to LTA?
    What effect does each option have on inheritance or charge at death?

  • 33 Bernetta Nigel May 6, 2022, 12:34 pm

    Someone I know earned an accounting degree at the age of 35. (many years ago). I started making decent money and purchased a townhouse. 15-year mortgage at 40 years old.

    She started having FOMO at 50 and became a single parent. She started having problems keeping work around 55 and had to sell her home.

    ‘If I had retained the first property, I would be content in a fully paid off townhouse with retirement savings.  Instead, I’m dealing with ever rising rent costs.’ She keeps telling me that now.

    To summarize, you’re doing excellent; but, be wary of lifestyle creep. Purchase a home that you can comfortably afford, continue to save, and pursue your interests…

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