Using a pension calculator to plan for a decent retirement how housing benefit is paid

Saving for retirement is tough, but not nearly so tough as getting started in the first place. To get going you need a retirement plan. To get motivated you can try putting some numbers through a pension calculator.

2047 – that’s 35 years from now. This thought alone is enough to make colin reach for the cyanide pills but luckily he stumbles across monevator while conducting an online price comparison and rediscovers his joie de vivre through the medium of simple investment wisdom.

• that maxes out his matching employer contributions at £150 per month, or another 6% of salary. The calculator assumes that contributions and wages will increase in line with inflation (defined as 2.5% a year).

• colin has a wife and though he can’t understand how she’d want to live without him, he nevertheless selects the 50% spouse annuity option, just in case.How housing benefit is paid

that means his significant other will soldier on with 50% of the income in the event of colin’s untimely death.

• in the nick of time, colin remembers that his £20,000 retirement income will be taxed. A quick spin on a tax calculator reveals that colin will be living on £18,100 a year, after tax, at age 65. Colin can accept this. It’ll be 2047 after all and the tax system may well look very different. What can you do?

Disappointing. An income of £20,000 after 35 years didn’t seem a lot to ask for but nonetheless, our col has pulled up short. If he doesn’t take action then he’ll be living on £15,000 – which is 75% of the desired amount.

As a good passive investor, colin will use cheap index trackers to hammer down his investment costs. So he goes into the calculator’s advanced options and turns the annual management charge down from 1% to 0.5%.How housing benefit is paid

That move alone makes a pretty big difference – projected income is now nearly £17,000 – but at 84% of the target colin needs to do more. It’s time to suck down some more painful solutions. Fire three – working longer

It amounts to no more than the push of a button now, but perhaps working for longer as a part-timer may be less painful when it comes to the crunch. The £21,000 income is a wiggle-room bonus. Fire four – saving more

Colin’s contributions must go up by another £100 every single month for the rest of his working life to hit his target income by age 65. Though that’s only £80 in actual spending money, thanks to tax relief. Fire five – live on less

Historically a 60:40 equities and bonds portfolio has averaged 7%. But many are predicting sub-average returns over the next decade or so, especially as bond yields have sunk so low.How housing benefit is paid investors starting in the early 1980s could have comfortably scored a 9% return, but history has not been so kind to market entrants in the noughties.

This is the nightmare scenario and it can happen to the cautious and adventurous alike. The prospect of low growth is why most of us must bear risk through our asset allocation but the markets can’t be trusted to behave as we would like.

Suddenly 7% expected growth doesn’t look so bad, but it still leaves our office survivalist battling to close the retirement income gap. Perhaps the medicine will seem less harsh if it comes in smaller doses?

That does it. By working one year longer to age 66, upping the savings rate another £25 a month (only £20 with tax relief) and cutting income expectations to £19,000 a year, our hero is finally able to create a palatable sacrifice sandwich that doesn’t make him baulk.How housing benefit is paid fire nine – more ammo!

Remember that any retirement plan is about as precision guided as a SETI sweep of the stars in search of ET. Don’t be fooled by the ludicrous exactness of projected income figures. Reality will turn out differently.

Trustnet’s pension calculator projects a much rosier income of £25,000 per year based on colin’s original inputs and a 7% growth path. But the hargreaves lansdown calculator used for the main example is the most transparent one I’ve found when it comes to assumptions and adjustable parts.

• unexpected growth rates – periods of spectacular gain or loss may demand a rethink. Maybe you’ll be able to reduce the risk in your portfolio and cruise home in style if the markets smile upon you. Maybe we’ll end up with the 5% (or worse) nightmare scenario and have to work longer, save more, and live on less.How housing benefit is paid I hope not.