10 hours ago
‘I can't afford the minimum retirement lifestyle. Will selling my home help?'
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There are few things Simon Tyler cannot fix himself after a career as a mechanical engineer.
The 57-year-old is currently drawing up plans to build a hot tub for his wife Rachel in their garden, but this is small fry compared to his most ambitious project: part-funding his retirement through the renovation of their three-bedroom home.
'You could easily make it five bedrooms and then it falls into a different category,' he tells me from his study at the property in Essex.
He estimates that with the extra bedrooms the property could sell for as much as £750,000, a significant increase on its current £600,000 value. He has calculated the renovation is achievable at a cost of just £40,000, which he plans to fund using his pension lump sum.
Tyler counts every penny and estimates he can live on as little as £1,000 a month in retirement, but ideally would like more of a cushion. His savings will also support Rachel, whose pension provision is not as generous as Tyler's, when she eventually stops working.
Having recently paid off the mortgage, this would represent a sizeable windfall after he downsizes, helping to cushion the couple's transition to life as retirees. Mr Tyler plans to stop working by age 60 at the latest, while his wife Rachel, 51, will follow him some years later.
As soon as he calls time on his career, Mr Tyler is eager to visit his son who lives in Cumbria for a holiday.
'It's very hard to get out to see them,' Mr Tyler explains, 'We plan to visit them as a holiday because my wife can't travel too far.
'The first thing I'll do when I retire is get out to see them.'
He has already started saving for the trip, with a few hundred pounds tucked away in a holiday savings account. It's one of half a dozen or so pots Mr Tyler has stashed away, including one for unexpected household costs.
But his prized rainy day fund is reserved for his collection of classic cars and a motorcycle. He estimates the collection costs about £105 a month to maintain, and he's set aside roughly £5,000 for the purpose.
Mr Tyler earns £65,000 before tax and has accumulated pension savings worth £172,000. Since paying off his mortgage, he's stuffed his retirement pot with £1,000 a month, which he forecasts will rise to £1,600 in September after he pays off a small credit card debt.
He also has a £20,000 Isa and £8,000 in premium bonds, and plans to sell his Tesla, which he believes could fetch up to £18,000 on the used car market.
Ian Futcher, financial planner at Quilter
Mr Tyler has managed to save quite a reasonable pot, and it's good to see he has the bones of a plan in place. However, there are a few concerns I have, and I feel his plan depends on several variables that could drastically alter his outcomes.
My first major concern is the drop in income. His plan is to live on £1,000 per month, which is below the Pensions and Lifetime Savings Association (PLSA) minimum standard of living in retirement for an individual. While many people get by on this, Simon is currently on an income of £64,000 per annum, and he may find this considerable drop hard to adjust to.
Additionally, his wife seems to have little pension provision. However, as he plans to focus on DIY projects and live frugally, this may be possible, but he needs to be prepared for it.
His current target of £12,000 a year is just about achievable with his pension if he makes the contributions he plans to. For this, I've assumed an average growth rate of 5pc per annum on a balanced risk investment portfolio.
However, Simon plans to take his 25pc lump sum at retirement to fund the renovation. By doing so, this will severely reduce the pot that he has, and, by my calculations, his sustainable income would fall to £9,000 per annum. This is the amount he could withdraw and likely not run out of money before death.
Now, the aim is to invest the lump sum in renovations and sell the house at an increased price. The problem with this is there is no certainty he will see that uplift. This year, we have seen signs of the housing market slowing, and it's a lot to gamble with many variables and no guarantee of the desired sale price.
That's not to say that downsizing isn't a good idea. In fact, it's forming part of more and more people's retirement plans to give them a significant boost in income in retirement. Let's assume Simon didn't take the money to make the improvements and sold the house at the current value of £600,000 and moved into a £300,000 property.
This would leave them with an additional £300,000 to invest. At this stage, if he invested for income, he could potentially generate an additional £12,000 a year, pushing their living standards up further. But this is dependent on what the property market does over the next few years.
Simon has other assets, but these are of little consequence to his overall income and should be looked at as more of an emergency fund set aside for a rainy day. All of the above is a bit skin-of-the-teeth. If we saw big stock market drops, for example, before or during retirement, this could significantly affect his desired income.
However, with careful planning, it is achievable. The figures above do not take into account the state pension, which, if he and his partner have the full state pension, will also give them more room for manoeuvre.
Daniel Hough, wealth manager at RBC Brewin Dolphin
Retirement is a milestone many look forward to but it can involve countless hours of planning, projections and assumptions. Mr Tyler has begun to think about his options and I'm confident about his numbers, but he wants reassurance that his plans will hold water in three years' time.
He is hoping that his current assets will deliver income of around £1,000 per month, or £12,000 per year. Taking into consideration the safe withdrawal rate of 4pc each year, he would need an overall figure of £300,000 to achieve a sustainable income of this level.
The majority of the portfolio will be comprised of his pension and his estates. In three years, these assets combined should total around £255,000 based on a 4pc net growth rate, or £262,000 on a more optimistic 5pc net growth rate.
Mr Tyler wants to withdraw his full 25pc pension lump sum for home improvements, leaving his fund value closer to £200,000. The remaining assets – his Isa, premium bonds and Tesla sale – will total around £50,000.
This leaves £250,000 from £300,000, with the assumption that the 4pc withdrawal rate will provide approximately £833 per month. While this will provide a sustainable income, it is below the expected £1,000 per month he is after. He can indeed increase the level of withdrawals he wishes to make, but that may have a long-term impact on the fund value as the initial capital begins to be eroded.
Mr Tyler is already making a significant level of pension contributions of £19,200 per annum, but there is scope for increasing these contributions through his employer. He could even utilise excess cash as additional contributions and take advantage of the tax relief offered.
With access only a few years away, it might be worth moving the premium bonds into the pension to boost it. Care must be taken to ensure an adequate contingency fund remains at all times.
Downsizing the house and releasing equity to improve retirement options is certainly a good idea. Mr Tyler's hope of releasing £350,000 before costs and legal fees could bolster his investments to provide more income in the long term.
If the original capital is slightly eroded in the first few years until the house is finally sold, it could easily be replenished with these proceeds. This should hopefully provide comfort that he has enough until the house is sold. Assuming Mr Tyler is looking for an income of around £2,000 from age 67, a portfolio of £600,000 would be the target.
