Duncan (aged 56) and Rebecca (53) came to Penguin Wealth Management with one burning question - could they afford to retire? Duncan had just accepted voluntary redundancy after working for his company for over 30 years. Rebecca was keen to give up her part time job, which she was not enjoying.

The couple had four key requirements for retirement. They wanted to have enough money to enjoy the rest of their lives togther. They wanted to travel more and had a huge emotional connection to travelling. This included going on more cruises, their favourite.

Duncan and Rebecca also wanted to pay off the mortgage on their house. This had £50,000 outstanding and repayments were due to finish in eight years. Finally, the pair wanted the resources, both time and money, to enjoy their grandchildren.

Duncan and Rebecca had worked hard all their lives to accumulate assets and had been savers for 40 years or so. The fact that both of their grown up children had been through costly divorces meant they were keen to ensure any assets would be protected from any future ‘predators and creditors’ as they called them. While Duncan was willing to take risks, Rebecca was quite risk averse character and spending did not come naturally to them.

 

The starting point was to sit down and map out what the future looked like for this couple:

How much were the cruises and holidays going to cost?

How much was retired life going to cost?

What was available from the pension fund in terms of lump sum and income?

How much was the mortgage costing, and going to cost to redeem?

What other big expenditure did they have planned?

This took a very long time – the clients had not sat and thought about this before. They had expected us to just tell them how much income their pension would give them and leave them to it. We sat and explored how the next five, 10, 20 even 30 years might look.

They dared to dream about how much travelling they could do. They were a little concerned about how many cruises they should have as their closest friends, Russell and Michelle, were not in a position to retire at this stage and were unlikely to be for another five to eight years. They eventually overcame this concern, especially once we had gone through the three Kinder questions!

As children they had not experienced many holidays, they had enjoyed camping and caravan holidays, but their families had not been able to afford continental holidays. They had scrimped and saved when their children were growing up to try to ensure that they had one nice holiday a year, but they did not feel that this had been enough.

One thing they decided they wanted to do for Duncan’s 60th was take the whole family to Disney, Florida. They had craved to take their children there when they were young, but had never managed to achieve it. When Duncan is 60, their youngest grandchild will be seven, assuming no more come along, so they feel that would be a great time to fulfill this particular dream.

We put together a planned spending pattern – we calculated everything to the last penny – how much the utilities were costing, the weekly food shop, running the two cars, how much the holidays may cost. We allowed £10,000 to cover the Disney trip.

After long deliberation, and seven to eight hours of chatting over a couple of meetings, we calculated that - assuming we redeemed the mortgage - the clients would need £28,000 per annum. This would include seven to eight holidays a year - most of which would be booked quite late in the day - as the clients could now go at the drop of a hat.

Duncan and Rebecca then decided that they did not need to run two cars now they were both retiring. We agreed that they would sell one car and reduce the planned outgoings each year by about £1,500.

They did not need the income to be regular, as the day to day living was only going to cost £1,400 per month - the difference would need to be made available to pay for the holidays and holiday spending money.

Duncan had about £450,000 in pension funds, while Rebecca had about £13,000 in pension funds.

They had combined savings, including the redundancy pay out, of about £130,000. The redundancy payout was £55,000, the remainder had been accumulated over the years from when their friend Russell had worked for the Pru. Russell had advised them to have two with profit endowments. They had a small amount of money in Isa investments as well.

We ran two cashflow scenarios for, and with, the client – one showing how life would look if we kept the mortgage on its current repayment terms. The other showing how the cashflow would look if they redeemed the mortgage now.

 

The numbers did not differ by much. But it did become apparent that redeeming the mortgage would make a huge emotional difference. So we agreed to do this at the earliest opportunity, which was about five months later as they had an early redemption charge outstanding.

With State Pension to come in at some point in the future, a plan to downsize the property at some point, and with a cash injection potentially available at Rebecca’s 60th we were able to demonstrate that they could live the life they desired without any real difficulty.

The next decision was to work out the best way to use the pension funds for maximum benefits. Rebecca was quite a risk averse character whereas Duncan understood and accepts risk in all walks of life.

The cashflow suggested we needed a return of approximately 5.5 per cent per annum to maintain their lifestyle, allowing for various assumptions we had agreed on together for inflation, holiday cost increases and so on.

We eventually agreed to move in to a Phased Retirement Solution.

The clients did not need the Tax Free Cash as a lump sum, as they had plenty of liquid funds available in the savings pot. Duncan wanted to ensure the maximum flexibility for Rebecca in the event of something happening to him prematurely.

After crunching the numbers we felt that we could use a combination of cash and income to meet the required income target, while maximising the tax benefits should something happen to Duncan by leaving a large portion of the fund unvested in the early years. Should something happen to Duncan, Rebecca would not be restricted by a choice they had made relatively early in their lives.

We utilised their Isa allowances from the liquid savings, as well as putting some money in unit trusts, and the clients have some income from this to supplement what they take from the pension fund.

We pulled a financial plan together for Duncan and Rebecca that covered all of the above and more. They spent a lot of time discussing it, tweaking it and trying to change their mindset.

For 40 or so years they have been savers, have worked hard and it has been a struggle to get to this point. Trying to understand that they could afford to spend money, they could afford to see the pension pot and savings reduce in value over time - so as not to be left with too much money at the age of say 90 - was a massive leap of faith for them. Rebecca’s cautious nature was holding them back from realising that they did not have to work again. Once they cleared that hurdle, and I still don’t know what it was that got them there, Rebecca resigned from her job in a flash!

The final piece of the jigsaw, to satisfy the last of their initial concerns was putting a Beneficiary Protection Trust Package in place, along with new wills and Lasting Power of Attorneys, to protect their assets down the generations.

 

Duncan and Rebecca have now been retired for two years. They cleared the mortgage which was a huge weight, psychologically, lifted from their shoulders.

Regarding holidays, the pair have had 13 ‘proper’ holidays since retirement and spent a huge amount of time with their family including their children and grandchildren. As a result they feel closer to them than they ever did before. In fact, they don’t know where they found the time to work!

They have an underlying investment/pension portfolio that aims to produce the return they need to ensure this money lasts their lifetime – rather than a portfolio that their risk attitude may dictate.

Rebecca now volunteers at a local children’s hospital three half days a week – when they are not on holiday that is.

Duncan and Rebecca are also aware, and reassured, that their assets cannot be seized by predators and creditors after their demise.

We communicate quite often via email, and tend to meet up every six months or so to review the plan. Duncan and Rebecca quite often email us for validation that they can spend some money on something – it is almost like they need permission to spend their money!

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