I changed my plans after trying this pension calculator

Given my working days are filled with telling other people how to improve their retirement saving, you’d think I’d have my own financial plans pretty-well covered.

Alas, that’s only partly the case. I’ll still regularly come across something that makes me rethink what I know and prompts me to see my own future retirement differently.

That happened recently when I trialled Fidelity’s new Retirement Calculator. There’s lots of similar tools out there - Fidelity has offered different ones in the past - but this updated version lays out in as simple a way as I’ve seen the challenge of meeting my retirement goals.

Having spent some time tinkering with the results and using the calculator in different ways I’ve realised a few valuable truths about my retirement plans. Perhaps I knew these in theory before but seeing them spelled out has been enlightening - as well as a bit of a reality check.

Here's what I learned from using Fidelity’s Retirement Calculator

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How it works

The calculator invites you to enter some details about your financial circumstances now, as well as some expectations you have about your retirement in the future. This is done via a simple ‘chatbot’ style interface. Don’t be put off, the process is short and very simple.

Once it has the information it needs, the calculator generates a results page which lays out in clear graphics the likely future size of your pension pot when you come to retire, the income it will generate and an indication of the income you’ll actually need to give you the retirement you’ve said you want.

The results let you instantly see if you’re on track to meet your target, or if there’s a shortfall that you need to make up.

So far, so standard. Where the calculator becomes really interesting - to me at least - is when you delve into the assumptions it uses to make up your results. These are laid out below your calculator results and include your likely investment returns, the pace of your pay rises, your future retirement date, your state pension, your tax treatment and the cost of the lifestyle you’ve indicated you want in the future.

Once you understand these you can see the difference that each will make to the success, or otherwise, of your plans.

Picturing your future retirement

The calculator uses some well-established industry standards to estimate the likely income you’ll need. These come from the Pension and Lifetime Savings Association and comprise three levels of income - one for a minimum level of lifestyle, one for moderate and one for comfortable.

The calculator doesn’t simply ask you which of these you want - comfortable please! - but also asks you more specific questions. How much do you think you’ll want to spend on eating out? Do you want a two-week foreign holiday and several weekends away each year - or will a week in the UK do? Do you need a car and how new must it be? What home improvements do you want to do? The answers you give help the calculator to land on a level of income it thinks matches your expectations.

The value of these questions is that you are forced to really think about what your retirement looks like - and realise that some sacrifices may well be needed. An uncomfortable truth but one worth getting your head around.

Crucially, as revealed in the list of assumptions, these living standards do not include housing costs, so the results assume you’ll be living mortgage and rent-free in retirement. This was a wake-up call. My circumstances mean that future home purchases could well mean I am repaying a mortgage into retirement - something that is far more common these days than used to be the case.

I need to factor that into my financial plan.

When will I retire?

The calculator asks your age - 44, if you must know - and uses this to work out how long you have to earn and contribute to a pension, as well as the length of time your pot has to grow. To do that it assumes you will retire when you reach the State Pension age, which for me is 68, and work at your current capacity until then.

Another wake-up call. I’m well aware of the trend for longer living, and trust that 68-year-olds in the future will be generally more active and healthier than they used to be, but that’s still a ripe old age to be doing the 9-to-5 (and the rest). In truth, I want to be slowing down before then.

The calculator helps you see the impact of that choice. It allows you to toggle your retirement age downwards and changes your results in real-time to show you the effect. As I moved my retirement age downwards it showed me the extra income I’d need given that I’d have less time to save and longer in retirement to pay for.

Most importantly, it allows you to see the results if you take away the State Pension - which is currently worth around £11,500 a year and won’t be available until age 68. Unsurprisingly, this dramatically increases the pot I need to give me the lifestyle I want. In fact, with some tinkering, the calculator was able to show me that I’d need more than twice my current pension contributions to achieve it.

How will I spend my tax-free pension money?

The calculator assumes you’ll use all of your pension savings to generate an income in retirement. This includes 25% that is usually available tax-free (up to a limit of £268,275).

But this is often not what happens. Many people choose to withdraw their tax-free cash - officially called the Pension Commencement Lump Sum - and use it for other purposes. That can be the right call - if you’re clearing debt or a mortgage, for example - but it will mean that your income falls by a corresponding amount.

That’s important for me to bear in mind with my retirement planning - any tax-free cash I don’t put towards retirement income will make hitting my savings target even harder.

My results - and how I’m changing my plans

Having run my details through the calculator I’m hopeful that, at a headline level, I can meet my retirement goals with a bit of dedicated saving from here.

But beyond the headline level things do get more tricky. I’m going to need to factor in that I might still be paying housing costs as I enter retirement. One potential solution to that could be to take tax-free cash to help clear a mortgage - but I need that money to provide an income as well. Balancing those needs will be tricky and I may ultimately need to up my saving now to help make up any shortfall in the future.

Perhaps a bigger problem highlighted by the calculator is that bringing my retirement date forward from age 68 is going to give me a big problem. The calculator has shown me that it’s not realistic for me to save enough that I could make up that shortfall just from extra pension contributions.

It’s confirmed in my mind that I’m going to need to prolong my earning years - but that doesn’t have to mean working at full steam. If I can work out a way of earning an amount equivalent - or hopefully a little above - the State Pension for a few years then I can use that to supplement my pension income until I hit State Pension age. It might not be everyone’s idea of the early retirement dream but it should mean I can look forward to working more on my terms, with hours and a location of my choosing, for a while. It’s an idea championed by my colleague Andrew Oxlade, who advocates a CHILL approach to retirement.

Working out exactly what that work might be is something I can work on but, thanks to the calculator, I’m now clear that I need to tweak my plans a little. Give it a try for yourself.

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.