# Savings Rate – the four pot solution

Today’s post builds a spreadsheet to work out how much you need to save in order to be able to retire early, using the four pot solution.

Contents

###### Four pot solution

Last week we looked at the maths behind your FIRE savings rate – the amount of money you need to save in order to become financially independent and retire early.

- We concluded that the maths is a bit more complicated than some people would like you to believe.

Today we’re going to build a spreadsheet to work out what a UK investor would need to put away in order to quit the rat race.

###### Five phases and four pots

Most people in the UK will draw on up to four pots of money in order to retire:

- state pension, from age 66
- company pensions, from age 60
- private pensions (SIPPs), from age 55
- ISAs, at your FIRE age, which is to be determined

Since the spreadsheet we’re making will work out whether you can retire early using your four pots, I’ve called it the four pot solution.

The sheet is based on a model of retirement that includes five phases:

- work, when you are still paying into your pensions and ISAs
- “buffer”, when you are spending your ISAs to get to the next stage
- in Phase 3 you can spend money from your SIPP
- in Phase 4 you can also spend money from your work pensions
- and in Phase 5 you are also receiving the state pension

###### The input panel

Here’s the input panel of the sheet.

- Let’s work through it section by section.

First we have age at the time of the calculation – that’s the yellow cell in the second column.

- I decided to make our hypothetical investor 30 years old
- the number 49 in the third column is calculated by the sheet – we’ll see how in a moment
- the numbers 55, 60 and 66 in the next three columns are facts that we already know – the ages at which the various phases begin

The second row is living expenses. This is in bold because it’s one of the key variables that determines when you can retire.

- the first column is your living expenses when you are still working
- the second column is your predicted living expenses after you are retired – hopefully these are a bit less than when you were working
- I’ve chosen £20K pa for current living expenses, and £18K pa for retirement living expenses
- the third column assumes that living expenses when you have access to your SIPP (Phase 3) will be the same as when you were spending your ISAs (Phase 2)
- the fourth column subtracts any DB pensions due at age 60 – in this case, just £1K pa
- note that it does not subtract the income from a works pension – this will need to be calculated and added in later
- the fifth column subtracts the state pension, here assumed to be the full £8K pa

Row three is the current value of your SIPP, and row four is the gross amount you put into your SIPP each year – another key variable.

Rows five and six are the same numbers for your ISAs – current value and annual savings.

Rows seven and eight are the same numbers for your works pension – the difference here is that we assume that contributions are matched by your employer.

- row eight shows your contributions only – employer contributions are added into the calculations later on

Row nine is the projected annual value of an DB pensions you have, if you are one of the lucky few with these schemes.

I’ve assumed that our hypothetical investor is a few years into their investment career, and has modest amounts of money in all three pots.

Rows ten through twelve deal with housing in the simplest way possible:

- how much is your house worth
- how much equity do you have in it
- how much do you need to repay each year in order to be mortgage free at the time you retire (the spreadsheet calculates this automatically)

Row thirteen is another key variable – the rate at which you expect your investments to grow (after inflation).

There are two numbers to input:

- the normal growth rate for every Phase except Phase 2
- the Phase 2 growth rate – you can’t afford to run out of money during this stage and might decide to invest in lower risk, lower return assets

I think that future returns will be lower than they have been in the past, so I went for a 3% real growth rate, and a 2% rate during Phase 2, when the consequences of failure are high.

Row fourteen is your safe withdrawal rate.

- This is linked to the investment growth rate, but need not be the same.
- I decided to play safe and withdraw 3% pa.

###### The Calculations

This looks complicated, but we’ll walk through it column by column.

The picture shows the first twenty rows of calculations, but the sheet actually calculates out for 50 years, just in case you need that long to build your retirement pot.

Column A is the year that we’re dealing with, starting at 1.

Column B is your age at the start of that year.

Column C is the money that you put into your SIPP each year.

- Note that there is no entry for year 20
- That’s because our mythical investor has just retired, and is no longer making contributions

Column D is the value of your SIPP after that year. Here’s how it’s calculated:

If Age <= 55: End value = start value * growth rate + contributions (if not retired) * growth rate / 2

If Age > 55: End value = start value * growth rate / SWR

If we’re not retired, we’re still contributing to the SIPP.

- The start value has the whole year to grow.
- We assume contributions are spread through the year, so the average growth rate is halved (to equal six months’ exposure).

If we’re over 55, we’re using the SIPP to fund our retirement, so whether it grows or shrinks depends on whether growth is bigger or smaller.

- I’m using 3% for both growth and SWR, so in fact the pot stays the same size after 55.

Column E is the ISA value.

- We don’t need a column for the ISA contributions, because they are constant until the year we retire, at which point we start spending the ISA.
- There’s no third state where contributions have ceased but the pot is still growing (which is true of the SIPP in Phase 2)

The calculation is:

If not retired: End value = start value * growth rate + contributions (if not retired) * growth rate / 2

If retired: End value = start value*growth rate - "burn rate"

The not retired calculation is the same as for the SIPP.

- the retired calculation is different – we are deliberately spending more than we can afford from the ISA, to run it down before we get to the SIPP

Column F and G repeat the SIPP calculations, but for the work pension.

Column H is the years to go until the SIPP can be accessed, which is just 55 minus current age.

Column I calculates how much can be safely withdrawn from the ISA during Phase 2:

`ISA burn = ISA value * growth rate + ISA value / years to SIPP`

The idea here is that we can withdraw the year’s growth, plus a share of the pot, with the aim of running out of ISA money just as the SIPP comes online.

- This column is also crucial because it’s used as the test of whether we can retire yet (see next column).

Column J tests whether we can retire by comparing the ISA burn rate with the Phase 2 income we need (from the inputs panel).

Once we have enough money to retire, this column shows “ENOUGH”.

- This happens in year 19 in the example, at age 49

Column K works out the safe withdrawal income for the works pension.

- We’ll need the value at age 60 for our stage two calculations

Column L works out how much we’ll need from the SIPP in Phase 5.

More importantly, column M is the safe withdrawal rate from the SIPP

- We’ll need the value at age 55 for our stage two calculations

###### Savings rate and time to FIRE

At this stage we know when we’ll have enough in the ISA to start the retirement process.

The first results panel (in blue) shows the answer, and also calculates the savings rate that has been needed to get there.

- Note that the savings rate doesn’t include the mortgage repayments (which would make it even higher).
- It also shows the “years to FIRE” number as well as the age of retirement.

In our example, a savings rate of 43% has been required to retire at 49 – 19 years into the future.

###### Waterfall calculations

But we aren’t quite there yet.

- We know that the ISA can get us from our FIRE age (in this case 49) through to the SIPP access age of 55
- But will the SIPP have enough in it to get us to 60 and then 66, when the works pension and state pension respectively come online?

The first four rows of the waterfall calculations (green panel) show the annual income from the three remaining pots (since the ISAs have been used to get us to age 55):

- the work pensions are split between DB and DC pensions, so there are four rows not three
- the values for the SIPP and workplace pension are taken at age 55 and age 60 respectively (taken from the calculations table)
- the values for the DB pension and the state pension were known at the start (taken from the input panel)

Row five sums the four numbers to give the gross income in Phase 5.

But pensions are taxable, so row six applies the personal allowance and deducts tax to give the net income in Phase 5.

The state pension is fully taxable, whereas the SIPP and the workplace pension come with a tax-free allowance of 25%.

- In effect they are 75% taxable at 20%, or taxable at 15%

The after-tax income needs to be more than the required income in retirement:

- In our example, the net income is £21.2K and the required income is £18K, so we are fine

Row seven takes the excess income above that required and converts it back to a capital sum:

`Excess in SIPP = (net income - required income) / SWR`

- In the example, the extra £3.2K of income converts to £105.5K using a 3% SWR.

There is usually a little left in the ISA pot at age 55, and this is shown in row eight.

- In the example, this is £11.3K.

So it looks as though we’ve saved £116.8K more than we needed to.

But in fact we need the extra:

- the SIPP has to cover for the work pensions between ages 55 and 60
- and for the state pensions between ages 55 and 66

Row nine shows how much is needed for ages 60 to 66:

`Needed for 60 to 66 = 8 * 6 = 48`

Row ten does the same for ages 55 to 60:

`Needed for 55 to 60 = (8 + 1 + 4.4) * 5 = 66.8`

Row eleven is the final calculation – is our “excess cash” enough to get us from age 55 to age 66:

`Surplus / shortfall = 116.6 - 48 - 66.8 = 2.1`

We’ve just enough money to get to 66 and the state pension.

###### Conclusions

This has been a bit of a grind, but we got there in the end.

- None of this is particularly complicated, but there are a lot of stages to get to the answer.

Luckily, using the sheet is a lot easier than describing it.

- Once you’ve entered all your basic details, you play around with your ISA contributions until you come up with a retirement age that you like
- Then you increase your SIPP contribution until the waterfall calculations show a surplus at age 66

Then you review the numbers once a year.

- If you can’t make the contributions add up to enough to retire early, try reducing your expenses, or changing the growth and withdrawal rates.

There are a couple of improvements that I can think of, but I’ll leave them for the future^{1}

- contributions are flat each year at the moment, and it might be nice to have the option to map them to the typical earnings curve by age
- we could get the housing calculations added into the central part of the sheet – they are a bit standalone at the moment

Shout out if you’d like to see anything else added, or if you spot a mistake.

In the first version of this article, I asked readers to send me an email if they wanted a copy of the sheet.

By popular demand, I’ve now added a direct link to the sheet – you can find it here.

Until next time.

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- I’m a bit sick of this sheet to be honest, after working on it for the last couple of days [↩]

This is very interesting, and something I’ve been struggling to try and model. Would appreciate a copy of the spreadsheet if you get a spare moment.

Hi Brian,

No problem. I’ll email you directly.

Mike,

As always thanks for a very thoughtful and useful column, if you could please email me the sheet it would be greatly appreciated. Thanks

Thanks Freddie, will do.

I’d like to have a copy too. Really enjoy your articles – thanks.

As a 30yr old starting the road to fire, this would be extremely useful to have, if you don’t mind sharing!

Hi Mike,

Like others, I would love to have a copy of the spreadsheet – I’m fairly new to going for Fire, so a bit past the 30 year old stage, but it will definitely help to give me an idea of what lies ahead!

Hi Mike, just found this article via Monevator and would love a copy of your spreadsheet. Glad you took the time to put all this into a spreadsheet and talk about it!

Hi Dwayne,

It’s on its way.

Hi Mike

Thank you for this. Interesting read – bit older than 30 but would like to understand in more detail. To this end I need to print out the article and read it properly whilst having the spreadsheet open…if you would email it over then that would be great, thank you.

Hi Andrew,

I’ve sent you the link.

Fantastic resource, have been looking for something UK-centric like this for ages! Please can I get a copy?

Of course.

Mike, Thanks for the great post – I have been trying to do something similar but my spreadsheet skills aren’t up to this yet. I would appreciate it if you could send me a copy of the spreadsheet if possible. Many thanks.

Hi Mike,

Came across this on a link from Monevator, will now bookmark it. I would love a copy of the spreadsheet

Wow, I’ve been looking for something just like this! I would really appreciate a copy of the sheet as well.

Interesting post. Could you please send me a copy of the spreadsheet? Thanks.

Mike

I have been trying to model this also any chance I could get a copy

Hi Mike,

Thanks for your efforts on this. You’ve managed to put a lot of the planning calculations of getting to FIRE in one place. I’d like to take a look at the spreadsheet if you don’t mind sharing? I love a good spreadsheet!

Thanks again,

Lee

Really helpful. Can you send me a copy please?

Thanks

Dave

Would be great if you could share this spreadsheet

Hi Mike,

Excellent sheet… one thing I’d like to change is the state retirement age as I will have to be at least 68 years old before I receive any state pension. What is the easiest way to do this in your file?

I think that should be pretty easy. Change the 66 at the top right of the yellow input panel to 68.

Then go to the cell in the green waterfall panel to the right of “Needed for 60-66”. The formula is K11*6 and you want it to be K11*8 for 68.

This is interesting as I’ve been muddling through something like this for a while with far less precision. I’d be keen to try yours if you’ll email it to me. One of the reasons I gave up on precision is trying to take account of being in a relationship where each half of the couple have different levels in their pots but are planning to retire at the same time and share their resources. Any advice on modifying the spreadsheet to account for this would be appreciated.

Hello,

My Dad just sent me a link to this page – and it is exactly what I have been trying to work out myself. But your model looks so much better than I could manage! I would also really appreciate a copy of your sheet that I can edit myself.

Thank you.

Bex

Hi Mike

Would appreciate a copy of the file/link as I am in the FIRE stage (looks tight if market crashes) and have my own modelling along similar lines so very interested to compare

Thanks

Keith

Hi Mike like others i found your blog from Monevator’s weekend roundup, and would really appreciate a copy of the spreadsheet to step through. A question would the strategy still be to use ISA’s to fund the buffer between FIRE and 55 if you had other un-sheltered savings and investments available ??

Hi Gary,,

There’s no cell in the sheet for non-sheltered money. One way to approach this would be to work out what income that money could generate and reduce your living expenses by that amount.

But the real question is why do you have unsheltered money when you can put £15K a year into ISAs and £40K a year into SIPPs?

Hi Mike, thanks for taking the time to both put this together and then provide such a detailed run through of its workings- it looks like it will be really useful for anyone who is building their FIRE pot. Would really appreciate getting a copy so I can see how I am tracking!

I guess you can end up in a position where your pension pot has enough and as your overall aim is to retire early you need to front load to enable earlier retirement. For example our collective pension pots have around £450k in them and we are still 20 years away from being able to access these. Therefore, although we could continue to squirrel away into this pot above our employee/employer contributions we actually want to fill isas and any excess is also squirreled outside of the pension/ISA wrappers.

It’s more complicated than that, but that’s the thinking behind the spreadsheet.

You have four pots of money that you can access at four different ages, and you need to work out how much to put in each so that you end up with the earliest possible retirement age.

Yeah that makes sense. I was just trying to explain why you might have stuff outside of the tax wrappers – ISA /pension – that you raised.

Thanks for this, followed your post and built my own version of the sheet but would appreciate a copy of yours to see if we get the same results 😉 if you would please?

Also just found this via Monevator. Grateful for a copy of the xls if you are happy to share it. Look fwd to reading some of your past and future articles.

Hi Mike, found you through Monevators Weekend Reading link. I would love an editable copy if not too much trouble. Looks like a great piece of work. I’ve book marked you to my favourites for future reading and signed up to the Newsletter. Many thanks !!!

Interesting article. I’d appreciate a copy of the spreadsheet so I can better understand your model and approach.

Please can I have a copy of the spreadsheet.

Thanks

Interesting the way you spell everything out and I also like that you can characterise different stages (when do you have access to your SIPP etc…).

Do you have a column for inheritance from rich aunt’s? 😛

(and can I have a copy of the sheet please)

Hi Donall,

There’s no cell in the sheet for non-tax-sheltered money, such as an inheritance.

As I suggested to Gary, one way to approach this would be to work out what income that money could generate and reduce your living expenses by that amount.

And get as much of it into tax-shelters as you can!

Another also directed here by Monevator. Seems like a very useful spreadsheet. Could I have a copy please?

Interesting stuff, id also like a copy of the spreadsheet if possible.

Hi Mike,

Like many others in the comments above, I’ve found your site via Monevator’s weekend-reading links.

May I have a copy of this very pertinent and useful-looking spreadsheet please?

I love spreadsheets (*rubs hands*)…

One question (which may have come-up already, apologies if I’ve missed it) – how does it handle rent as opposed to home-ownership/a mortage? What about the transition from renting to owning a home ?

Rent is just part of your living expenses. I treat property separately, and just work out how much per year you need to pay off your mortgage.

I assume that you want to have your mortgage paid off by the time you stop earning.

If you want to keep renting, just add your rent into your living expenses.

Hello,

Very interesting reading. Found my way here via Monevator… will be reading further after this!

I’d love a copy of the spreadsheet you have created please.

Thanks,

RH

Very interesting piece, I’d love a copy of the spreadsheet too. The gap between retiring and pensions kicking in has been in the back of my mind for a while and I’ve gone no further than that! This seems like a good place to start.

My wife has a university pension which, from what I can remember, is broken into various parts some final salary, some average salary as the scheme has tried to adjust to lower expected returns and longer life expectancy, hopefully this will spur me into looking at this as well.

Hi Mike.

Would like a copy of your four pots spreadsheet if possible. I have Isa’s, Sipp, house nearly paid off and a DC pension all with significant sums in them.. Made redundant last December at 55! , so would like to see if it shows if I am able to retire now…..

Thanks

Great site.. Will add to my favourites..

Please could I have a copy of the spread sheet. Looks interesting.

I would also appreciate a copy of the spreadsheet please.

Would appreciate the spreadsheet too please 🙂

Looks like a fantastic spreadsheet and you’ve done all the hard work figuring out the four pot method of calculation (which I had previously out off trying to analyse as it seemed like too much work).

I have started building my own version based on your method, but got sick of it after getting as far as the ‘can phase 2 start’ calculation and then seeing here was still the waterfall stuff to do as well… Also interestingly had slightly different results on the calculations that’s shown in your example and I couldn’t figure out why.

So would you be kind enough to send me a copy of e completed sheet also to play around with?

Could I also have a copy pretty please? I have a civil service work pension and I’m starting a S&S ISA but I hadnt thought of getting a sipp. If early retirement and financial independence is my end goal should I be starting one up? I was thinking of starting a lifetime isa when they come next year, though you cant get it until your 60, 5years later than a sipp. Great blog may thanks, G.

And another new, impressed reader. I have another much simpler version of a calculator that I created myself but would v much like to try yours. Could you send it to me please?

Hi Mike, thanks for all the great info on the site. It’s good to find a FIRE blogger who sees the value of a mixed active/passive investment strategy (and explains why!). There’s a lot of passive evangelism out there on other FIRE blogs and it’s good to be reassured that others share my thinking. I’ve been trying to work out how best to divide my contributions between pensions / isa for some time now through a number of separate calculations, but with limited success, so i would really appreciate a copy of this spreadsheet. Thanks and keep up the good work!

Morning, I too would love the opportunity to input my details into the spreadsheet and see when I might be able to retire to the seaside, thanks!

Love me a good spreadsheet and this would help me so much to work out whether to put money into SIPPs, please can you send me the spreadsheet? Aiming to retire by husband’s 40th birthday (just over two years away) so currently not putting anything into SIPPs as don’t want to wait 15 years to access them! But maybe your spreadsheet will prove we should be putting money into it. Thank you it would be so helpful!

I’m 25 and currently planning my financial future, I would be really grateful if you could send me a copy of this spreadsheet.

What’s your opinion on the new Lifetime ISA on FIRE?! Government top up on a tax free account, but you can’t access it until 60 …

Hi Matthew,

I’ve sent you the link to the spreadsheet.

I think you need to see the LISA for what it is – more government support for the housing market, rather than a savings vehicle. If you leave it until 60, it’s worse than a pension (eg. SIPP – available from 55) and offers only basic rate tax relief.

It’s only advantage is to grow your deposit for a house tax-free.

“If you leave it until 60, it’s worse than a pension (eg. SIPP – available from 55) and offers only basic rate tax relief.”

This isn’t right, since a pension is taxed on the way out but the LISA is not.

For totals over the personal allowance, it actually works out as equivalent to a salary sacrifice pension for a basic rate taxpayer.

Salary Sacrifice:

Net cost £68, Pension value £100. £25 tax free + (£75 * 0.8) = £85 withdrawn

LISA:

Net cost £68, end value £68 * 125% = £85

HI Ian,

I meant that you can access a SIPP before a LISA. Since access seems to be the main reason why young people prefer ISAs to SIPPs, I can’t see that the LISA would be more attractive to those saving for retirement.

Plus you can only save £4K per year until age 50, which isn’t enough on its own for retirement.

As it currently stands, the LISA is just a government ploy to prop up the housing market. It may evolve into something more, but I’m not sure yet that May supports it the way that Osborne did.

> I can’t see that the LISA would be more attractive to those saving for retirement.

I assume these people are planning to live past 60? It’s worth more than a SIPP for a basic rate taxpayer for any income over the personal allowance withdrawn over that age.

> Plus you can only save £4K per year until age 50, which isn’t enough on its own for retirement.

No, but that is still a pot of £150,000 + growth that you can save up from 20-50. With 3% real growth (assuming allowed contributions rise with inflation) then that’s £242k by the time you’re 50 and then £327 with another 10 years to grow. At £18k/year withdrawal and 2% growth at withdrawal that’s 22 years.

I don’t know why you’d class it as “not a savings vehicle”.

Hi Ian,

I don’t think we’re going to agree here.

– a pot of £150K going in is entirely inadequate, and so is £327K coming out – you need closer to £1M in the UK.

– there are plenty of posts on my website explaining how much you need

– but the main point is that the people who won’t put money into a pot they can access at 55, are unlikely to put money into a pot they can’t access before 60.

Of course I get the point about living past 60 – that’s the entire reason I did the four-pot spreadsheet.

– I have a discussion every week with someone who prefers ISAs to pensions because they can get the money out anytime, and I always explain that if they plan to live beyond 55, they should think about pensions, too.

So, in theory, basic-rate savers might like the LISA, but, in practice, it’s hard to get basic rate taxpayers to save for their long-term future (and harder to get them to invest in equities rather than cash).

Why do you think the LISA was introduced? We already had ISAs (TEE) and SIPPs (EET). The only extra in the LISA is the bonus towards a deposit (as per the Help-to-Buy ISA).

My basic point is that only someone planning to buy a property would see the LISA as significantly helpful to their goals.

– Please don’t let me stop you taking one out if you think it will help, but it’s not the answer to our country’s problem with retirement savings

We need higher contributions into workplace pensions than the planned 8% pa.

– Personally I would make them compulsory, as in Australia.

Another person after a copy of this excellent looking spreadsheet!

Sent you the link.

Reddit sent me here – /r/fireuk to be precise. This spreadsheet looks like a polished version of what I’ve been stumbling towards in my own Excelling – would love a link please!

Good old reddit – could you send me the link out of interest?

I’ve sent you the sheet.

Mike

Thanks Mike! This is the link that sent me here:

https://www.reddit.com/r/FIREUK/comments/53nvir/higher_rate_tax_payers_do_you_max_out_your_work/

Hi Mike,

Also here from reddit and love your blog, can’t believe I’ve not come across it before.

As someone starting out on their FIRE journey I’d also appreciate a link to the spreadsheet.

Thanks,

James

Hi James,

Your comment went into my spam filter I think.

The link to the sheet is in the article now, so I hope you have had the sheet for a while by now.

HI Mike,

I am a contractor with a LTD company and I’m fortunate enough to be able to FIRE at 40 (currently 30), however all the calculations fall apart for me and it just says #Value in most fields… any thoughts?

Hi James,

If you can send me a screenshot or a link to your copy of the sheet, I’ll take a look.

Mike