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Looking outside the box to create a future pension

Updated on September 28, 2011

A different way of looking at a retirement income

Most people are not aware of how much they need to build as a next egg at retirement to generate sufficient income, I was recently having a chat with a friend who was looking to move back to the UK to give it another shot at building a business, yet he has a potential business in France.

I never like seeing anyone giving up on there dreams so decided to point out a different way of looking at things.

I asked him what level of income did he wish to have at retirement and was told £30,000 per year at age 65, he is 40 years of age now. It was then established that no retirement provisions were in place.

I said that in order to generate £30,000 per year, as a rough guide you would need a pension fund of £600,000, assuming a 5% income return on the fund.

Assuming over the next 25 years your money doubled within a pension fund, that still means he had to save £300,000 over the next 25 years. That works out to be £1.000 per month.

This same friend was hoping to create 3 holiday cottages from a long barn but felt he could not afford the renovation cost of £150,000 and was stuck for ideas.

I then explained the real value of starting the renovation, firstly I said, why not just create one holiday cottage at a time, lets say the first cottage will cost £80,000 the lions share of the total cost because of the ground works to put into place and the other two will cost £35,000 each.

Can you finance the £80,000 and the answer was yes via a loan, ok now the loan will cost lets say approximately £700 per month and this is how the picture was painted;

Ok next year your first cottage is finished and your now taking bookings, the first cottage should generate £10,000 per year, over 6 years £60,000, now assuming you cover half the cost of the mortgage payments from the income (£350 per month) £25200, that leaves £34,800 to pay for the second cottage.

So lets say we are now in year 8 and both cottages are rented, new income £20,000 per year, in 3 years £60,000 generated. Now both cottages pay the entire mortgage payments, over 3 years at £700 per month equals £25,200 leaving again £34800 for the renovation of the third cottage.

By year 12 all 3 cottages are finished with an income of £30,000 per year, the overall cost on mortgage payments paid out of own pocket, year 1 £700 x 12 = £8400, year 2-8 £350 per month = £29,400.

Total cost of mortgage out of own pocket = £37,800 average cost per month over 8 years =£393.75

Now bearing in mind we were looking at having to save £1000 per month for 25 years, we now have the situation of only having to spend under £400 per month for 8 years and in 12 years all the properties are up and running and I would expect if the income is not touched by year 15 the original mortgage is repaid.

We therefore have the situation that 10 years earlier we are generating £30,000 per year and lets consider the other benefits.

The completed property might now be worth £300,000, but it should not be looked at in that way, its actually worth £600,000 because of the income its able to generate.

Over factors to take into account are:

Income is inflation proved because you increase your rental rates each year, all expenditure is tax deductible and in the event of death after retirement more is left in the estate than with a pension.

Obviously there is a lot of work in doing the renovation and a little in running a holiday cottage but surely its worth while if it means your able to keep living the french dream.

I am actually following my own advice now because this year Ive created an apartment for me to reside in and I'm renting my house out in addition to La Forge, the concept is the additional income from my house will fund a future renovation project in 5 years time.

As a caveat I would say that all the above figures are approximate I just wanted to share the concept as you might be able to achieve other financial goals using the same principal, a self funding money maker....thinking outside the box.

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