Retirement Investing Today

[tieresias]

To have financial freedom is one thing but to give up work?

Sorry to hear about your wives Dod.

You have highlighted the dilemma I will face next year. I am 55 (divorced, never re-married, house paid off, all children grown up and graduated, decent pensions/savings/investments...) but still healthy and adventurous. It feels too young...

[TheRIT]

I'm on a sorta 3% safe withdrawal rate, of which a third of that is 'rent' i.e. 2% disposable withdrawal rate. For all 30 year periods (calendar year granularity) since 1896 the worst case for that Talmud style was to end 30 years with two thirds of the inflation adjusted start date amount. On average it ended 30 years with twice the original start date amount. i.e. I have heirs and 2% disposable after 'rent' paid is adequate for my modest lifestyle.

Safe Withdrawal Rate being to take 2% of the total as the first year withdrawal, and uplift that £ amount by inflation each subsequent year.
...

Sorry, just to clarify in the model that ended up with 2/3 of inflation inflation adjusted start wealth worst case. Are you assuming 2% or 3% starting WR which is then uplifted annually for inflation? Also are you using 50% 'US Equities' and 50% gold or have you somehow included property?

[TheRIT]

I should mention the Talmud is not my only source of income. I started off in my 40's with enough in bonds to cover 20 years of income, and a growth bucket that I hoped would replenish and more the bond drawdown (two bucket approach). I still have that as a source of income however the growth bucket growth rate was fast enough to lead me to diversify (add the Talmud style).

That bond/drawdown bucket was in effect reset a few year back, and the new bond bucket is pretty light because in another 4 years I start receiving a occupational pension and at 67/68 a state pension (might) come online, which significantly reduced the amount of loading into bonds to cover 20 years of income.

Often you might hear of a retiree that is 100% in stocks and consider that to be too risky. However without knowing what other sources of income they have misdirect you to incorrect perceptions. 10K of pension income priced at 2% for instance could be considered as comparable/equivalent to 500K of bond value.

Now it really does sound like you might have entered retirement with an 'almost' permanent portfolio - bonds, cash, equities and gold. Can you remember roughly what your total portfolio %'s were as you retired?

[TheRIT]

Its the average of house prices (only, excluding imputed rent benefit), US stocks total return (including dividends) and Gold. With 2% SWR (yearly disposable). If you assume 3% average yearly imputed rent value on top of that, then with a third weighting = 1% of the total portfolio value (making 3% effective SWR but where a third of that is being 'spent on (imputed) rent'). With the figures adjusted for inflation and reduced by a common average assumption of taxes. Historically imputed rent was more like 4.5% average (comparable perhaps to more like a 6.7% gross amount needing to be earned to cover that net 'cost' and taxes).

Mostly you don't want to be rebalancing home value, other than under more extreme conditions/drift. Maybe upsizing if doing very well, downsizing if things turn ugly. So whilst the measures are for all three, in practice the core liquid portfolio is 50/50 stock/gold (excluding a third of wealth being in a home value).

Compare just stock prices (excluding dividends) with house prices (excluding imputed rent) and gold, and they might all broadly pace inflation over time, but tend to zig zag around each other during interim periods. Sometimes with the stock purchase power of gold massively up, sometimes with the gold purchase power of stocks sometimes massively up. Rebalancing back to 50/50 target weightings is a natural means to 'trade' that volatility. This Dow/Gold chart for instance provides a indication of the extremes in those moves

http://home.earthlink.net/~intelligentbear/dj-au-ratio-lt.gif

Unless I'm missing something that doesn't sound much better than a Modern Portfolio Theory portfolio consisting of equities and bonds. If I use http://www.cfiresim.com/ and just use the default 75 Equities:25 Bonds, expenses of 0.18%, a 30 year period but assume drawdown is 3% (not the default 4%) then I end up with wealth of 53% of starting.

Put in only a little gold (5%) at the expense of equities and you get 67% of starting.

Have I missed something?

[TheRIT]

Back then I was using a sort of Bridgewater Safe choice for inflation pacing/safe, a combination of gold, short term gilt ladder, long dated gilt, index liked bonds ...etc. With around a 50/50 split i.e. a similar amount in growth/stocks. On the basis that at 4%/year real then after 20 years the growth/stock half would have doubled in real terms, whilst the 'bonds' would have been spent over the 20 years. So starting with 50/50 stock/bonds and 100/0 stock/bonds anticipated 20 years later, average 75/25 stock/bonds.

I didn't count home value back then, but after large increases in prices and a 'downsize' I started to look at the Talmud style. I'm well aware of the Permanent Portfolio but if you take that back to 1896 it didn't work too well as it is exposed to too much taxation risk. 15% inflation, 15% bond yield, 33% taxation and in a single year you're down 5% net real. And the PP has 50% exposure to such risk.

Bridgewater Safe (something like 10% gold, 20% 10 year gilt, 30% 3 year gilt ladder, 40% index linked gilts) alleviates the taxflation risk as index linked gilts don't have their inflation element taxed. I opted to swap out the 20% mid duration treasuries for stocks (more aggressive/spicier form of 'safe bonds').

Many thanks for this. Coming back to very simple portfolio building blocks I'm planning in going into FIRE with 65% 'Equities' : 35% 'Bonds' but with my gold in Equities. From there I intend to annually rebalance back to nominal. In comparison you were 50% 'Equities' : 50% 'Bonds' but with your gold in bonds and then you intended to allow 'Equities' to increase over the years from there.

Is that your interpretation? If yes then I'm potentially carrying more potential volatility into FIRE than your good self but over time we'd converge.

[TheRIT]

Yes you've greater upfront 'risk' whereas I time diversified into risk, and ended with higher risk exposure. I did consider rebalancing yearly myself at the time (constant risk), but ended up preferring the lower up-front risk, higher later-life risk as I saw potential other risks such as not living another 20 years, and that a higher equity exposure in later years would be a more appropriate portfolio for younger heirs to inherit. Overall however the two broadly compare, just a matter of personal preference (when I resigned in my early 40's to 'retire' it was pretty frightening for me at that time to make the move away from a safe/stable occupational income ... into the unknown, and I felt more comfortable with the lower up-front risk choice at that time).

"...and that a higher equity exposure in later years would be a more appropriate portfolio for younger heirs to inherit." That's actually a very interesting perspective and something I've missed. Thanks! If in 'many years' portfolio performance has been good then that seems a very sensible. Something else for me to model idc. If it's been poor then derisking myself further, maybe even with an annuity, at the expense of inheritance might be the only route.

[gryffron]

Interesting thread. I FIREd 4 years ago @47. After 20 years of getting nowhere as an employee, just 5 years of self employment got me to FI.

Interested to know why you all seem so fixated on "dividend" income. What does it matter whether your income comes from dividends or selling capital? As long as the total return is adequate.

And with the upcoming change to tax rules, you can have a lot more tax-free income from capital than dividends. Will that skew your thinking?

Gryff

[Lootman]

And with the upcoming change to tax rules, you can have a lot more tax-free income from capital than dividends. Will that skew your thinking?Gryff

I'm not sure I agree with that. You can take about 11K a year in tax-free capital gains. For dividends, you can take between 5K and about 17K income tax-free, depending on whether you have any other income or not.

In terms of rates, the lowest rate of CGT that applies afterwards is 10%. For dividends, it's 7.5%

Best to have both, of course, plus whatever you can squirrel away in an ISA.

[dspp]

Thanks RIT for posting here and starting this thread.

I had come across your blog on my travels - you asked why so few had commented / posted on your blog site. I never really even thought of doing so - for me community spaces are where one posts, and they need to have more dimensions in them than can be in purist site such as yours. That's not to denigrate your blog site at all, quite the reverse. So places such as LemonFool (now) or UK Fool (then) were the appropriate places to post.

Personally I am at my own FI point now, provided that I continue to live frugally. Actually I'd rather not be quite so frugal, so that is one reason to postpone RE. Another is that I am only 50 and actually enjoy my own work - I've always followed career choices that felt worthwhile for both personal and social value reasons. In my particular case I work part time running a manufacturing firm, and doing consulting alongside that, and helping in a friend's small business alongside that. So the RE can come later and be tapered to suit.

Interesting to see many of the similarities in the investment / portfolio decisions that many of the contributors to this thread have made so far. Mine are not so dissimilar.

regards, dspp

ps - for RIT: I've lived in southern France and Spain and they are nice. Family have lived in Malta and Spain. I am sure you aware that we are no longer converging/harmonising because of Brexit (which I'll try not to say what I think about) which in practical RE terms means that they may become quite foreign. I see in another post you are looking at Herefordshire. A long time ago various members of my family did just this analysis and we independently picked Dorset so perhaps take a look. I hesitate to say it as one of the best things about Dorset is being never too high a profile.

[Lootman]

In contrast capital gains taxation are less of a easy target as it relies upon sales occurring and during times of such higher taxation the tendency is not to sell (some opt to instead lend stock in exchange for cash). To circumvent that they'd have to move to a total wealth tax, which has many negatives/complications (less likely to be a choice of target).

Actually there is another way a rapacious or desperate government could circumvent that. Unrealised gains could be taxed on some kind of mark-to-market basis. I believe that Australia does something like that, and for course some businesses are taxed that way here.

[TedSwippet]

... a rapacious or desperate government...

Is there any other kind?

[Minerva]

As I wrote in an earlier post, we moved to Spain when I had enough to FIRE in my early forties. After some 15 years there we have now moved to the Channel Islands as the children are all independent and we are looking to spend more time travelling (the idea being to live on one of the Channel Islands not in it). The tax regime here is very benign for anyone who has FIREd as there is no CGT, income tax is a flat 20% with an annual ceiling of £110,000 and no corporation tax or inheritance tax. This makes investing for income from a fixed pool of assets much simpler and leaving or passing what is left to heirs, simple.

I might also add that both the quality of life (a benign climate, little or no crime, full employment and plenty of beaches, boats, sports etc.) and the fact the islands are British but only a few miles from France are important considerations. (This is not intended as an advert, quite the contrary as like the comment about Dorset some things are best not shared too openly).

[DeBriefed]

Can anybody retire to the Channel Islands *Minerva* or do you have a family connection?

I have (working) friends about to move there, but he was born there which means he is entitled to work there too (and means his professional experience off the Islands is apparently quite a rare thing). But my understanding was that his wife will not be able to work (or at least not until she has been there some years). And I think they mentioned even some of the housing is hypothecated for people who were born on the islands?

[mickeypops]

I have a similar understanding DeBriefed. UK citizens have the right to live there, but there are severe restrictions on buying and even renting property, which make settling there somewhat problematic. Happy to be proved wrong though......

[DeBriefed]

So probably Minerva doesn't need to worry about an influx too soon

[Minerva]

Each island has slightly different rules. We live on Guernsey. The rules here are fairly simple provided you don't plan to work in the island economy, where a right to work permit needs to be obtained.
The housing stock is divided into local and open market, the latter being available to anyone. Naturally the better properties are in the open market and although they go do a premium to local market "equivalents" due to very low turnover and mumbling about possibly merging the two markets the differential is not that great. We are lucky that my wife qualifies (and I do by extension) for local market, but we have decided to rent till we are sure we want to buy. (There are open market rentals as well). In all probability if we do buy it would quite likely be open market anyway as there are more nice ones to choose from - plenty of online browsing available.
There is plenty of information available from https://gov.gg/openmarket
There are some eligibility rules but anyone who is financially independent and an EU citizen should have no problem. As you can imagine investing from here is very easy andno VAT helps, too.
Jersey has different rules but equally they are online.

[TopOnePercent]

I called myself Financially Independent, with the option of Early Retirement, as soon as my planned retirement spending equalled Wealth times 2.5%.

An interesting and useful (for me) metric. I've just done some quick calculations and I could possibly FIRE in another 5 years, were I to ignore increasing costs in the near term (Children to get through uni).

Unfortunately the other major blocker is that nearly 60% of my wealth is in private pensions, and at the age of 42, the minimum age for putting them into payment has risen to 58, likely to hit 60 before I can claim my money. The other small factors are my remaining mortgage, which would reduce my income too low to live on, if I cleared it using assets, and finally the fact that my good lady wife has not yet had the sense to leave me for someone ... well, less me.

If I was determined enough I could stop being an employee and start being a contractor, thus increasing my income while significantly reducing my largest bill (Income taxes). That would almost definitely put me in the position where I could FIRE after 5 more years, by reassigning what used to be income taxes into buy to let properties in my Northern homelands.

Overall I don't think I'd have sufficient padding to weather a downturn without damaging my wealth enough to avoid cuts to standard of living, and my profession is such that once you've been out of it for a couple of years, you're history.

[TheRIT]

...
ps - for RIT: I've lived in southern France and Spain and they are nice. Family have lived in Malta and Spain. I am sure you aware that we are no longer converging/harmonising because of Brexit (which I'll try not to say what I think about) which in practical RE terms means that they may become quite foreign. I see in another post you are looking at Herefordshire. A long time ago various members of my family did just this analysis and we independently picked Dorset so perhaps take a look. I hesitate to say it as one of the best things about Dorset is being never too high a profile.

Many thanks for the thoughtful reply dspp. Really haven't spent any time in that part of the world. Sounds like it's certainly worth some desk research before I go to much further.

[Brava21]

Hello TheRIT

I have been reading this thread with great interest...I had not come across your blog before, and I am not sure how I had missed it previously, but just wanted to say what a cracking read it is. It's refreshing to read a UK based FIRE blog, for one thing, but it's also very well written and full of great advice.

I'd encourage anyone else similarly interested in this thread, who hasn't yet seen retirement investing today.com to pop over and have a look.

Brava

[TheRIT]

Hello TheRIT

I have been reading this thread with great interest...I had not come across your blog before, and I am not sure how I had missed it previously, but just wanted to say what a cracking read it is. It's refreshing to read a UK based FIRE blog, for one thing, but it's also very well written and full of great advice.

I'd encourage anyone else similarly interested in this thread, who hasn't yet seen retirement investing today.com to pop over and have a look.

Brava

Many thanks for the hat-tip Brava21. It really means a lot and it's great that all those hours invested writing posts since 2009 haven't been wasted.