FIRE

Including Financial Independence and Retiring Early (FIRE)
TahiPanas
Posts: 24
Joined: November 4th, 2016, 9:48 am

Re: FIRE

Postby TahiPanas » November 29th, 2016, 4:49 am

TopOnePercent wrote:Perhaps I might suggest speaking to a good tax accountant? That you are relocating to the UK does not necessarily require that your assets do the same, and repatriating only what you require to spend may allow the remaining income to legally find a tax free home on some shady island.

TopOnePercent,

I will do so, thanks. However, my understanding is that UK residents are liable for their worldwide income. I have read nothing so far over the years that suggests there are any, hrmmmm...legal, loopholes. What features were you thinking of?

FredBloggs
2 Lemon pips
Posts: 183
Joined: November 12th, 2016, 8:42 am

Re: FIRE

Postby FredBloggs » November 29th, 2016, 5:00 am

TahiPanas wrote:
TopOnePercent wrote:Perhaps I might suggest speaking to a good tax accountant? That you are relocating to the UK does not necessarily require that your assets do the same, and repatriating only what you require to spend may allow the remaining income to legally find a tax free home on some shady island.

TopOnePercent,

I will do so, thanks. However, my understanding is that UK residents are liable for their worldwide income. I have read nothing so far over the years that suggests there are any, hrmmmm...legal, loopholes. What features were you thinking of?
Indeed you are correct. But there are conditions attached to it. The HMRC pdf's are quite clear-ish and should be the basis of your research into the topic.

Fred (resident in the UK, asia and middle east at the moment).

LadyGagarin
Lemon Pip
Posts: 78
Joined: November 4th, 2016, 8:10 pm

Re: FIRE

Postby LadyGagarin » November 29th, 2016, 9:19 am

TedSwippet wrote:Being in the 40% tax bracket from savings/pension income alone means that doing any paid work at all garners me less than 60% of the benefit, whereas someone else in lower tax brackets will extract much more value for themselves from the same effort.


It must still be worth it though, if you can command a high enough income to enter the higher tax bracket. It's increasingly hard to retire at all if you are a BR taxpayer, let alone early. I suspect the more common pattern, in future, will be to carry on at least part-time into old age. This regardless of whether you find your job intellectually or socially stimulating, but because it's economically necessary. I can't see how someone earning say £14,000 p.a. could, however frugal, save enough to sustain a 40 year retirement - especially given they will still, realistically, be paying rent. If you have the opportunities and qualifications to earn 4x that and one day not have to either pretend you agree with things that make you angry, or sit bored at home with that third sweater on...why wouldn't you?

scotview
Posts: 3
Joined: November 5th, 2016, 9:00 am

Re: FIRE

Postby scotview » November 29th, 2016, 10:33 am

I retired at 52 and have a couple of company pensions which provide our main income and other investments which provide additional income for little luxuries like travel and hobbies. Once in early retirement there are unforeseen events which cannot be planned for. Let me give you a few practical examples which have affected us recently.

1 I will start drawing the "new" state pension next June. I thought I would be receiving £150 per week but a forecast shows that it will actually be £133 per week because I was contracted out.

2 Not only will I be receiving a lower old age pension but it will be taxed at 40% which will give me nett £79 per week, quite a difference ! My feeling is that the old age pension should not be taxed.

3 From the autumn statement, it looks like UK taxpayers will have the 40% tax allowance raised in stages during the coming years, thus helping those early retirees in the UK tax system. I, however, now have a Scottish tax code and it seems likely that the Scottish Parliament will NOT be raising the current 40% tax threshold.

4 We had thought my wife would receive her State Pension at 60, but she has missed the cut-off date and will not receive her pension until she is 66. She is a non taxpayer, so that is a loss of about £43K of tax free income over that six year period because of the change to womens' state pensions.

I use the above to illustrate that things can happen outwith your control once you are in retirement.

swill453
Lemon Slice
Posts: 321
Joined: November 4th, 2016, 6:11 pm

Re: FIRE

Postby swill453 » November 29th, 2016, 10:40 am

scotview wrote:4 We had thought my wife would receive her State Pension at 60, but she has missed the cut-off date and will not receive her pension until she is 66.

As I understand it, it wasn't a simple "cut-off date", but actually spread over 4 years, wasn't it?

Scott.

TedSwippet
Posts: 42
Joined: November 4th, 2016, 12:57 pm

Re: FIRE

Postby TedSwippet » November 29th, 2016, 5:33 pm

LadyGagarin wrote:... and one day not have to either pretend you agree with things that make you angry, or sit bored at home with that third sweater on...why wouldn't you?

Because that's a false dichotomy. Now free of work, I indeed don't have to pander to whatever whim or fantasy my manager or anyone else at the same employer has dreamed up this week.

But neither do I just "sit bored at home". Life after retiring early is actually much, much richer than before, not least because I can now live with agency and intent. I can honestly say I have not been bored at all. Freedom to structure life as desired is a gift. For me, relinquishing some of that for less than 60% of the financial benefit from doing so is not a worthwhile value proposition.

LadyGagarin
Lemon Pip
Posts: 78
Joined: November 4th, 2016, 8:10 pm

Re: FIRE

Postby LadyGagarin » November 29th, 2016, 6:44 pm

TedSwippet wrote:Because that's a false dichotomy.


But you see my point though? I.e. that a retirement short of funds may mean your opportunities for entertainment are somewhat curtailed.

LadyGagarin
Lemon Pip
Posts: 78
Joined: November 4th, 2016, 8:10 pm

Re: FIRE

Postby LadyGagarin » November 29th, 2016, 6:47 pm

swill453 wrote:
scotview wrote:4 We had thought my wife would receive her State Pension at 60, but she has missed the cut-off date and will not receive her pension until she is 66.

As I understand it, it wasn't a simple "cut-off date", but actually spread over 4 years, wasn't it?

Scott.


Yes that's correct - however it did add up to a later retirement age than expected when his wife started work.

TedSwippet
Posts: 42
Joined: November 4th, 2016, 12:57 pm

Re: FIRE

Postby TedSwippet » November 29th, 2016, 7:09 pm

LadyGagarin wrote:But you see my point though? I.e. that a retirement short of funds may mean your opportunities for entertainment are somewhat curtailed.

I can see that in the general case a person's retirement opportunities might be curtailed through lack of funds. But... I'm not short of funds.

My pension and investment incomes together tip me into the 40% tax band before considering paid employment. So anything that I do, even one day a week, would see more than 40% of that compensation lost to tax. I have employment offers, but this level of remuneration loss disincentives me to accept any. Especially as a younger and/or less 'pensioned' person could extract more value for themselves from this work.

TopOnePercent
2 Lemon pips
Posts: 243
Joined: November 8th, 2016, 9:33 pm

Re: FIRE

Postby TopOnePercent » November 29th, 2016, 9:08 pm

TahiPanas wrote:
TopOnePercent wrote:Perhaps I might suggest speaking to a good tax accountant? That you are relocating to the UK does not necessarily require that your assets do the same, and repatriating only what you require to spend may allow the remaining income to legally find a tax free home on some shady island.

TopOnePercent,

I will do so, thanks. However, my understanding is that UK residents are liable for their worldwide income. I have read nothing so far over the years that suggests there are any, hrmmmm...legal, loopholes. What features were you thinking of?


I've genuinely no idea for personal taxation. With companies I know how to do a lot of things. I suggest advice only because I'd bet a professional could unearth a few options.

StepOne
Posts: 46
Joined: November 4th, 2016, 9:17 am

Re: FIRE

Postby StepOne » November 30th, 2016, 12:02 pm

swill453 wrote:
scotview wrote:4 We had thought my wife would receive her State Pension at 60, but she has missed the cut-off date and will not receive her pension until she is 66.

As I understand it, it wasn't a simple "cut-off date", but actually spread over 4 years, wasn't it?

Scott.


And it was announced in 1995, so there was plenty of warning.

swill453
Lemon Slice
Posts: 321
Joined: November 4th, 2016, 6:11 pm

Re: FIRE

Postby swill453 » November 30th, 2016, 12:42 pm

StepOne wrote:And it was announced in 1995, so there was plenty of warning.

Going off-topic a bit, I do have some sympathy for those who didn't hear the "warning". Many people are not financially literate, don't read the press, and don't have (relevant) conversations with those who are/do.

So for Doris, born in, say, 1954, sitting comfortably in her job expecting to get her State Pension in 2014, when exactly would she have been directly told that she wasn't going to get it till 2019 or 2020?

Scott.

gadgetmind
Posts: 32
Joined: November 25th, 2016, 10:30 am

Re: FIRE

Postby gadgetmind » December 1st, 2016, 10:16 am

We're hoping to retire in 2018 when we'll both be 55.

We'd like an income of £60kpa after all taxes but could easily get by on less. It might mean downsizing though as while we're mortgage free(1), our current pile consumes about £7kpa in rates+utilities+insurance and repairs etc. probably add another £5k pa.

We have no DB pensions (2) but should both get full single tier SP in 2030 (my wife may need to do some Class 3). We're therefore reliant on ISAs, DC pensions, and unwrapped investments. I'm hoping that this pot at retirement will be worth about £1.6m - it's close to that now, and we're still accumulating, but you know how the markets can be.

My spreadsheet (which models for tax) shows that we'd need to withdraw 4.3% pa between 2018 and 2030 and then we could drop to 3.3% assuming the pot hasn't been depleted too much by the 4.3% withdrawal. This isn't anything like as safe as I'd like, but we could spend less, some share options could do better than expected, another company that I'm investing into could take off, I could probably pull in £1kpcm by commercialising some of what are currently hobbies, and there is always the downsize option. House is worth around £1m and we could pick up (or build!) something for £500k if we're happy to be further away from the city centre.

Overall, things are going to plan, but only because we've been pouring money into pensions and ISAs since the late 80s. Things would have been easier if my wife hadn't taken a 20 year career break (and she's part time on close to minimum wage now) but this made others things easier, so no regrets there.

(1) - We're actually not as we borrowed against it so we could loan daughter money to buy a house, but the money she pays us covers interest and a bit, plus she can borrow in her name once she's working.
(2) - Again, not strictly true, but wife's LGPS will come to about £750pa if that and won't come along until 2030.

thebarns
Posts: 37
Joined: November 4th, 2016, 12:56 pm

Re: FIRE

Postby thebarns » December 1st, 2016, 11:11 am

Gadgetmind,

That all looks very good, well done.

I note that you lent money to your daughter to help her buy a house and effectively she covers your interest, maybe not the capital element.

I had also thought about this for a similar situation that will arise but thought there may be tax issues with the interest you receive from the relative.

gadgetmind
Posts: 32
Joined: November 25th, 2016, 10:30 am

Re: FIRE

Postby gadgetmind » December 1st, 2016, 11:29 am

thebarns wrote:Gadgetmind,
I note that you lent money to your daughter to help her buy a house and effectively she covers your interest, maybe not the capital element.


She takes in lodgers (and her income is within "Rent a Room" allowance) and can therefore pay off some capital. However, that's not the intention currently as she's a student, but should soon qualify as a Doctor. Once she does, she should be able to get a mortgage in her name as outstanding amount should be within 3x JD's income, and LTV should be <70%, though switching to a repayment mortgage may be a bit much for her! Lots of options.

I had also thought about this for a similar situation that will arise but thought there may be tax issues with the interest you receive from the relative.


Loan is done via a Promissory Note in my wife's name, and this extra income on top of her part time work doesn't push her beyond her personal allowance. There may be ways to avoid tax for those earning more but it wasn't something we had to investigate.

thebarns
Posts: 37
Joined: November 4th, 2016, 12:56 pm

Re: FIRE

Postby thebarns » December 1st, 2016, 1:29 pm

Gadgetmind,

Thanks for that, I follow now, a judicious and quite proper use of the personal allowance to avoid the potential income tax issue.

I am aware that there are income and inheritance tax issues involved in lending, interest free or not, or indeed gifting sums of money to offspring to assist in a house purchase or indeed for any other purpose and something i will need to examine in greater depth as the time approaches.

For those with children, it can play a part in FIRE, although your daughter looks as though she will be carving out an admirable career herself and one in which she should not need as much medium to long term financial parental support as some others.

1nv35t
2 Lemon pips
Posts: 239
Joined: November 4th, 2016, 8:18 pm

Re: FIRE

Postby 1nv35t » December 3rd, 2016, 12:44 pm

gadgetmind wrote:We'd like an income of £60kpa
...
pot at retirement will be worth about £1.6m

Looking at http://www.fixedincomeinvestor.co.uk/x/bondtable.html?groupid=3530 to pre-load a ladder of 10 years of £60K/year inflation adjusted income with recent negative real yields would require around £660K. Which would leave you around £940K after such 10 years of drawdown i.e. assuming £660K of £1.6M were allocated to such a 10 year ladder. With 10 years of inflation adjusted income pretty much secured, if the £940K remainder were invested in accumulation (stocks) that achieved 5.4% real annualised over those 10 years then that £940K would have grow in inflation adjusted terms to £1.6M i.e. you end the 10 years with the same amount in inflation adjusted terms as at the start.

Starting with 40% in bonds, 60% in stocks, ending with 0% bonds, 100% stocks, averages 80/20 stock/bonds over the decade, assuming you held as-is for the decade, less if you perhaps opted to review every few years and maybe top up the ladder with additional years tagged onto the end (sell some stock to add to bonds).

The S&P500 PE is recently around 25 = 4% real yield, as a broad general guide that indicates that the 5.4% real yield for growth that I used above is towards the ambitious side. Adjusting down to 4% real for 10 years on £940K = £1.4M (inflation adjusted) after 10 years. Suggesting 200K or 20K/year 'over-spend' (or acceptance of 12.5% drawdown over a decade long period, 1.4M end amount versus 1.6M start amount).

This isn't anything like as safe as I'd like

Looks relatively safe to me. If you've won the game there's no need to take risk (10 years of inflation bonds). Review as you go along and top up bonds when stocks are doing relatively well, and a very good chance that your money will easily outlive you. Enjoy your retirement whilst you physically (and mentally) can, as a sudden illness or condition can take all of that away in the blink of a eye, i.e. personally I would go with the 60K/year 12.5% potential 10 year pot decline rather than reducing to a 40K/year income, pot value potentially remaining level choice.

Whether you opt for bucket style ... a bond bucket that is drawn down, stock bucket for growth, or opt for a constant weighted, perhaps 70/30 stock bond that you periodically realign to, is just a question of personal preference. They both generally work out to much the same thing overall. The bucket choice can be the better when start date valuations are relatively high, which at present under very low interest rates/inflation they possibly are. However, including your £1M home value as part of the portfolio has your resources up at £2.6M, that with a 60K income requirement = 2.3% yield requirement. Yet another choice is something like the Talmud advocated third each in land (your home, where capital value and imputed rent benefit are both tax exempt (no capital gains on sale of your primary home)), merchandise (stocks) and reserves (gold ... where legal tender gold coins such as Britannia's/Sovereign's are CGT exempt). On 2.6M and 2.3% yield (income), and assuming you hold US stocks for geopolitical diversification alongside a UK home and (global) gold, for all 50 year periods over the last 120 years had a worst case outcome of having a third of the inflation adjusted value remaining after 50 years. Which includes some pretty bad times i.e. the worst case spanned the WW1 years and collapse of the British Empire. More likely (on average) the value grew in real terms 3.2 times over 50 years ... which equates to a additional 2.4%/year that could have been drawn on top of target spending rate (so on 2.6M = another 60K/year 'top-slicing' potential). And that assumes leaving a comparable amount in inflation adjusted terms as at the start for heirs. That excludes imputed rent benefit that historically averaged around 4.5% such that proportioned to a third = 1.5% 'yield'.

Under current valuations I'm personally fond of that Talmud choice. US stocks = large land mass/natural resources, strong military, capitalist tendencies and somewhat a island (friendly or less powerful land adjoining neighbours), a high density/demand home (UK), and global currency (gold), that is potentially tax efficient. Where income can be drawn from the yearly best performing asset, often that is up +20% (on average) over the year (a bit like ... gold is up this year and selling some will pay next years bills; Or stocks are up this year and selling some will pay next years bills). Of course a home value is illiquid which restricts 'rebalancing' however 'land' can include some REIT's which are more liquid/easily traded in addition to core home value.

Whatever you do decide, looks to me that you'll be just fine. My advice would be to go for retirement early and make the most of what you do have asap. I speak from a similar age, having retired over a decade ago and around similar wealth (but with the additional benefit of reasonable inflation linked pensions that will come online in another 5 years or so), but where my partner is no longer able to enjoy life due to health issues! It is of some comfort that we pulled the retirement trigger earlier rather than too late.

Hariseldon58
Posts: 26
Joined: November 4th, 2016, 9:42 pm

Re: FIRE

Postby Hariseldon58 » December 4th, 2016, 5:45 pm

Very interesting thread, lots of good info from personal experiences. i thought I would add a few more ! 9 years in I have changed my approach which was more akin to those who are still planning but I found whilst the earlier methods worked, they can evolve.

I went FIRE in late 2007 with a largely Equity portfolio and no significant pensions to come. I was working on living off the natural yield , circa 4% of a largely Equity Income Portfolio with a large dollop of International Investment trusts and HYP individual equities.

Talk about sequence of returns risks ! I was mentally prepared for a 50% drop in the markets at some point in the future, I had seen heavy declines in 2000-2003 but I was pretty surprised to say the least that such a situation should occur almost immediately.

I chose to dump the HYP in the spring of 2008 and this proved to be beneficial. ( I did a little analysis earlier this year to see what would have happened if I had stuck with the portfolio as of 2008 to 2016 against what I had actually done)

Since then I have moved to a more passive approach but still largely equities.

I now ignore the natural yield ( it is just over 2%) I concentrate on overall returns and live off what ever cash is in the bank account, it is topped up by a mixture of investment income, some part time work , asset sales occasionally by top slicing prior to reinvestment. I find this a very sensible method, it suits me personally as I fairly relaxed about money and risk, others clearly prefer the structure of a reliable income flow.

I now find myself with nearly twice as much capital in real terms as when I retired, despite living comfortably and travelling. Total return does matter...I am very tolerant of large movements in the value of a portfolio and have significant confidence that it will come right ( this may be misguided but its a much more pleasant way to live than to be worried about it ! )

I am now 58 but see little virtue in the eternity portfolio, its likely that I will leave a significant sum to family but they should not rely on it and it may not be really beneficial to them as regards quality of life. The eternity portfolio is likely to be too cautious and lower the standard of living until you realise its too late to spend it all.

The approach of the poster with expertise in inflation and targeting a1.5% drawdown is I think too close to his specialist subject and unduly pessimistic, experience so far is that spending is broadly similar to previous years, some major expenditure on travelling is now much cheaper by using 'last minute deals' due to changes of practice by the companies I use and having the freedom to travel whenever, is great.

I like Inv35t's idea of the portfolio being considered in liability matching terms i.e. I need £X for 10 years then £Y for 25 years, one could stash that away in a low risk investment pot and use the balance to fund growth in a riskier manner. Not that I have done that but feel I could see a 50% fall in capital and still manage, so why worry ?

Working part time is good, the financial remuneration is not particularly relevant but it provides good social benefits and some structure to one's days.

Health is taken for granted and recent experience has left us unable to travel for a year and its absence is painful.

From an investment perspective the low cost, global passive approach at very low cost is simple and effective, there are still opportunities to profit occasionally with contrarian moves and this has proved helpful to the overall portfolio growth.

mickeypops
Posts: 13
Joined: November 4th, 2016, 2:10 pm

Re: FIRE

Postby mickeypops » December 6th, 2016, 9:46 pm

Interesting stuff. Me and Mrs MP are about 18 months away from our intended FIRE date, at which point I'll be 63 and she 60. Like a lot of us I guess we have multiple assets. The house is mortgage free, we are empty nesters and could downsize if we wished. We both have DB pensions which will readily cover all basic costs. We have state pensions to come and have saved up a cash lump sum to pay ourselves the equivalent until it arrives. Our DC and SIPP pensions are now invested in income producing ITs, currently yielding about 4.5%, and this is our "fun" money. I know that this yield is on the highish side, but if we leave the capital intact, as is the plan, I hope we'll be OK.

gadgetmind
Posts: 32
Joined: November 25th, 2016, 10:30 am

Re: FIRE

Postby gadgetmind » December 7th, 2016, 12:30 pm

Wow, thanks everyone, particularly 1nv35t . I do know that you should be heavier in bonds just before - and for several years after - retirement, but hadn't really started to think through how to do it and whether to use index linkers. Waving goodbye to 10% of the money in return for getting security and linking on the rest feels wrong in my gut but my head is telling me to look deeper into it.

One small detail of course is that I'll be paying £6.8k pa in basic rate tax on SIPP drawdowns, and had planned to leave touching the ISAs until all the unwrapped (mainly PCLS) had gone. We'll only have enough unwrapped for half of that gilt ladder, but I guess the rest can be in the SIPP as money is fungible and I'm accepting the tax hit will be there until I pop my clogs.


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