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FIRE

Including Financial Independence and Retiring Early (FIRE)
TheRIT
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Re: FIRE

#4079

Postby TheRIT » November 12th, 2016, 10:36 am

kodokan wrote:Talking of geographical arbitrage, this popped up in my newsfeed this morning and I thought of you, RIT.

https://www.theearthawaits.com

It's a calculator where you can plug in how much you have to spend monthly, desired standard of living, number of family members, acceptable to you levels of crime and pollution, etc, and then it tells you where in the world you could live. I can currently live in quite a few places in Mexico, and most of Eastern and some of Southern Europe, which is nice to know :)


I quite like that, thanks. Plugging some details in for my situation, including a modest lifestyle, low pollution and low crime then sorting into quality of life order I get the top 10 as:
- 5 x Spain
- 2 x Portugal
- 2 x Greece
- 1 x Germany

Looks like someone agrees with my own research that a Mediterranean lifestyle is for me,

TheRIT
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Re: FIRE

#4084

Postby TheRIT » November 12th, 2016, 10:44 am

zxspectrum48k wrote:...
Based on those assumptions, then for a 90% success rate, the Monte Carlo throws out a required investment portfolio of around £4.2mm, plus £800k for school/uni fees for a nice round £5mm target. ...

Wow, that is a lot of capital. I feel I'm incredibly fortunate to have found a way to work myself up to be a 1% UK earner but even with those earnings my spreadsheet tells me that even at age 60 I'd still be nowhere near £5m.

Of course we're all different and it's one of the reasons I stay blogging but all I'll say is I'm going FIRE with a lot lot less as I'm a believer that you're a long time dead.

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Re: FIRE

#4088

Postby TheRIT » November 12th, 2016, 10:48 am

TopOnePercent wrote:
thebarns wrote:£5 million for FIRE and pay the children''s schooling/uni !

For 60k pa.

Strikes me as an enormous sum, well beyond the attainment of your average or indeed considerably above average investor and would put off the vast majority from ever considering FIRE !
...
I am sure many at or contemplating FIRE will be looking at considerably smaller capital sums.


Out of interest, would any posters close to or post FIRE care to divulge the minimum capital sum they'd consider necessary?

That's a bit of a how long is a piece of string question as we're all different. In my case I've blogged about the assumptions, calculations, alternate countries and risks ad infinitum. I always end up requiring a little over 7 digits.

TheRIT
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Re: FIRE

#4090

Postby TheRIT » November 12th, 2016, 10:53 am

TopOnePercent wrote:...
On one hand then I may need 10 more years rather than 5. On the other, assuming 2.5% income from the assets, I could FIRE today on the very basic existence level. I'm fortunate in that I enjoy what I do for a living, even though ageism will see me out of a career sooner rather than later, but with children to see through school & university, I'll probably still be working in 15 years :-O
...

A 2.5% withdrawal was what I also settled on as one that could give a long FIRE for a level of risk appropriate to me.

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Re: FIRE

#4094

Postby TUK020 » November 12th, 2016, 10:56 am

Lot's of discussion about the 4% rule for FI.
How do people adapt this for inflation?
We have been living in a low inflation era for a while, but should not assume that it continues this way

TheRIT
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Re: FIRE

#4097

Postby TheRIT » November 12th, 2016, 11:01 am

ap8889 wrote:I think getting your expenses under control is the key to FIRE. As many FIRE bloggers have pointed out, optimising expenses to give you the lifestyle you choose is a double whammy because the capital required is much lower with much lower expenses.

I think with paid off housing one needs very little to live a good life. If I get 36k a year post tax that will be more than plenty for us as a couple: I dont need much to be happy, an Internet connection, a kettle and tea, and I am set.

My biggest investment area that I think I need to work on before retirement is building social capital in the form of friends and family nearby. My mother in law passed away unexpectedly last week, having never left her hometown. At the funeral and wake it was really brought home to me that all the people she kept close with in her life had made it rich, full of good times, despite sometimes little money and serious health issues.

You can have too much financial capital, but I don't think you can ever have too much social capital.

Great post and I 100% agree with you. FIRE is only possible (IMHO) if you earn significantly more than you spend so you need to find ways to earn more and spend less in parallel. I ran some numbers this week looking at 'The Miracle of Compound Interest' based on what I've seen since 2007 and the news isn't good. If you're an average saver and investor you're going to be waiting a long long time - in the example I ran it was 46 years which ain't going to be FIRE. Even an average saver who knocks it out of the park investment wise (I assumed twice the return I've physically seen) took 28 years. In contrast my high saving rate allowed me to do reach FI in 9 years.

TheRIT
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Re: FIRE

#4100

Postby TheRIT » November 12th, 2016, 11:07 am

TUK020 wrote:Lot's of discussion about the 4% rule for FI.
How do people adapt this for inflation?
We have been living in a low inflation era for a while, but should not assume that it continues this way

The 4% Rule assumes that you take 4% of the capital value in year 1 as your 'salary' and then in subsequent years uplift that 'salary' for inflation. So you're actually only ever likely to be 4% in year 1.

Be careful with it though and definitely read all the small print. Personally, as a UK based investor looking to live in The Med I think it's way too bullish for a FIRE'ee.

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Re: FIRE

#4309

Postby pbarne » November 12th, 2016, 10:28 pm

Wizard wrote:May I ask if this means you operate on the basis of an assumed level of inflation of 0%? You state "4% (after inflation)" then take £22k and divide it through by 4% to arrive at £550k, so where does inflation get dealt with? So twenty years after retirement as you have had to spend every penny to get the median lifestyle nothing has been reinvested, so income is still £22k. But that will be nothing like median income then.
Terry.


ap8889 wrote:Umm 4% is the real return...


Actually the 4% rule as originally conceived was the initial level you could withdraw (and adjust every year for inflation) and still not use up all your capital after 30 years (i.e. if you have 1p left you have succeeded). If you model this using the PMT formula you only actually need an average real return of 1.3% which is way lower than long-term market returns - the reason for this conservatism is to allow for hitting the worst historic sequence of returns (bad returns in the early years).

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Re: FIRE

#4384

Postby zxspectrum48k » November 13th, 2016, 9:07 am

TheRIT wrote:... I feel I'm incredibly fortunate to have found a way to work myself up to be a 1% UK earner but even with those earnings my spreadsheet tells me that even at age 60 I'd still be nowhere near £5m.
Of course we're all different and it's one of the reasons I stay blogging but all I'll say is I'm going FIRE with a lot lot less as I'm a believer that you're a long time dead.

Yes, it is a lot of capital. However, I'm assuming £60k living costs for two adults and two children for the next 15-20 years (plus £30-40k for school/uni fees) and then £60k for just the two adults. I read your blog, and it's not totally clear, but I think you are assuming around £20k+/annum for just yourself. I don't like SWRs (the modelling by academics of this is very weak, even Wade Pfau) but my SWR is effectively just 1.5%. In comparison yours is closer to 2.5%.

I think both of us are skeptical of the 4% rule (international SWRs are nowhere need 4%) but I'm more skeptical because I've spent quite a bit of my life understanding inflation baskets. The bifurcation in good/services inflation in the the typical G4 inflation basket is likely to result in most people needing to grow their wealth at CPI+2% just to stand still. Many FIRE types don't explicitly think about the liability side of the equation, and just focus on the returns on their assets . You only have to look at a bloggers crowing about their returns this year due to Sterling's fall but who don't reprice their forward liability curve. That's just intellectually weak. My case is particularly bad since school fees have risen 550% since 1990, while CPI has risen just 200%. So school fees are a liability rising at around CPI+3%. School fees will rise even faster with a weaker Sterling rate (foreigners will find UK schools cheaper). You have to model these liabilities, you can't just assume a blanket CPI flat rise.

One other point, is that obviously I'm making significant provision for my children (school fees, uni fees, house deposit/purchase, inheritance etc). I always feel that children are ignored in FIRE blogs. My view is that while my partner and I can attempt FIRE, I have no right to expect my children to see FIRE as a good idea. They may want to compete for high paid/high hour jobs, love consumerism etc etc. So I need to provide the maximum level of optionality so they can choose.

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Re: FIRE

#4393

Postby toofast2live » November 13th, 2016, 9:44 am

Why the hell have school fees rocketed? Surely their major costs are building maintenance and teacher salaries. Both of which should be rising at no more than cpi.

Buy a house near a decent state school may be worth considering.

£1,200 a week seems quite a lot for two people in a paid for house.

TheRIT
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Re: FIRE

#4411

Postby TheRIT » November 13th, 2016, 10:33 am

zxspectrum48k wrote:Yes, it is a lot of capital. However, I'm assuming £60k living costs for two adults and two children for the next 15-20 years (plus £30-40k for school/uni fees) and then £60k for just the two adults. I read your blog, and it's not totally clear, but I think you are assuming around £20k+/annum for just yourself. I don't like SWRs (the modelling by academics of this is very weak, even Wade Pfau) but my SWR is effectively just 1.5%. In comparison yours is closer to 2.5%.

I think both of us are skeptical of the 4% rule (international SWRs are nowhere need 4%) but I'm more skeptical because I've spent quite a bit of my life understanding inflation baskets. The bifurcation in good/services inflation in the the typical G4 inflation basket is likely to result in most people needing to grow their wealth at CPI+2% just to stand still. Many FIRE types don't explicitly think about the liability side of the equation, and just focus on the returns on their assets . You only have to look at a bloggers crowing about their returns this year due to Sterling's fall but who don't reprice their forward liability curve. That's just intellectually weak. My case is particularly bad since school fees have risen 550% since 1990, while CPI has risen just 200%. So school fees are a liability rising at around CPI+3%. School fees will rise even faster with a weaker Sterling rate (foreigners will find UK schools cheaper). You have to model these liabilities, you can't just assume a blanket CPI flat rise.

One other point, is that obviously I'm making significant provision for my children (school fees, uni fees, house deposit/purchase, inheritance etc). I always feel that children are ignored in FIRE blogs. My view is that while my partner and I can attempt FIRE, I have no right to expect my children to see FIRE as a good idea. They may want to compete for high paid/high hour jobs, love consumerism etc etc. So I need to provide the maximum level of optionality so they can choose.

I give quite a lot away and so my anonymity remains important (at least for now). I therefore always stay away from the children discussion however what I will say is that I would be/am <delete as appropriate> happy for my children to be educated in non-private schools. I was and I turned out ok. It's also because I would happily personally provide further assistance/tutoring to help them further if gaps were appearing.

The reducing spending piece is one of the most important elements enabling FIRE (and I wrote extensively about it yesterday on the blog) as it not only increases your savings rate during the accumulation phase but it also reduces the actual wealth you'll need in FIRE. Apologies, if I have not come across clear previously. Let me try again:
- In TheRIT household I am responsible for all family running costs and my own discretionary spending. They are the numbers I declare. MrsRIT just covers off her discretionary spending. So a family holiday or the leccy bill I cover but a new lipstick she covers. Ie her spending is actually pretty small.
- In the last rolling twelve months (the accumulation phase) my total spending has been £26,800 however that needs some clarification:
-- We rent in a particularly expensive part of the country as that gives me the best opportunity to maximise savings (earnings-spending). If we net rent off (we'll buy in FIRE and yes I acknowledge I'll have home maintenance costs which I'll cover later) and also net work costs off (won't have those in FIRE) I'm down to £9,800 per annum.
-- This year we've also spent £3,100 of that £9,800 on the ground researching FIRE locations (specifically multiple visits to Herefordshire and Cyprus).
-- So we no longer spend very much...

In FIRE I am budgeting:
- If we go the Cyprus with a home purchase I am budgeting annual spending of EUR22,300. I use an exchange rate of 1.123 in my planning so that's £19,800 which is the £20k you reference. That includes expected home maintenance costs and car replacement costs. 31% of it is also purely discretionary spend (eating out, travel, etc) and we don't currently spend anywhere near that but I acknowledge we'll also have more time to spend.
- If we go the Herefordshire route I think we need a little more. Around £21,100.

So compared to the accumulation my FIRE budget allows us enough margin to live like royalty (in our opinion). This is because when I FIRE I want paid work to become 100% optional forever while also acknowledging that my spending profile may change as I could be FIRE'd for a lot of years. It is also (IMHO) important to add that all my modelling is based on historic worst case sequence of returns and even with one of these our life will be all we desire. If I just get an average sequence I am going to end up with so much wealth than I don't currently know what to do with it all. A position I'm pretty happy to be in.

I would be interested at the top level drivers that make you use CPI+2%. You mention private school fees but what are you seeing after that as I typically just use RPI in my modelling which has of course been higher than CPI for a long time (forever?)? In the spirit of transparency I've kept very accurate spending profiles for myself since 2013. Comparing 2013 to an annualised 2016 I've actually seen a nominal spend reduction of 10%. This may not however be so helpful to the discussion as over that time I've been learning how to increase quality of life while learning how to spend less and I acknowledge that at some time in the future my spend will minimise then start to be hit by inflation.

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Re: FIRE

#4520

Postby Wizard » November 13th, 2016, 4:49 pm

ap8889 wrote:Umm 4% is the real return...


OK my misunderstanding. I saw previously people using the 4% as a gross number, or at least that what I interpreted it as.

Terry.

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Re: FIRE

#4528

Postby TheRIT » November 13th, 2016, 5:32 pm

Wizard wrote:
ap8889 wrote:Umm 4% is the real return...


OK my misunderstanding. I saw previously people using the 4% as a gross number, or at least that what I interpreted it as.

Terry.

The 4% in the 4% Rule is neither a nominal or real return. As I described above it is the withdrawal rate you start drawing down at. Ie you take your wealth in £/$/etc's and multiply it by 4% to get a withdrawal rate 'salary' in £/$/etc's. Then you uprate that 'salary' by inflation each year. Remember the 4% Rule as published actually resulted in wealth actually running out in some cases (the risk piece) before a 30 year period was up.

Can't embed images but I have the tables on my blog http://www.retirementinvestingtoday.com/2013/02/calculating-that-important-retirement.html and it shows for example that if a US based investor had 50% in US stocks and 50% in US bonds then looking historically they would have run out of wealth prior to 30 years of drawdown in 4% of cases.

Also remember it's US based. The table I have here shows how that historically changes for different countries http://www.retirementinvestingtoday.com/2014/05/further-exploration-of-safe-withdrawal.html. For example a UK investor with 50% in UK stocks and 50% in UK bonds could only withdraw 3.05%, before investment expenses, if they wanted "100% historic success" over a 30 year period. With global stocks and bonds it improves slightly to 3.26%, before expenses.

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Re: FIRE

#5475

Postby TahiPanas » November 16th, 2016, 3:21 am

I use the 4% Rule only as an income target. Many would consider that to be almost low yield but everyone's circumstances are different.

I am 72 and retired. Almost all our income comes from shares. We have no state pensions but my wife has a 5k pa civil service pension. In addition we have NSI Pensioner Bonds, an emergency cash fund, a balancing fund for dividend fluctuations and about 1 years income in cash. That's it.

My low-ish 4% yield target allows me to include safer low earners such as RB, ULVR and DGE. Our income portfolio has a mix of HYP shares, Luni's ITs, and ETFs, all for diversity.

We never intend to sell any of our investments if at all possible. We live off our income and fortunately that is greater than our natural expenditure. We will return to the UK next year from a much more expensive location so, even allowing for higher tax, we should be better off. In any case, in the unlikely event that our income drops very significantly below our current expenditure, we have ample scope to trim costs.

My wife and I feel blessed to be in this fortunate position which I think is largely due to the excellent advice I received from TMF. Thank you all so much.

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Re: FIRE

#5964

Postby funduffer » November 17th, 2016, 3:40 pm

Thread has gone a bit quiet, but I thought I would add my experience of FIRE.

I FIRE'd at 58, which is not that young, but I would still class as retiring early. I am now 61, and live off a DB pension and my investments (mainly dividend-paying shares and IT's, mainly in ISA's). However, I thought I would mention a few non-financial aspects of FIRE:

1. Get social. Unless you have a very active social life already, you will find you miss the day-to-day office banter with work colleagues. Go and find some clubs/organisations/voluntary groups to join for the social interaction. If they are during the working week, you will find you are amongst the youngest in these groups, so be prepared to interact socially with people 10 or 20 years older than yourself. I have joined a male voice choir, and have made many new friends from this.

2. Keep active. You should have more time, so use some of it to get fitter and healthier. I now walk to many places I used to drive to, and also cycle and swim. I have lost a fair amount of weight since retiring and feel much healthier than when I worked (which was basically a sedentary job in an office).

3. Be intellectually challenged. Keep your brain active, by taking part in something that stretches your mind. This might be further education, or some club with an intellectual challange - eg discussion groups. I joined a local discussion forum, and a medical research committee, from which I have learned a lot and kept my brain active.

4. Be worthwhile. Do something to maintain/gain self-esteem, which is all part of your overall personal well-being. Voluntary work is the obvious thing here - I volunteered for the local Air Ambulance charity as a speaker, which took me to all sorts of places, and made me feel I was still being useful to society.

5. See the world. If you can afford it, go and see the world, or the country, or your local region. Do it before you get too old. Start with long haul, as your horizons will reduce as you age. I have identified about 10 places I want to visit before I reach 70.

6. Stay solvent. The biggest thing approaching FIRE is to understand what you will spend, and therefore what income you will need. I under-estimated how much cheaper it is to live after FIRE, and have generally been too cautious in my spending. I hadn't quite realised how much tax, NI and work expenses were taking from my income when I worked. Also, after FIRE,you have more time to scrutinise what you spend, and I have found I have made very large savings in what I spend simply by finding bargains, changing bank accounts, switching energy suppliers and the like. I have been so successful, I am now struggling to spend up each month without generating new savings that I do not really need. The change in mindset from saving/investing as much as possible in achieving FIRE, to spending to enhance your quality of life has taken me some time to achieve.

Overall, enjoy FIRE - I do.

FD

TheRIT
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Re: FIRE

#6720

Postby TheRIT » November 19th, 2016, 11:50 am

A great thoughtful post funduffer. Should be compulsory reading before anybody is allowed to FIRE.

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Re: FIRE

#7121

Postby OLTB » November 20th, 2016, 6:43 pm

I'm really concerned that the FIRE option is too late for me (if I'm realistic). I have a small deferred DB scheme that is currently due to pay approx £4,600 from normal retirement age (62) and a simple guess at inflation will make this worth approx £6k at that time. My only other pension is my HYP and although I'm really trying to build this up, not too sure how much power compounding will have between now and 62 (15 years). Perhaps my plan of achieving FIRE at 62 will have to move, but interested to see how much in retirement is required. I would like to do all the expensive stuff first in retirement as I am aware that my DB scheme and State Pensions (alongside Mrs OLTB's) will increase each year and as I reach my late 70's / early 80's. run the risk at that time of income exceeding expenditure. Have considered transferring my DB scheme away to my HYP as I'm sure that over the next 15 years, the income reinvested could exceed the estimated £6k - the transfer value is really meaty and becoming increasingly tempting. Foolish? perhaps, but don't want potential to disappear! Will respond to any positive feedback be that a virtual arm round shoulder saying everything will work out / a Ferguson type hairdryer treatment telling me to man up!

Cheers, OLTB.

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Re: FIRE

#7189

Postby grimer » November 20th, 2016, 10:00 pm

OLTB wrote:Have considered transferring my DB scheme away to my HYP as I'm sure that over the next 15 years, the income reinvested could exceed the estimated £6k - the transfer value is really meaty and becoming increasingly tempting.


I expect the current value with be very tempting, given current interest rates - but perhaps equities are about to crash? I'm 100% invested in equities via HYP, trackers and ITs. I'm aiming for full retirement at 55, but would like to build up enough to 'survive' if I my career hits a dead end before then. 55 is 17 years away, for me and I think this is enough time to keep investing through any downturns, buy shares while prices are depressed and hopefully ride any recovery in asset prices. I don't really see any other options for building my retirement pot, but that could probably just be ignorance on my part.

I think that compounding will have enough time to build up my portfolio pot to somewhere between £800k-£1.2million depending upon return and dependent upon contributions continuing at their current level - i.e. no career ending redundancy. I may actually be able to increase my contributions, if something at work pans out in my favour. If that happens, my pot might be substantially larger.

Ultimately, I have no idea what the future holds. My savings rate is currently 40% gross and any future earnings will be earmarked purely for savings and investments, so it could rise to 50%+. If that isn't enough, then there are going to be tens of millions living in abject poverty in their old age.

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Re: FIRE

#7549

Postby TheRIT » November 21st, 2016, 9:25 pm

grimer wrote:I expect the current value with be very tempting, given current interest rates - but perhaps equities are about to crash? I'm 100% invested in equities via HYP, trackers and ITs. I'm aiming for full retirement at 55, but would like to build up enough to 'survive' if I my career hits a dead end before then. 55 is 17 years away, for me and I think this is enough time to keep investing through any downturns, buy shares while prices are depressed and hopefully ride any recovery in asset prices. I don't really see any other options for building my retirement pot, but that could probably just be ignorance on my part.

I think that compounding will have enough time to build up my portfolio pot to somewhere between £800k-£1.2million depending upon return and dependent upon contributions continuing at their current level - i.e. no career ending redundancy. I may actually be able to increase my contributions, if something at work pans out in my favour. If that happens, my pot might be substantially larger...

17 years is a bit longer than my 9 years but make sure you model what you might expect compound interest to deliver as I received quite a surprise as only 38% of my wealth came from compound interest while 62% came from saving. It was so surprising it prompted me to explore it further here http://www.retirementinvestingtoday.com/2016/11/wheres-snowball-why-youd-better-save-if.html if anyone is interested.

grimer wrote:...Ultimately, I have no idea what the future holds. My savings rate is currently 40% gross and any future earnings will be earmarked purely for savings and investments, so it could rise to 50%+. If that isn't enough, then there are going to be tens of millions living in abject poverty in their old age.

A person after my own heart. A few years ago I was at 60% of gross but as my salary grew and my tax rate increased it's reduced to 53% in the last 12 months.

If I understand correctly your 38 years old today, your at a 40% gross savings rate and you only think you can FIRE in 17 years. With a bit of critical thinking I'd challenge if you might just be able to do a bit better than that. In comparison I started when I was 34, became FI only 9 years later at age 43 and will FIRE next year under current plans.

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Re: FIRE

#7556

Postby UncleEbenezer » November 21st, 2016, 9:44 pm

pbarne wrote:
thebarns wrote:I further guess the majority will look for somewhere around £750K- £1.5M.


A rough and ready reckoner of income in retirement discussed a few times on the other place was:

12K for a very basic existence
24K for a moderate lifestyle
36K for a good lifestyle with some luxuries

Assuming a range of 3% to 4% drawdown that would equate to a range of 300K to 1.2M.

All assuming your "pot" would need to finance all your income.

Who is posting those figures?

So much depends on what you're used to. My parents retired on a lot less than £12k, but nevertheless with much more money to spend than they had had when bringing up a family and servicing a mortgage. I find it hard to spend that much, despite having upgraded three years ago to a much better house, and taking little luxuries like the whole of last week in a four-star hotel in Seville (in my youth, a Youth Hostel would've been far too expensive). Now that £12k is tax-free, it looks like a particularly attractive plan - though sadly it seems my pension pot would only stretch to half that at today's annuity rates, so I'd need to buy a house and eliminate the rent.


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