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Redundant / early retirement

Including Financial Independence and Retiring Early (FIRE)
NearlyThere
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Redundant / early retirement

#340372

Postby NearlyThere » September 15th, 2020, 10:32 am

Hello Lemon fools, my first post....

Looking for a sense check on my plan to leave corporate life and retire (or semi retire)
I'm taking an opportunity for redundancy in December this year. I'll be aged 54

I have an outstanding mortgage of £110k and cash savings of £250k which I'll use some of to clear. No other debt.
Kids all grown up, flown the nest and financially independent. My partner works part time and earns ~£14k p.a.

My severance & bonus payment will be £105k. I'm planning on transferring £75k of this into my DC pension which will give me a total pot of around £270k in that scheme. I also have £60k in an L&G SIPP.

From a previous employer I have a DB pension fund which will pay:
£14k age 55
£16.5k age 60
£20.5k age 65

I also hold shares in a single company worth around £160k which currently pays dividends of £8k p.a

My plan:
Pay off mortgage, leaves £140k in "cash" savings with NS&I
Use £30k tax free redundancy money to live off until age 55
At age 55 take my DB pension at £1100 / month
Move £270k DC fund and £60k L&G SIPP to a drawdown account and take ~£1500 / month (should last till age 75?)
Continue to take dividend payments ~£670 / month

I rekon to need about £33k net p.a income, so have some headroom (I think)

Also due to get full state pension at age 67, assuming things don't change.

I'm seeking professional advice (which is proving difficult/expensive), but would appreciate any critique on my plan particularly any pointers on best drawdown account to move my DC fund into?

Thanks!

Nearly.

dealtn
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Re: Redundant / early retirement

#340375

Postby dealtn » September 15th, 2020, 10:43 am

NearlyThere wrote:Hello Lemon fools, my first post....

Looking for a sense check on my plan to leave corporate life and retire (or semi retire)
I'm taking an opportunity for redundancy in December this year. I'll be aged 54

I have an outstanding mortgage of £110k and cash savings of £250k which I'll use some of to clear. No other debt.
Kids all grown up, flown the nest and financially independent. My partner works part time and earns ~£14k p.a.

My severance & bonus payment will be £105k. I'm planning on transferring £75k of this into my DC pension which will give me a total pot of around £270k in that scheme. I also have £60k in an L&G SIPP.

From a previous employer I have a DB pension fund which will pay:
£14k age 55
£16.5k age 60
£20.5k age 65

I also hold shares in a single company worth around £160k which currently pays dividends of £8k p.a

My plan:
Pay off mortgage, leaves £140k in "cash" savings with NS&I
Use £30k tax free redundancy money to live off until age 55
At age 55 take my DB pension at £1100 / month
Move £270k DC fund and £60k L&G SIPP to a drawdown account and take ~£1500 / month (should last till age 75?)
Continue to take dividend payments ~£670 / month

I rekon to need about £33k net p.a income, so have some headroom (I think)

Also due to get full state pension at age 67, assuming things don't change.

I'm seeking professional advice (which is proving difficult/expensive), but would appreciate any critique on my plan particularly any pointers on best drawdown account to move my DC fund into?

Thanks!

Nearly.


A single share portfolio of that size would appear to be quite a significant, undiversified, exposure. There may be reasons of course that you haven't disclosed. You should at least be aware of that (and I am sure you are).

AleisterCrowley
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Re: Redundant / early retirement

#340378

Postby AleisterCrowley » September 15th, 2020, 10:47 am

Yes, as above "I also hold shares in a single company worth around £160k which currently pays dividends of £8k p.a"
Looks like a massive risk - could be another Carillion, or Lloyds...everything fine, until suddenly it isn't

Gan020
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Re: Redundant / early retirement

#340479

Postby Gan020 » September 15th, 2020, 5:16 pm

I suggest it would be helpful to build a spreadsheet and ensure you consider inflation because this is going to eat up your pot.

At 55 you have £14k+£18k+£8k=£40k on which you are going to have to pay some tax (say around £5k) leaving you around £35k

at 67 you have £21k (assuming you get inflation at 2%) + £8k (dividends) + £12k (state pension inflated) = £41k less some tax leaving you around £36k. You will have left your £140k NS&I pot and another say £130k left from your DC pot


But the cost of living at 67 won't be £33k a year it will be £33k plus 22 years inflation (at say 2%) = £33k*1.02^22=£51k per year, which means you will have been drawing more that £18k a year from your DC pot. Lots more.


However, if you throw your partner's part time work into the maths and they continue working until they are 67 (or perhaps some lower age but still many years) and the £33k you need is your joint requirement not your individual requirement it would seem much more plausble.

JohnB
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Re: Redundant / early retirement

#340484

Postby JohnB » September 15th, 2020, 5:42 pm

I would never include inflation explicitly in calculations, as it makes the numbers feel unreal. Instead I'd look at the after inflation values, which for shares might be 3% dividends and 1% capital growth. Your DC withdrawl rate initially at 12% is certainly agressive compared with that.

I didn't go through the numbers, but if you multiply all pensions by 20 and add investments, and assume a 3% SWR after tax, you need about £1m to spend £30k. What do you get?

You need a spreadsheet to run the numbers forward.

terminal7
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Re: Redundant / early retirement

#340488

Postby terminal7 » September 15th, 2020, 5:52 pm

I also hold shares in a single company worth around £160k which currently pays dividends of £8k p.a


Agree with others that this is very risky in the context of your total assets (unless there are other matters you do not wish to disclose). I can tell you that many years ago I worked for an SME that incentivised their staff to invest in the company's shares. As a result over time a number of the staff built up sizeable pots of shares and in many instances this was their only investment. The company was taken over - paper for paper for the shareholders. Within 2 years the predator went bust leaving staff with worthless paper (and in this instance also no jobs).

T7

EthicsGradient
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Re: Redundant / early retirement

#340491

Postby EthicsGradient » September 15th, 2020, 6:23 pm

JohnB wrote:I would never include inflation explicitly in calculations, as it makes the numbers feel unreal. Instead I'd look at the after inflation values, which for shares might be 3% dividends and 1% capital growth. Your DC withdrawl rate initially at 12% is certainly agressive compared with that.

The DC withdrawal rate looks to me like 18k/(270k+60k)=5.5%.

JohnB
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Re: Redundant / early retirement

#340496

Postby JohnB » September 15th, 2020, 7:17 pm

Pesky reciprocals. You are right

monabri
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Re: Redundant / early retirement

#340509

Postby monabri » September 15th, 2020, 8:58 pm

Gan020 wrote:I suggest it would be helpful to build a spreadsheet and ensure you consider inflation because this is going to eat up your pot.


Yes, that would be a good idea.

NearlyThere
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Re: Redundant / early retirement

#340559

Postby NearlyThere » September 16th, 2020, 8:52 am

Thanks for the comments....

I agree single company stock is a risk. This is a "blue chip" holding in the large corporation I've been working for over last 14 years. Probably should diversify. Any suggestions how I can maintain the same return?

I have built a spreadsheet that runs the numbers forward. It assumes 2.5% increase in desired income, with the same increase in DB payments and DC drawdown amounts. Drawdown decreases by the value of state pension at age 67. I've assumed the dividend income remains flat.

This tells me my DC pot runs out at age 80. I'm ok with this and anticipate I'll either be dead, or have to manage on a 25% drop in income!

My BIG assumption here is that the DC pot has an annual growth rate of 4% after charges. Is that reasonable? It's also why I'm asking for pointers to the best drawdown account/funds.

Cheers,
Nearly

Urbandreamer
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Re: Redundant / early retirement

#340570

Postby Urbandreamer » September 16th, 2020, 9:56 am

NearlyThere wrote:I agree single company stock is a risk. This is a "blue chip" holding in the large corporation I've been working for over last 14 years. Probably should diversify. Any suggestions how I can maintain the same return?


The word "return" is a bit woolly as is the concept of risk.

I calculate that you are claiming a yield of 5% (8/160). That's quite a punchy yield and is it what you mean by return?
For example the the FTSE 100 yields between 3-4% since the cuts. It was yielding almost the 5% that you wish.
If we look at total returns then investing in lower yield assets can make sense.
FCIT has quite a track record (47 years of increaded dividends and been around over 150 years), though it's yield isn't great at less than 2%. It's total return is quite good desite the low yield.

A portfolio or mix might be a better idea though.
For example I hold HFEL which yields 6.7%, but is exposed to significant China risk. It also has no growth that I can see.
FCIT, already mentioned.
SMT, which is expected to be volatile.
IBT, which invests in companies that don't usually pay dividends. The trust manufactures a dividend by selling investments so that it can pay 4% of it's assets out each year.
CTY, currently poorly performing but with a good history.
etc.....

At this point someone will chime in pointing out that these are all active investments where people get paid to manage them. They may claim that passive investments are cheaper (which isn't always true) and perform better (a debate that will go on forever), then point you at an index tracker (which may indeed be the bast choice for you).

I think that few would dispute the idea of using collective investments as a method of diversifying some of the risks.

Adamski
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Re: Redundant / early retirement

#340604

Postby Adamski » September 16th, 2020, 11:55 am

Congrats on your forthcoming early retirement. Hope you get chance to celebrate in December, pandemic permitting! I'm looking at early retirement myself.

We've all got different preferences for investments. I had a windfall which I initially put half in NS&I and half in a Vanguard Lifestrategy fund, before decided what to do with it. Then moved a portion into 'satellites' of riskier investments.

StepOne
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Re: Redundant / early retirement

#340674

Postby StepOne » September 16th, 2020, 3:47 pm

Have you thought about the option of not paying the mortgage off? With interest rates as they are, it should be possible to find relatively safe investments yielding enough to cover your monthly interest and a bit more. You can get ten year fixed rate mortgages as low as 1.99%. FTSE yields almost double that, even after all the recent cuts (some of which will be reinstated).

NearlyThere
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Re: Redundant / early retirement

#340684

Postby NearlyThere » September 16th, 2020, 4:51 pm

StepOne wrote:Have you thought about the option of not paying the mortgage off? With interest rates as they are, it should be possible to find relatively safe investments yielding enough to cover your monthly interest and a bit more. You can get ten year fixed rate mortgages as low as 1.99%. FTSE yields almost double that, even after all the recent cuts (some of which will be reinstated).


Good point. I think it's a psychological thing to get the mortgage cleared. I suppose I'd be about £100 / month better off by doing that? Just feels more satisfactory to be able to say I'm debt free.

Itsallaguess
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Re: Redundant / early retirement

#340692

Postby Itsallaguess » September 16th, 2020, 5:15 pm

NearlyThere wrote:
StepOne wrote:
Have you thought about the option of not paying the mortgage off? With interest rates as they are, it should be possible to find relatively safe investments yielding enough to cover your monthly interest and a bit more. You can get ten year fixed rate mortgages as low as 1.99%. FTSE yields almost double that, even after all the recent cuts (some of which will be reinstated).


Good point. I think it's a psychological thing to get the mortgage cleared. I suppose I'd be about £100 / month better off by doing that? Just feels more satisfactory to be able to say I'm debt free.


I'm still working, but paid my mortgage off years ago, and whilst there may well be clear financial arguments for sometimes taking one view on this or another, such as StepOne has quite rightly done above, I would urge you to put real weight behind the psychological benefits of removing what is often the single largest financial millstone around our necks...

Not everything in finance can be justified by the use of a calculator alone, and the day I paid the final part of my mortgage off really was one of the happiest days of my life, and the knowledge that it is paid off continues to provide me with an awful lot of emotional and psychological comfort....

Best wishes for your retirement - I always think it's a great comfort to the rest of us who are still working when we read of people here who have managed to get to the finishing line....

Cheers,

Itsallaguess

SalvorHardin
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Re: Redundant / early retirement

#340699

Postby SalvorHardin » September 16th, 2020, 5:41 pm

NearlyThere wrote:Good point. I think it's a psychological thing to get the mortgage cleared. I suppose I'd be about £100 / month better off by doing that? Just feels more satisfactory to be able to say I'm debt free.

Indeed. There's a tremendous psychological benefit from becoming debt free.

Turn the situation around. You are retired and have no debt. Would you think it a good idea to borrow a large amount at 2% to invest in the FTSE100 at something like 3.5% to 4% yield? On paper it looks like "free money", and the models loved by neoclassical economists and the finance industry say that it's a good idea.

But in practice you're taking on a new level of worry, having gone from debt free to now having a lot of debt which is backed by an asset class whose performance in recent years has been mixed. Especially when you consider the collapse in FTSE100 dividends during 2020.

dealtn
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Re: Redundant / early retirement

#340701

Postby dealtn » September 16th, 2020, 5:44 pm

SalvorHardin wrote:
Turn the situation around. You are retired and have no debt. Would you think it a good idea to borrow a large amount at 2% to invest in the FTSE100 at something like 3.5% to 4% yield?


No way. It would never be FTSE 100.

Urbandreamer
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Re: Redundant / early retirement

#340705

Postby Urbandreamer » September 16th, 2020, 5:54 pm

SalvorHardin wrote:
NearlyThere wrote:Good point. I think it's a psychological thing to get the mortgage cleared. I suppose I'd be about £100 / month better off by doing that? Just feels more satisfactory to be able to say I'm debt free.

Indeed. There's a tremendous psychological benefit from becoming debt free.

Turn the situation around. You are retired and have no debt. Would you think it a good idea to borrow a large amount at 2% to invest in the FTSE100 at something like 3.5% to 4% yield? On paper it looks like "free money", and the models loved by neoclassical economists and the finance industry say that it's a good idea.

But in practice you're taking on a new level of worry, having gone from debt free to now having a lot of debt which is backed by an asset class whose performance in recent years has been mixed. Especially when you consider the collapse in FTSE100 dividends during 2020.


Wasn't there a recent thread by someone wanting to do something very similar to that only at far less return?
viewtopic.php?f=18&t=25108

On a personal note, I'm glad to have paid my mortgage off. As said, it is a constant comfort that I have done so.

StepOne
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Re: Redundant / early retirement

#340944

Postby StepOne » September 17th, 2020, 2:03 pm

I'm looking forward to paying off the mortgage as much as the next man, but I currently have both a mortgage and an HYP. We come out of our fixed rate next March, and I have considered cashing in the HYP and paying off a chunk of the mortgage.

I would be better off each month (mainly because the majority of the mortgage payment is capital repayment, not interest), but when we reach the original mortgage end date, I won't have my HYP sitting in my ISA - instead I will have nothing.

And I can't help thinking that if we did have a bit of extra money each month, it would just go on stuff we don't really need.

If we can get by on what we earn at the moment, then why pay off the mortgage. Just keep the HYP, going and possibly use that to retire a bit earlier.

I understand what everyone says about the psychology, but I keep thinking, why take a course of action that makes me worse off?

Apologies for hijacking the thread :D

kempiejon
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Re: Redundant / early retirement

#340952

Postby kempiejon » September 17th, 2020, 2:19 pm

I'm with you Stepone, the numbers are more important, however I've just remortgaged and the rate dropped from about 2.6% to 1.7%. I'm leaving the payment level the same though so I'm not getting that reduction in payments the lower rate offers. There's more than enough investments and cash to clear the mortgage and although this year has been tough my records show me returning several times the interest rate as an investor.
A chum of mine no longer invests, he over pays the mortgage but his mortgage is a much larger % of his outgoings than mine is, here the psychology plays on his mine ore than mine.


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