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Able to FI(RE)?

Including Financial Independence and Retiring Early (FIRE)
Storcko
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Able to FI(RE)?

#463928

Postby Storcko » December 7th, 2021, 5:46 pm

Hi,
I've been observing on here for a few months and am really impressed by the wealth of knowledge and wisdom so I've summarised my and Ms S's numbers below with some questions that I'm grappling with in the hope you can help my thinking.

Background:
- both 55; one employed, other self employed
- one child at Uni financially dependent for the next 2 years (budgeted for and not in the figures below)
- no expected inheritance
- O/O no mortgage with downsizeable equity of £50-100k

Guaranteed pots:
- Ms S has DB paying £5k pa now
- 2* DBs paying £1.6k pa each at 60 (one each)
- 2* full SP expected at 67
- Total DB - £8.2k at 60; £26.2k at 67 (assumed)

Drawdownable pots:
- Mr DC £545k (£37k pa currently going in via salary sacrifice)
- Ms S&S ISA £180k
- Mr S&S ISA £85k
- Total £810k

Pre tax income required:
£40k pa to 75 then £30k pa

Funding required from drawdownable funds (ignoring inflation):
56-60 = £35k pa (total £140k)
60-67 = £32k (£224k)
67-75 = £14k (£112k)
75+ = £4k (assume £100k)
Total funding requirement = £576k

Things that I think about / am trying to learn about:
- higher inflation (i.e., consistently above 5%) and how to invest to protect what we have
- sequence of returns risk in drawdown (I have cash = 2 years income in the SIPP and 2-3 months' worth outside)
- drawdown options for SIPP and the tax implications
- minimising tax on drawdown by using the pots efficiently
- LTA potentially
- planning for care costs in later life

Based on this fairly crude analysis FIRE looks feasible with a decent margin but have I missed anything and what else should I be thinking about?

Many thanks in advance.

TUK020
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Re: Able to FI(RE)?

#463931

Postby TUK020 » December 7th, 2021, 6:01 pm

Good list of things to think about.
I would add:
- kid will not magically become financially independent on graduating. My youngest graduated last year with a 2.1 in Philosophy from a Russell group uni. Has now started a 2 year law conversion course at a private uni......guess who is paying the tuition. After that, will come help with getting started on the property ladder etc. Think of it as a tapering process, rather than a stop.
- easier to downsize, than to release equity. Temptation will be to go for a better quality of house/location with fewer rooms to manage. This will not necessarily wind up being much cheaper. Add in transaction costs, and it is easy for that equity release figure to vanish.

The big one on your list I am chewing my fingernails over is the inflation issue.

JohnB
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Re: Able to FI(RE)?

#463935

Postby JohnB » December 7th, 2021, 6:07 pm

The OP has enough unless they want to be a bank of M&D

Storcko
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Re: Able to FI(RE)?

#464049

Postby Storcko » December 7th, 2021, 10:25 pm

TUK020 wrote:Good list of things to think about.
I would add:
- kid will not magically become financially independent on graduating. My youngest graduated last year with a 2.1 in Philosophy from a Russell group uni. Has now started a 2 year law conversion course at a private uni......guess who is paying the tuition. After that, will come help with getting started on the property ladder etc. Think of it as a tapering process, rather than a stop.
- easier to downsize, than to release equity. Temptation will be to go for a better quality of house/location with fewer rooms to manage. This will not necessarily wind up being much cheaper. Add in transaction costs, and it is easy for that equity release figure to vanish.

The big one on your list I am chewing my fingernails over is the inflation issue.


Good points thanks - the former is budgeted for on the basis of definite and maybe so the fund is actually quite a bit more than 2 years worth and the latter point is something which we've been discussing recently and I think we'll actually ignore for purposes of The Number. Inflation? Now if only you had the answer to that!

airbus330
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Re: Able to FI(RE)?

#464082

Postby airbus330 » December 7th, 2021, 11:08 pm

I'm doing it now with numbers that are not wildly different from yours. I started at 60 (62 now) which makes a difference and neither of us have much DB pension, so most of the income is from investments until SP starts. I'd make a couple of observations.
I'd reiterate the child support. We have 2, one is self sufficient, but the other has failed to launch and back in education. While not an enormous financial drag, it does worry us that she may need feeding and watering for years to come. The other, whilst solvent, required an uplift to his savings to get on the property ladder, which we were happy to do and it is being repaid. That along with large price tag replacements, such as cars, means you need a decent amount of cash in hand to spend especially in the early years. If you are budgeting on 40k a year income, that doesn't leave much scope for accruing savings for big ticket items.
Many on this site have a very good idea of their outgoings. I thought I did too, but after the 1st year of FIRE I realised my earlier calculations were light. With time on your hands and relative youth, you need quite a lot of spending money to enjoy life.

Think carefully about your own attitude to investment risk. I knew I would have to be very heavily equity invested to generate the income I need, but when markets crashed in 2020, even though I knew in theory they would recover, the loss of capital really gave me sleepless nights. This made me reevaluate my investments and change them so I always had a safe figure to exist on for a few years. This, of course has a trade off as my income has reduced. Its been OK, but Inflation is now as much a threat as market corrections and I may have to make a choice to deploy more money into riskier assets to avoid potential poverty in 20 years time.
There is no doubt that you can FIRE with the figures you have quoted, but in an inflationary world they might be a bit thin IMHO. Perhaps keep some earning potential in reserve until the world has calmed down a bit?

tjh290633
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Re: Able to FI(RE)?

#464090

Postby tjh290633 » December 7th, 2021, 11:17 pm

I think that your expectation of a fall in the need for income at 75 may be wide of the mark.

I did not see any noticeable fall in expenditure at that age. I am now 88 and it has kept up, apart for effects of Covid, which has precluded at least 4 cruises so far.

TJH

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Re: Able to FI(RE)?

#464106

Postby xxd09 » December 7th, 2021, 11:55 pm

Long retired-18 years so been through the mill
My touch stone was a 60/40 portfolio of 2 index funds produces £4000 pa from a £100000 portfolio
A global equities index fund and a global bond index fund
Probably now £3000 pa would be a safer estimate
With this knowledge plus a estimate of the income you will require-have you saved enough?
2 years of yearly income expenses in cash is common practice
With large variables still in the system ie kids still in education and not earning caution is the watchword
Your wife and yourself stopping working/earning will be a critical decision-could you delay/ stagger it?
xxd09

kempiejon
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Re: Able to FI(RE)?

#464128

Postby kempiejon » December 8th, 2021, 6:37 am

Hey Storcko, you said
Based on this fairly crude analysis FIRE looks feasible with a decent margin but have I missed anything and what else should I be thinking about?

it does look feasible, I did an itemised spreadsheet for 12 months of spending years ago and I've analysed years of spending now so I have a good idea of spending. I've predicted my income requirements added a safety margin; we can always cut back on outgoings in hard times. You probably have enough money but a little more cash would always be safer and at 55 you've hopefully too long a time horizon to make meaningful predictions.
What else should you be thinking about? Health, grand-kids, hobbies, lifestyle changes, assuming you've been gainfully employed for the past 30 odd years what are you going to do for the next 30 years.

Storcko
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Re: Able to FI(RE)?

#464622

Postby Storcko » December 9th, 2021, 8:46 pm

Thanks for all the comments. I guess my underlying thought with all this is that whilst we probably could and we'd probably be ok, there would be significant peace of mind in building more reserves especially increasing cash for all the reasons suggested. We're lucky we both have work we enjoy so will carry on for a year or two more although that could be extended if circumstances meant we should. We both spent a fair bit of our 20s / early 30s in education and especially travelling so in a way we have already consumed some retirement and neither of us feels like we've had our noses to the corporate grindstone for too long. We do have concrete plans for retirement though, one of which is definitely easier when younger, so we might explore options to reduce hours.

Thanks again.

airbus330
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Re: Able to FI(RE)?

#464653

Postby airbus330 » December 9th, 2021, 11:31 pm

Storcko wrote:Thanks for all the comments. I guess my underlying thought with all this is that whilst we probably could and we'd probably be ok, there would be significant peace of mind in building more reserves especially increasing cash for all the reasons suggested. We're lucky we both have work we enjoy so will carry on for a year or two more although that could be extended if circumstances meant we should. We both spent a fair bit of our 20s / early 30s in education and especially travelling so in a way we have already consumed some retirement and neither of us feels like we've had our noses to the corporate grindstone for too long. We do have concrete plans for retirement though, one of which is definitely easier when younger, so we might explore options to reduce hours.

Thanks again.

Sounds like a good assessment. If you are able, reducing your hours/days working both gives you more time and primes you for the big change that stopping work entails. I did 3 years on 75% and had just started 50% when employer went under. It made going to work a pleasure.

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Re: Able to FI(RE)?

#464666

Postby JohnB » December 10th, 2021, 2:43 am

Ah, the seductive tones of "One More Year". Search for Retirement Investing Today and read the sorry tale of how one man blogged about reaching his target, then working 18 months more, retiring to the Med, hating it and going back to work.

Every year you delay you lose out on the delights of retirement and increase the chances of dying with far too much. You can never eliminate all risk, be bold

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Re: Able to FI(RE)?

#464717

Postby DrFfybes » December 10th, 2021, 11:52 am

The one thing that strikes me is the massive skew towards Pensions rather than savings.

I fully appreciate the SS saves you NI as well as Tax so is massively attractive, but that is taxed on the way out. In later life you could easily find State Pension plus Private Pension nudging you back towards higher rate tax, and even at 20% that's a lot of tax over 30+ years. I'm also not convinved the current ability of Pensions to fall outside of IHT will continue indefinitely, there will be some mitigation or cap applied at some point.

One suggestion would be to take the lump sum at drawdown and shift some to your ISA, and increase the non-SIPPd cash buffer so you can pause drawdown in a market crash. It doesn't matter if it is Cash or equities in your SIPP, the withdrawal is still taxable.

Adding up the amount you will need and assuming growth will beat inflation is one approach, but also consider expressing how much you will need as a percentage of your assets for each period.

Assuming £850k at end of next year, you need 4% for the first 5 years, dropping to 3.7%, and then plummetting from Age 67. That is emminently doable, you could well see a dip in asset value initiallly (especially after inflation) but once the SP kicks in you should see growth.

I would look closely at the DB scheme penalties for taking them early, the annual reductions have been changing (a few years ago LGPS went from circa 3% to 5% reduction for every year taken early, which was a shock to people who found working that extra year meant they actually got less pension). You might be better leaving the DB's to run until age 67 amd taking more from the SIPPs.

Paul

Storcko
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Re: Able to FI(RE)?

#464749

Postby Storcko » December 10th, 2021, 1:49 pm

Good point re the two DBs Paul - I will find out if they are deferrable. The bias toward the SIPP has been largely due to there being HRT - BRT arbitrage potential for most of my working life but unbalanced pot size can be a consequence that needs to be managed so I'll look at your suggestion re PCLS.

JohnB - I read RIT a while back but it was never clear to me what his plans were other than stop work so what ensued wasn't a surprise given his youth. Occupational deprivation is an under-appreciated problem IMO so something I've thought a lot about recently. I'm very lucky with work so not desperate to quit but I also seem to be accruing a number of education, volunteering and other projects! It's about choosing the right time once 'definitely' FI as in my industry once you've been out a few months it's hard to get back.

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Re: Able to FI(RE)?

#464751

Postby TUK020 » December 10th, 2021, 2:08 pm

Storcko wrote:Thanks for all the comments. I guess my underlying thought with all this is that whilst we probably could and we'd probably be ok, there would be significant peace of mind in building more reserves especially increasing cash for all the reasons suggested. We're lucky we both have work we enjoy so will carry on for a year or two more although that could be extended if circumstances meant we should. We both spent a fair bit of our 20s / early 30s in education and especially travelling so in a way we have already consumed some retirement and neither of us feels like we've had our noses to the corporate grindstone for too long. We do have concrete plans for retirement though, one of which is definitely easier when younger, so we might explore options to reduce hours.

Thanks again.

a couple of different points:

If you still enjoy your work, reducing hours works out really well. It defers the point at which you are spending your savings, which makes a double whammy impact - easy way of building margin into your calculation. It also eases you into moving your time towards leisure. Going cold turkey on career work can be stressful in itself. I did 18 months at 4 days a week before retiring this summer. I would have gone on to 2 days a week if that had been compatible with my role. Even at 4 days a week, you discover that you have 50% more weekend, which makes a big difference.

You should decouple your decision on what you withdraw from various pensions from what you need to spend. Pensions work best if you can arbitrage the tax rates going in and going out. For example, if working fewer hours takes you below the HRT threshold, you may want to top up your taxable income using a SIPP drawdown, even if you then stuff the surplus £ into your ISA. The game is how you make max use of your tax bands. Key caveat is that once you draw taxable income from any pension, you are then limited in what you can contribute to pensions in the future/

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Re: Able to FI(RE)?

#465845

Postby dmukgr » December 14th, 2021, 7:01 pm

TUK020 wrote:- easier to downsize, than to release equity. Temptation will be to go for a better quality of house/location with fewer rooms to manage. This will not necessarily wind up being much cheaper. Add in transaction costs, and it is easy for that equity release figure to vanish.


As somebody who is currently in the process of downsizing I agree - we are moving to a much cheaper area (moving up north from down south) but somehow have managed to pretty much break even on the cost after expenses and the new place isn't that much smaller either - but it is in a (hopefully) really nice location, hence the price.

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Re: Able to FI(RE)?

#465855

Postby moorfield » December 14th, 2021, 7:51 pm

Storcko wrote:
Things that I think about / am trying to learn about:
- higher inflation (i.e., consistently above 5%) and how to invest to protect what we have
- sequence of returns risk in drawdown (I have cash = 2 years income in the SIPP and 2-3 months' worth outside)
- drawdown options for SIPP and the tax implications
- minimising tax on drawdown by using the pots efficiently
- LTA potentially
- planning for care costs in later life

Based on this fairly crude analysis FIRE looks feasible with a decent margin but have I missed anything and what else should I be thinking about?




Yes, "stress test" your plans for the unexpected - a legal dispute, a private health procedure, additional financial assistance for offspring, building/car repairs, adverse change in pension/tax legislation, vets bills, the list can be endless - by removing random amounts up to £100k at different stages of your plan, and check that said amounts are accessible at short notice at each stage.

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Re: Able to FI(RE)?

#466118

Postby Storcko » December 15th, 2021, 4:43 pm

Excellent perspectives all and plenty to think about. Thanks

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Re: Able to FI(RE)?

#466151

Postby monabri » December 15th, 2021, 7:13 pm

Storcko wrote:Excellent perspectives all and plenty to think about. Thanks


Perhaps spend some time constructing a spreadsheet.

Top Line : Cash balance

Top section
Income(s) from all sources and the years they become realisable.

Middle Section
Outgoings - bills and anticipated spends (car, hols, house repairs)

Bottom Section
taxation

After tax has been paid, this gives an idea of what next years starting cash balance might be. The value after tax is "taken up" to the top line

Run this forward on a yearly basis, 2022,23,24,25,26, etc. Then you can stress test by inputting £xxx for new car/medical emergency/whatever.

Storcko
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Re: Able to FI(RE)?

#466203

Postby Storcko » December 15th, 2021, 10:30 pm

A cashflow spreadsheet such as you describe Monabri is pretty much how i got to the £40k a year figure. Some smaller capex, e.g., re-decoration, regular outside maintenance etc is also factored into that but big spends - like a new bike or extra education - would be from capital for which I've notionally allocated pots. The £40k number could also be reduced a fair bit too if an unforeseen financial event struck.


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