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Curb my enthusiasm?

Including Financial Independence and Retiring Early (FIRE)
JohnW
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Re: Curb my enthusiasm?

#389336

Postby JohnW » February 23rd, 2021, 9:38 pm

bucklb wrote:I've always hoped to retire (long term) on the basis of defined benefit pension and SP, with the SIPP/ISA to get me though to SPA and thereafter for luxuries. On that basis I've tended to make my investments on the riskier side of things, assuming that the db pension takes the place of any need for bonds.
Bob

I don't want to open a can of worms here about a pension taking the place of bonds, but in one or two senses they do but in another one or two they don't. Be sure you recognise this before pulling a trigger that relies on something that's not quite true. For example, you can't rebalance a pension into stock purchases during a stock crash the way some people do with bonds.
'tendered' is past tense, what of the future? Riskier investments are fine, as long as you don't capitulate if they crash badly for several years and sell at a bad time. They should give better returns over 'long' periods than a less risky mix, but might not. Given that it's unknown is the potential gain over thirty years worth the extra anxiety? Only you can say.

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Re: Curb my enthusiasm?

#389407

Postby Joe45 » February 24th, 2021, 8:00 am

Over the past 4 years in the run up to my recent retirement I’ve kept a track of my expenditure. Non-discretionary spend has been pretty consistent, namely £500 per month each for supermarket, other shopping and utilities. So £18k a year. I am mortgage free.

I’ve set this as a baseline and worked out how much I’ll need to cover this, as a bridge to the state pension and beyond. Comes to roughly £250k.

I’ve deducted this from my portfolio to leave a good size pot for discretionary spending (ie fun, travel, dining out and new car etc). I reckon this will be high to start with, then reducing as we (hopefully) pass 70. After that, who knows? I’ve set an initial annual withdrawal rate for this latter pot at 5% for 20 years, reducing in real terms by 2% a year to match likely spend profile.

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Re: Curb my enthusiasm?

#389454

Postby hiriskpaul » February 24th, 2021, 10:33 am

JohnW wrote:
bucklb wrote:I've always hoped to retire (long term) on the basis of defined benefit pension and SP, with the SIPP/ISA to get me though to SPA and thereafter for luxuries. On that basis I've tended to make my investments on the riskier side of things, assuming that the db pension takes the place of any need for bonds.
Bob

I don't want to open a can of worms here about a pension taking the place of bonds, but in one or two senses they do but in another one or two they don't. Be sure you recognise this before pulling a trigger that relies on something that's not quite true. For example, you can't rebalance a pension into stock purchases during a stock crash the way some people do with bonds.
'tendered' is past tense, what of the future? Riskier investments are fine, as long as you don't capitulate if they crash badly for several years and sell at a bad time. They should give better returns over 'long' periods than a less risky mix, but might not. Given that it's unknown is the potential gain over thirty years worth the extra anxiety? Only you can say.

It is not at all clear that rebalancing into risk assets after a fall is a good strategy when in drawdown. McClung for example advises against it. In his suggested drawdown strategy, risk assets are sold when they rise by a certain amount, rebalancing into cash/bonds. Spending is done from the cash/bonds. From a safety point of view I can see the logic, as it makes running out of money less likely, but possibly at the expense of higher long term expected returns.

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Re: Curb my enthusiasm?

#389461

Postby scrumpyjack » February 24th, 2021, 10:45 am

hiriskpaul wrote:It is not at all clear that rebalancing into risk assets after a fall is a good strategy when in drawdown. McClung for example advises against it. In his suggested drawdown strategy, risk assets are sold when they rise by a certain amount, rebalancing into cash/bonds. Spending is done from the cash/bonds. From a safety point of view I can see the logic, as it makes running out of money less likely, but possibly at the expense of higher long term expected returns.


As you will have a guaranteed inflation protected income of 50k, you may feel you can take more risk in your pension fund than if that fund had to be your main source of income.

I saw in an article yesterday that even US Indexed Linked bonds (TIPS) have a NEGATIVE real return of 0.77% pa, and that is before any charges by whatever fund you might hold them in. So there are, in real terms, no risk free assets and over 30 years -0.77% mounts up!

There is no such thing as risk free, you just have to weigh up what gives you the best chance of a reasonable long term return vs the risk of running out of cash at some point.

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Re: Curb my enthusiasm?

#389501

Postby 1nvest » February 24th, 2021, 12:20 pm

scrumpyjack wrote:
hiriskpaul wrote:It is not at all clear that rebalancing into risk assets after a fall is a good strategy when in drawdown. McClung for example advises against it. In his suggested drawdown strategy, risk assets are sold when they rise by a certain amount, rebalancing into cash/bonds. Spending is done from the cash/bonds. From a safety point of view I can see the logic, as it makes running out of money less likely, but possibly at the expense of higher long term expected returns.


As you will have a guaranteed inflation protected income of 50k, you may feel you can take more risk in your pension fund than if that fund had to be your main source of income.

I saw in an article yesterday that even US Indexed Linked bonds (TIPS) have a NEGATIVE real return of 0.77% pa, and that is before any charges by whatever fund you might hold them in. So there are, in real terms, no risk free assets and over 30 years -0.77% mounts up!

There is no such thing as risk free, you just have to weigh up what gives you the best chance of a reasonable long term return vs the risk of running out of cash at some point.

Assuming -0.77% across the full 30 year range, then that cost is relatively mild. To provide 10K/year for instance then buying into 1, 2, 3 ... 29 year TIPS (keeping the first 10K/year in cash from the offset) requires around 336K total ... to in effect assure 30 years of 10K/year inflation adjusted income (drawdown). If you had 600K at the offset then having loaded 336K into 1, 2, 3 .... etc TIPS to cover the 10K/year inflation adjusted income, that leaves 264K that might be invested in stocks for longevity. If those stocks accumulate at 2.8%/year annualised real then at the end of the 30 years you still have the same total wealth in inflation adjusted terms as at the start. Start with 44/56 stock/bonds, end with 100% stock, averaging 72/28 overall stock/bond exposure. And where unlike a annuity where if you died perhaps 7 years into that all was lost, much of the wealth might still be intact for heirs.

If you were following such a strategy then obviously you don't rebalance. Optionally. After 25 years and in good health you might prefer to rebalance, top up additional assured years of income. Or opportunities may present along the way, if for instance TIPS yields rose to +4% real you might decide to sell stocks and lock into that level of guaranteed return.

That's all assuming I've calculated things correctly that is, i.e. I make it a cost of 12,513 to buy 10K of inflation adjusted income (TIPS) in 29 years time ... etc. down to it costing 10,077 to buy 10K of inflation adjusted income in a years time.

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Re: Curb my enthusiasm?

#389514

Postby dealtn » February 24th, 2021, 12:43 pm

1nvest wrote:
scrumpyjack wrote:
hiriskpaul wrote:It is not at all clear that rebalancing into risk assets after a fall is a good strategy when in drawdown. McClung for example advises against it. In his suggested drawdown strategy, risk assets are sold when they rise by a certain amount, rebalancing into cash/bonds. Spending is done from the cash/bonds. From a safety point of view I can see the logic, as it makes running out of money less likely, but possibly at the expense of higher long term expected returns.


As you will have a guaranteed inflation protected income of 50k, you may feel you can take more risk in your pension fund than if that fund had to be your main source of income.

I saw in an article yesterday that even US Indexed Linked bonds (TIPS) have a NEGATIVE real return of 0.77% pa, and that is before any charges by whatever fund you might hold them in. So there are, in real terms, no risk free assets and over 30 years -0.77% mounts up!

There is no such thing as risk free, you just have to weigh up what gives you the best chance of a reasonable long term return vs the risk of running out of cash at some point.

Assuming -0.77% across the full 30 year range, then that cost is relatively mild. To provide 10K/year for instance then buying into 1, 2, 3 ... 29 year TIPS (keeping the first 10K/year in cash from the offset) requires around 336K total ... to in effect assure 30 years of 10K/year inflation adjusted income (drawdown). If you had 600K at the offset then having loaded 336K into 1, 2, 3 .... etc TIPS to cover the 10K/year inflation adjusted income, that leaves 264K that might be invested in stocks for longevity. If those stocks accumulate at 2.8%/year annualised real then at the end of the 30 years you still have the same total wealth in inflation adjusted terms as at the start. Start with 44/56 stock/bonds, end with 100% stock, averaging 72/28 overall stock/bond exposure. And where unlike a annuity where if you died perhaps 7 years into that all was lost, much of the wealth might still be intact for heirs.

If you were following such a strategy then obviously you don't rebalance. Optionally. After 25 years and in good health you might prefer to rebalance, top up additional assured years of income. Or opportunities may present along the way, if for instance TIPS yields rose to +4% real you might decide to sell stocks and lock into that level of guaranteed return.

That's all assuming I've calculated things correctly that is, i.e. I make it a cost of 12,513 to buy 10K of inflation adjusted income (TIPS) in 29 years time ... etc. down to it costing 10,077 to buy 10K of inflation adjusted income in a years time.


You think $336k to provide $10k income a year for 30 years is relatively mild?

A likely minimum annual income of $30k costs over a million dollars. I guess the question is "relative" to what?

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Re: Curb my enthusiasm?

#389517

Postby 1nvest » February 24th, 2021, 12:52 pm

Jack (John) Bogle commissioned a long term study of rebalanced versus non rebalanced and broadly found them to be the same in reward terms. With non rebalanced one asset often rises to be the dominant weighting, i.e. you end up with more in the asset that performed the best compared to had you rebalanced out of that asset.

Concentration risk, which is a significant risk, does rise, but often where losses if/when hit are more a case of giving back some/all of good gains.

Not rebalancing can be the more cost/tax efficient.

All stock portfolios often do very well over multi-decades of income-drawdown/growth, but as-ever there are exceptions and cases of where even 0% withdrawals might barely break-even in real terms or worse. Gold can equally sustain multi-decades of income-drawdown/growth, but again has exceptions where 0% withdrawals still lost. Ditto bonds ...etc. Start with some in each and not rebalancing will tend to see at least one 'succeed', others 'fail', but where the successes more than compensate for the losses. More usually with a third started in each you'll end up with a stock heavy portfolio, but not always. US data and for 50/50 initial stock/gold in 2000 for instance by the end of 2009 after a 4% yearly inflation adjusted income that had a 20% higher inflation adjusted portfolio value and was holding 20/80 stock/gold. In contrast all-stock was down -75% inflation adjusted.

Start in 1980 instead, when the Dow/Gold ratio was near 1.0 (i.e. gold was very expensive) and by 1999 50/50 initial stock/gold had migrated over to being near 100% stock. After 4% SWR real gains were still evident/relatively consistent, but nowhere near as high as for all-stock that did exceptionally well (1.5% annualised real versus 5% annualised real type growth values (after the 4% SWR)).

If you're liability matching rent by owning a home, liability matching income using the likes of a inflation bonds ladder, and depositing surplus amounts into stocks for growth/longevity then you don't want to be rebalancing. If you're drawing a regular income from a portfolio such as a 4% SWR and diversifying across multiple assets/currencies to de-risk that, then rebalancing becomes more subjective. You can get away without rebalancing, but more often at the risk of seeing a diverse portfolio having migrated over to being a concentrated portfolio.

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Re: Curb my enthusiasm?

#389526

Postby 1nvest » February 24th, 2021, 1:03 pm

dealtn wrote:You think $336k to provide $10k income a year for 30 years is relatively mild?
...
I guess the question is "relative" to what?

36K over 30 years additional cost (compared to being able to buy 10K of income in 30 years time for 10K present day money i.e. TIPS real yields of 0%)

A likely minimum annual income of $30k costs over a million dollars.

Subjective. Rounding to say a 10K/year state pension, 10K occupational pension, 30K/year required disposable income and 336K in those TIPS might cover that for 30 years - potentially into beyond life expectancy range. Owning say a 300K home that otherwise might cost 4% (historic) rental yield to rent in effects adds (avoids having to find/pay) 12K to that, a 44K/year type lifestyle. 636K combined total wealth when TIPS yields are -0.77% compared to 600K if TIPS yields were 0%. A 6% difference, where often portfolio values can vary 20% or more across a single year.

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Re: Curb my enthusiasm?

#389531

Postby 1nvest » February 24th, 2021, 1:17 pm

dealtn wrote:A likely minimum annual income of $30k costs over a million dollars.

That is this generations legacy to its children. We received free uni fees, they build up 50K+ debts for the same ... somewhat like discriminating them to pay 50% taxation rates when they start working. We mostly had free health care, increasingly they don't. We had good inflation linked pensions they don't. There's also massive discrepancies between gold plated state (funded by private sector) and private sector pensions.

Yes the present younger generation will have to accumulate much more wealth to achieve similar retirement levels, and pay much more for other things along the way. For many/most that will be nigh on a impossibility and as such they're far more worse off than their parent generation.

Fundamentally I see that demise as being the cost of having been in and massively subsidising the EU for the last 4 decades that has further reduced wages/standards via low cost migrant workers. Had instead we invested domestically rather than given/subsidised other nations then the present generation might have inherited so much more. Hopefully having ejected that cost/liability things might be turned back around. Primarily the state should care for and aid its citizens, not as is more often the case nowadays be looking towards the best interest of other countries citizens.

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Re: Curb my enthusiasm?

#389627

Postby terminal7 » February 24th, 2021, 4:48 pm

Fundamentally I see that demise as being the cost of having been in and massively subsidising the EU for the last 4 decades


- so how did the largest net contributor do so well?

T7

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Re: Curb my enthusiasm?

#389652

Postby 1nvest » February 24th, 2021, 5:28 pm

terminal7 wrote:
Fundamentally I see that demise as being the cost of having been in and massively subsidising the EU for the last 4 decades


- so how did the largest net contributor do so well?

T7

They didn't net contribute. Germany made massive/bold bets (debt) that in 2008/9 backfired. Those bets were then transferred (swapped) over to the ECB - the rest of the EU (Eurozone) massively bailed out Germany. 2 trillion+ new Euros were printed as part of that (each new Euro devalues all other Euro's in circulation). Same old bankers gameplay, bet and if you win keep the proceeds, otherwise the taxpayers bail you out, but to a much larger scale. Difficult for Germany not do to well under such circumstances. In the way of contrast, Greece whose problems were just a drop in the ocean by comparison, were refused assistance.

German pretence of being a large net contributor left the UK as actually being the largest net contributor. The majority of other states being net beneficiaries.

When the UK subsidises competitors, those competitors can produce/sell more cheaply than the UK, which sees a outflow of UK assets, economic decline. Nowadays British utilities, rail ...etc. tend to all now be foreign owned. The UK sold the family silver to help build up other countries to levels that now exceed that of the UK, but wont see that aid being reciprocated.

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Re: Curb my enthusiasm?

#389771

Postby tjh290633 » February 24th, 2021, 10:05 pm

Joe45 wrote:Over the past 4 years in the run up to my recent retirement I’ve kept a track of my expenditure. Non-discretionary spend has been pretty consistent, namely £500 per month each for supermarket, other shopping and utilities. So £18k a year. I am mortgage free.

It's a long time ago since I retired, but I looked at my expenditure for a few years beforehand. I retired from full-time work at State Pension Age, having paid off my mortgage in that year. The obvious differences were no more NICs to pay, no pension to contribute to, and a lot less car mileage (I had been doing about 30,000 miles per year in a company car). I had a Toyota MR2 as well as the wife's smaller car, and I changed the MR2 to a mid-size saloon because of the need to carry luggage beyond what would fit behind the seat in the Toyota. I had been doing under 2,000 miles per year in the MR2 until I retired, then did about 3,000 in the next 6 months before I swapped it. Then I did about 10,000 miles per year while I was doing part time work and then it dropped to about 6,000 miles per year, where it has remained until the present crisis.

Holidays accounted for a significant expenditure, with a major trip to the USA in 1999 using my air miles from KLM/Northwest. Cruising can take up a fair amount, depending on how long the cruise is and what sort of accommodation you book.

Just how much you spend depends on your lifestyle and whether you are giving money to grandchildren, which I have done regularly since each was born. Clothes are more easily handled with no need for formal attire most of the time, but the DJ comes out a few times a year in normal times. Slacks and casual outerwear is what needs replacing as they wear out. Like you, £500 or so covers a month's supermarket shopping. Our utilities are obviously higher than yours, running at about £400 per month for Rates, Water, Sewerage, Gas, Electricity and Telephone. I have a considerable number of standing orders and direct debits to various organisations. I think they are breeding.

I knew what my income would be and it has always been more than adequate. If you know what you are spending money on, you can afford to splash out now and then.

TJH

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Re: Curb my enthusiasm?

#389845

Postby AF62 » February 25th, 2021, 9:08 am

As someone who retired early at 58 eight weeks ago, although pushed / assisted by voluntary redundancy my thoughts are -

Spending - know where your money is going so you can try and anticipate changes when retired. I have used Microsoft Money for the last 25 years and that has allowed me to export the data to 'play around' with the categories of spending which might change (either up or down) and also which were necessary and which were discretionary.

Income - I found it helpful to consider pre and post retirement income net of employment costs (after tax, NI, pension contributions, commuting, etc.). It was much more comforting to see that a substantial drop in gross income translated to a minimal drop in net income.

As for the 4 years to reach the NI contributions at 60 for a full SP. I assume you have checked this on the government site (http://www.gov.uk/check-state-pension) as you mentioned you have DB pensions and as you were probably contacted out in the past that most likely impacted on the number of years required when the New SP was introduced - although if further years are needed this can be dealt with by voluntary NI contributions.

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Re: Curb my enthusiasm?

#390052

Postby JuanDB » February 25th, 2021, 7:19 pm

AF62 wrote:As someone who retired early at 58 eight weeks ago, although pushed / assisted by voluntary redundancy my thoughts are -

Spending - know where your money is going so you can try and anticipate changes when retired. I have used Microsoft Money for the last 25 years and that has allowed me to export the data to 'play around' with the categories of spending which might change (either up or down) and also which were necessary and which were discretionary.

Income - I found it helpful to consider pre and post retirement income net of employment costs (after tax, NI, pension contributions, commuting, etc.). It was much more comforting to see that a substantial drop in gross income translated to a minimal drop in net income.

As for the 4 years to reach the NI contributions at 60 for a full SP. I assume you have checked this on the government site (http://www.gov.uk/check-state-pension) as you mentioned you have DB pensions and as you were probably contacted out in the past that most likely impacted on the number of years required when the New SP was introduced - although if further years are needed this can be dealt with by voluntary NI contributions.


Would that be Microsoft Money 95? If so, I have also used the same for 25 years for expenditure and investment tracking. Probably the best and most useful “free” product I have received. Although I do seem to recall having to buy a new PC to get the free software!

30 minutes spent each Sunday morning to enter transactions, reconcile statements and forecast upcoming expenditure is time well spent. Nothing in the newer Open Banking account information service based products would get me to handover my data.

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Re: Curb my enthusiasm?

#390066

Postby AF62 » February 25th, 2021, 7:52 pm

JuanDB wrote:
AF62 wrote:As someone who retired early at 58 eight weeks ago, although pushed / assisted by voluntary redundancy my thoughts are -

Spending - know where your money is going so you can try and anticipate changes when retired. I have used Microsoft Money for the last 25 years and that has allowed me to export the data to 'play around' with the categories of spending which might change (either up or down) and also which were necessary and which were discretionary.

Income - I found it helpful to consider pre and post retirement income net of employment costs (after tax, NI, pension contributions, commuting, etc.). It was much more comforting to see that a substantial drop in gross income translated to a minimal drop in net income.

As for the 4 years to reach the NI contributions at 60 for a full SP. I assume you have checked this on the government site (http://www.gov.uk/check-state-pension) as you mentioned you have DB pensions and as you were probably contacted out in the past that most likely impacted on the number of years required when the New SP was introduced - although if further years are needed this can be dealt with by voluntary NI contributions.


Would that be Microsoft Money 95? If so, I have also used the same for 25 years for expenditure and investment tracking. Probably the best and most useful “free” product I have received. Although I do seem to recall having to buy a new PC to get the free software!


Originally Microsoft Money 95 which came free as a floppy disk on the front of Computer Shopper (iirc) as a persuasion by Microsoft to upgrade to Windows 95 as it wouldn't run on Windows 3. If I recall correctly it had a rather naff 'leather binder' looking interface.

I did buy a couple of subsequent versions, and am now using the 'sunset' version which Microsoft released free a few years ago and still works fine on Windows 10. They released both a US and UK 'sunset' version and you used to be able to download both from their website, and although they have since been removed the software can be found on the internet if you search for it.

JuanDB wrote:30 minutes spent each Sunday morning to enter transactions, reconcile statements and forecast upcoming expenditure is time well spent. Nothing in the newer Open Banking account information service based products would get me to handover my data.


Saturday mornings here, and totally agree about time well spent. It is so useful to actually know what you spent money on rather than simply guessing. Also so handy when you think 'when did I buy that' and 10 seconds with the search will find it.

And back to the purpose of this thread, it did let me look at recent spending and whether my retirement income would work.

Open Banking and the dedicated spending tracking that some of the new banks are offering are a OK as far as they go, but in no way provides the flexibility of Microsoft Money.

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Re: Curb my enthusiasm?

#390068

Postby JuanDB » February 25th, 2021, 8:15 pm

I am mortally offended at the suggestion the hand burnished interface of Money 95 is naff. Artisanal developers spent minutes achieving that antiqued look.

I did try a Money 98 upgrade in about 2010 but it all seemed a bit modern. The simplicity of the original replaced with something less elegant.

Your point is the key one. The time spent over 20+ years gives insight into income and spending we can have confidence in. It’s helped understand expenses and plan a multi-year shift in spending patterns that I’m not sure I could have achieved any other way.

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Re: Curb my enthusiasm?

#390157

Postby Joe45 » February 26th, 2021, 9:07 am

I use Google Sheets and fill in a column at the end of the month by manually reviewing my credit card and bank statements. A bit laborious but now I’m fully retired I think I can afford the time!

Having done this for the past 4 years, I’ve been a little surprised at how consistent my non-discretionary spending has remained. My biggest failing is classifying too many items as “one-offs”. I should probably add a fourth category for such things and call in “miscellaneous” or something.

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Re: Curb my enthusiasm?

#390164

Postby swill453 » February 26th, 2021, 9:14 am

The way I handle large items like new cars etc. is to maintain a running total in my spreadsheet of underspend against the budget I set when I retired 7 years ago. This underspend is like a virtual savings pot that can be dipped into for big purchases. I allow it to go negative if necessary, since it's not actually related to my real cashflow.

Despite not adjusting my budget for inflation over the years, my underspend has allowed me to change my car twice, and buy outright a £30K campervan.

Scott.


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