Am I as close as I think?

[Frostyfred]

Long time reader, first time poster and I'm looking for the collective wisdom of the Fools.

My situation. Aged 48 with £350k held.

- £125k in equity ISAs (spread across Vanguard mainly but some Scottish Mortgage and Fundsmith in there too)
- £100k in premium bonds
- £125k cash

Pension currently worth £375k.

Property owned outright and worth circa £600k.

Shares due to vest periodically across next two years worth £180k after tax though could get worse/better depending on price.

Living costs circa £45k per year.

My maths tell me that at age 51 I could have about £450-500k plus the pension, state pension and the house. Property equity rarely gets mentioned on this board but if I downsize in a decade (as I plan to) and release £100-150k then that goes in the pot.

Even with modest, risk averse returns of less than 2%, I calculate that I could take about £40k per year out of the pot to live on (indexed to 2% annual inflation), reducing to £30k (in today's terms) from about 70.

I would run out of money in my early 80s. If that's sub optimal (and it probably is ) then I've still got circa £400k equity in the property I've moved into which I could release.

I'm not saying I will stop working either entirely or at all at 51, but knowing I have the choice is immensely powerful!

Does my plan stack up or is it a pipe dream full of holes?

[Kantwebefriends]

Assume growth rate = inflation rate (impossible to tell whether this is optimistic or pessimistic but certainly simple).

From 48 to 55 = 7 years. Divide into £350k = £50k p.a. i.e. the desired £45k p.a. plus a bit left over to save into (say) wife's pension.

At 55, available to fill gap to 67 (is it?) is £375k + £180k => about £45k p.a. less some tax.

At 67 all that's left is state pensions and any money from the house.

It looks to me that if you want to retire at 51 you need to be more frugal.

[monabri]

Minor point...check your state pension entitlement. Do you have sufficient "years" to qualify for the full state pension at 51?

[Frostyfred]

Minor point...check your state pension entitlement. Do you have sufficient "years" to qualify for the full state pension at 51?

I believe that I do.

Thanks for the replies so far. I will probably be working past 51, perhaps part time, perhaps not, so the drawdown may be less than £40k depending on that. Even without that, I'm unclear how much value I should place on the equity in the property. If I release some of that in a downsize and then even more again further down the track, then I get to use the majority of the 600k I may have.

Capital preservation and leaving it all to the taxman isn't my priority!

[JohnB]

£1.5m total at 50 really should be enough, but I think you need to be more aggressive with your investments at 48, you have too much in cash/PBs.

Spending £45k sounds generous with a paid-off house, can you calculate your base spending you could cut back too if the markets turn?

£600k in housing is a lot if you have no dependents, you should be able to realise most of that if needbe.

[tjh290633]

I think that you should forget the property. As it stands you would have about £800k between savings, investments and your pension. With luck that will give you about 4% per annum, if invested suitably. That is about £32,000, with your state pension to add to that. Probably £9,000 by then.

You can't afford to use your savings to tide you over if you spend £45,000 a year. As pointed out in viewtopic.php?p=424771#p424771 you need about £1.5 million to be comfortable, so get saving.

TJH

[JohnB]

You can't ignore the property if it will provide 10 years expenditure (either by equity release or just renting). The OP has no inheritance plans, and is most unlikely to spend £500k on care

[monabri]

Broad brush approach.

I've split your list of assets into the groups and made an assumption as to when you can access your pension at 60 years of age. State pension kicks in at 67 but I've assumed you won't receive the full amount until the following year. I've not tried to do anything clever such as allow for state pension increases and I have a caveat on the £375k pension that may or may not grow. Maybe you can access your £375 pension earlier - I dunno ?

Your equities. premium bonds ,Cash and "new cash" of £180k (items 1 to 4) could be drawndown over 17 years.

Your pension kicks in at 60, item 5 and is consumed over 26 years to the Age of 85 (assumed death ).

You downsize your property at 68 (item 6) and start state pension (item7).

I think consuming the assets at a rate of £40k per year is going to be at too fast a rate. Cash and Premium Bonds are earning next to nothing.

If you set up a spreadsheet you could jig things around to see if you could improve things.

[monabri]

Maybe one could draw down on the P.Bonds at a higher rate to increase available cash early on and downsize your home to release £150k rather than £100k?

[JohnW]

Looking at this approach might assist you: https://www.bogleheads.org/wiki/Amortiz ... withdrawal
there's a link to a discussion of it at page bottom.

[xxd09]

You are certainly getting there
£100000 in a 60/40 portfolio would give you £3000 pa
So you need a pot of £1500000 for £45000 pa
Any pensions that give you income would enable you to reduce the size of this pot
(Ignore the house and it’s value-it’s for keeping you warm and out of the rain-we all need one at all times)
Really as simple as that
xxd09

[scrumpyjack]

Your cash and PBs are losing value in real terms and earning a negative real return, which is very risky long term.

To earn a positive real return involves higher risk but better long term prospects, perhaps investing in good global investment trusts.

Once you stop work you may find it difficult to restart work if things do not go to plan.

I think you have to carry on working for quite some time and also invest in assets with a good chance of earning a higher total return than inflation.

[Gan020]

Maybe one could draw down on the P.Bonds at a higher rate to increase available cash early on and downsize your home to release £150k rather than £100k?

I would suggest you do some modelling in Excel starting with the above. You don't mention the tax status of your pot but I would guess you are going to be paying some tax too which will deplete your pot quicker. (with state pension at around £9k and the tax free allowance at around £12.5k, you are going to be some tax at 20% I would guess. My figures might be a bit out of date)

Inflation is the thing worth modelling most because a pint of beer is going to cost double in 20-30 years time but your pot will have depleted.

Interestingly your expenditure of £45k p.a. is far higher than most we see looking for advice. It looks about right to me. Retiring early costs money as you won't want to be sitting around the house doing nothing.

Finally, it is worth considering what you are going to invest in to generate your returns and consider what impact a 15% drop in the stock market would do to you if this happenned in the first year after you retired.

[JohnB]

The OP needs to clarify if its an income or expenditure of £45k that they wants, as once you approach Higher Rate Tax levels tax planning is important. Do you get it as a pension with its income tax rates, tax free lump sums, ISAs tax free or unsheltered dividends with their 7.5% rising to 32.5% tax, and Capital Gains issues.

[monabri]

You might also bring forward spend on line 4, "New cash" (as detailed in orange coloured cells). Instead of takin £10.6k p.a at the age of 60, the cash is consumed earlier. It gets you closer to the original question.

The worry in all this is the dreaded inflation. A significant chunk of the assets are not growing. The purchasing power of P Bonds, Cash sums is not growing and are actually devaluing as time goes by.

[monabri]

With £100k in PBs, there must be a.n.other in the equation..for which we have no information.

(I'm surprised at the age of 51* that someone will have a full state pension entitlement).

Perhaps there is scope to consider Class 3 contributions if their entitlement to state pension shows a "shortfall".


( *) 51 was my retirement date and I was 8 years short of the full state pension entitlement...so I'm buying years via Class 3 contributions.

[monabri]

Ah, I was contracted out almost all the years.

[gryffron]

When did it change to 16? Do you have to earn to qualify?

According to HMRC, I have a full record from my 18th birthday. Apparently including a full year when I was still at school (6th form). Does that still happen?

Gryff

[JohnB]

I got 2 years when I was in sixth-form, 83-84. You didn't get years at university unless you took on paid work.

[dmukgr]

Back to the original question, the author is in a similar position to myself except I am a couple of years older. My aim is something similar though, with a target of £500k in pension and £500k in IT's via an ISA by the time I am 55. Also similarly, I plan on owning outright a property also worth ~£500k.

Having just sold my current property I too have £100k in Premium Bonds though I may move this into a Vanguard trust and drip feed into the ISA's over the coming years. My thinking is that at the age of 55, having £500k three ways and nobody to inherit it (it is just me and the wife) that I will be able to comfortably spend £40k a year, though I may do more in the initial years, knowing it will tail off the older I get.

My issue is that I find myself gravitating to capital preservation and wanting to just live of the dividends, or (as I try and convince myself some capital selling is more efficient for overall gains - stop high yield chasing basically) dividends and (some) profits.