Another "sanity test"

[DuncanM]

Really enjoyed reading greylocks post and subsequent comments re going part time sanity check and thought it would be good to get some feedback on my plans.

I recently turned 62. I have worked 3 days a week for the last year and had planned to go to 2 days a week next year before finally retiring at the end of 2024. However my better half just retired age 60 and I decided that I should too. I finish in January.

Having made the decision to retire. When I did my sums, I reckon I will be fine and taking a low wage part time job will fill any gaps in social or financial needs if needs be.

We have around £65k pa income (index linked) from our defined benefit pensions. Total savings are around £160k in various pension funds and ETFs and £115k cash currently getting around 4% pa. Our State pensions kick in in 2028 and 2030 respectively when our income will increase to around £80k pa. We have properties in UK and Spain valued around £1m, no mortgage or other debt.

Our funds and ETFs are:
Aviva My Future Focus Consolidation S6 £60k (Low Risk majority in Bonds, Gilts etc)
Scottish Widows Pension Portfolio Five Pension (Series 2) £5k (Very Low Risk majority fixed interest, and Gilts)
Scottish Widows Pension Portfolio Four Pension (Series 2) £45k (Medium Risk 50/50 Global Equities/Fixed Interest)
USS Growth Fund £5k (High Risk Global Equities)
Various ETFs in Investengine with a decent spread across markets and a leaning towards income generation £45k (High Risk Global Equities)
UK 33.91%
North America 21.44%
Europe ex-UK 21.05%
Japan 13.02%
Asia ex-Japan 3.55%
Rest of the World 3.54%
Emerging Markets 3.49%

Looking for £6k a month income after tax and using the surplus for "treats" such as holidays. I was thinking of moving some of the cash into stocks and shares in the new year and perhaps increasing the investment in Emerging Markets.

Any comments/advice please?

[Gilgongo]

So you are looking at a net income of about £55K (£4,500 per month) from index-linked pensions from 2030, and want to get an extra £1,500 per month from the rest of your assets? Is that right?

Are these in ISAs or unsheltered? Personally, I'd look to simplify that lot to maybe just a couple of ITs and take the divis off that (at about 3% yield that's more than enough). Keep the cash as it is - having a couple of years income as a buffer is nice, no?

BTW you don't say on what basis you're targetting £6K a month though so it's a bit hard to know what the precision should be, as it were.

[DuncanM]

Defined benefit pensions are around £65k per annum pre-tax from now rising to around £80k per annum pre-tax when our state pensions kick in. That will generate around £4,600 per month after tax initially, rising to around £6,000 per month when the state pensions kick in between 2028 and 2030. By my calculations, we will need around £85k to bridge the gap until the state pensions kick in. So yes.

Aviva, Scottish Widows and USS funds are defined contribution pension pots so 25% will be tax free the rest will be taxable. ~£42k cash is in ISAs and £45k ETFs are in ISAs. The remaining ~£72k cash is unsheltered and it is £40k of that I am looking to move into stocks & shares ISA next year.

Just asking opinions whether that is the right move, especially increasing my exposure to Emerging Markets. Any other observations/comments on what I can do better is also appreciated.

Cheers

[Dicky99]

Is it important to you to maintain capital value of your cash and investments because with the remainder of your investable assets over your pensions being £275k, you'd need to return say 3 to 4 % pa just for it to standstill.

You'd then need to make an additional £15k pa return over that to achieve your desired amount of top up income, so about 8.5% in total. It's not out of the question but it also wouldn't be a conservative expectation in my view. Right now I'd hope for a 5% return and take only 2% but who knows what next year and beyond holds

[DuncanM]

No, not important to retain capital value. We would be happy if we don't run out of cash before we snuff it If we need extra cash we can always free up more capital from the UK property and downsize.

Plan to use excess capital for travel while we are still able. Spanish property will mean we can do that with little cost but want to go further afield in the winter.

[DuncanM]

I'd look to simplify that lot to maybe just a couple of ITs and take the divis off that (at about 3% yield that's more than enough).

Yes, agree. I think the Scottish Widows, USS and Aviva pension pots need to be consolidated and moved to something else. Don't know a lot about ITs. Anything you would recommend?

Keep the cash as it is - having a couple of years income as a buffer is nice, no?

Yes, nice to have cash and it is currently earning around 4% pa. Don't think I need that much cash tbh as we have defined benefit pensions and a fair proportion of non-cash is high yield distribution funds. Not convinced we need 40% in cash and 60% in stocks and bonds. I was thinking of moving to 20% cash and 80% stocks and bonds and increasing my exposure to emerging markets.

you don't say on what basis you're targetting £6K a month though so it's a bit hard to know what the precision should be, as it were.

Well that is reasonably close to our disposable income before retirement. We have no debt and no longer contribute to savings/pensions so I am thinking we will be comfortable with that. I confess I haven't done the spend side of the equation and there are probably plenty of things we currently pay for that we don't need.

[xxd09]

What you haven’t stated is your living expenses
Great incomes are all very well but if your expenses are more then…………
How much income do you need to live on?
Living expenses are the necessary other half of you equation
Hopefully you live well within your means
xxd09

[kempiejon]

Well that is reasonably close to our disposable income before retirement. We have no debt and no longer contribute to savings/pensions so I am thinking we will be comfortable with that. I confess I haven't done the spend side of the equation and there are probably plenty of things we currently pay for that we don't need.

This need addressing. When I started down the route to FIRE I created a spreadsheet, it looked at how much money I could input into the goal of FI and some expectations of growth rates. I made assumptions about being able to increase my savings and investing, some guesses about interest rates and investment returns and was aiming for a retirement income level of about 75% of my then take home pay.
Then I was made redundant. I wasn't able to immediately replace my lost job and took advantage of the hiatus to take stock of career direction and work life balance. With no job my new spreadsheet was all about outgoings, spending broken into categories, there wasn't any more investment or savings from earned income.
With base line of inflexible costs, housing, fuel, insurances, taxes, food you can get a subsistence value. Then with itemised categorised outgoings you can look at discretionary spending. and get a new level of income for what you want to spend you money on, what you will spend your money on when you don't have to go to work and want you might not be spending now you're not going to work.

[DrFfybes]

Well that is reasonably close to our disposable income before retirement. We have no debt and no longer contribute to savings/pensions so I am thinking we will be comfortable with that. I confess I haven't done the spend side of the equation and there are probably plenty of things we currently pay for that we don't need.

What you haven’t stated is your living expenses
Great incomes are all very well but if your expenses are more then…………

Exactly. The First step of early retirement is "How much money will I need". Without that figure then the rest is pretty academic. You need to look at where the money goes and will go, lunches on work days, £2k on a train pass, etc. Will you spend more time in your foreign property, especially in winter, will that save you £2k in gas bills. You have obviously thought about what you plan to do, but you do need to take a closer look at the costs.

You may well find that when you work it out your figure of £1250 a week is more than you need and you could have quit years ago

Personally I'd be concentrating on what wrappers your assets are in and the values, rather than what the actual investments are. Where you hold the assets can be adjusted easily. However for post tax income planning it makes more difference whether it is in an ISA or SIPP than anything else. Arrange unsheltered assets to maximise your personal allowances.

It appears you have £87k in ISA, £115k unsheltered, and £75k in SIPP, and plan to ISA another £40k this or next tax year?

Effectively you want to fill a circa £18k pa gap for 6 years average, depending upon how your current £65k DB schemes are split. With £275k total that is going to erode your capital. Long term you're probably better off spending unsheltered assets and then SIPPs and keeping the ISAs until last, unless you are planning on leaving SIPPs as an IHT exemption which might well vanish.

Start with any lumps sums from commencing the DB pensions, some will be older schemes so I would expect come with a lump sum? Then look at the unsheltered assets, shelter what you can (probably into an ISA), and spend the rest. You could put it into an income fund or a low cost Global ETF or Fund like VHYL or VEVE, or whatever you choose, Premium Bonds, Marcus Cash account, whatever you are comfortable with. After 2 years you should have £80k sheltered and £36k spent. Then look at the tax free lump sum from the SIPPs, that's another 18 months, so just you're 18 months from your first SP when your top-up requirements drop, most of your SIPP is intact, and you've now got hopefully £150k+ in an ISA you havent touched. Take SIPP income up to any personal tax thresholds, put the excess into ISAs, and hopefully when you both hit SP age all the savings will be ISAd and tax free income

Paul

[Gilgongo]

BTW if you say £6K is close to your current disposable, and that disposable includes the amount you are spending on savings, then at the risk of stating the obvious, remove savings and you might have a hefty pay rise in retirement! This is why I ask about "precision". After a while, you have to ask whether it's worth chasing more income, and just set and forget.

For example, if your pension income is enough to weather a downturn (that is, pay for normal outgoings), then you may not need that cash (or indeed worry much about what to invest in). Could just spend it instead!

As to ITs - I'm hoping to rely on City Of London and Merchants Trust myself but DYOR obviously. ITs are seen as possibly expensive, but I'm willing to trade that for reliable-ish income as opposed to growth.

[DuncanM]

Thanks all for the sage advice.

I will compile a spreadsheet of expenditure - Must have, should have, could have and won't have. To be honest I have already started trimming costs that were unnecessary.

Next is to get that unsheltered into sheltered. Not sure whether to move it into a cash ISA or a stocks & shares ISA but the concept of hybrid ISAs sounds appealing. Anyone have any details?

I think I will find out that I should have retired years ago but I was waiting for the better half and have been working part-time for the past year anyway. As others have pointed out, many of my working expenses will disappear. No commuting or lunches, no pension contributions and savings. Also spending time in Spain will reduce my cost of living. Other expenses will appear too. Private health insurance for one, used to get that as a workplace benefit.

Will get on to the spreadsheet as matter of urgency and complete the other side of the equation

Thanks again for the advice.

[DrFfybes]

Other expenses will appear too. Private health insurance for one, used to get that as a workplace benefit.

Discussed elsewhere, but MrsF paid for this for years, I reckon BUPA had £50k out of her until 2020 when she finally stopped it. She had a couple of minor claims about 20 years ago.

Since then she's had a Private MRI, Xray (required for the MRI as she does silversmithing), and a few visits to physio/podiatrists. Total cost just less than a year of premiums.

Paul

[Dicky99]

I will compile a spreadsheet of expenditure - Must have, should have, could have and won't have. To be honest I have already started trimming costs that were unnecessary.

Assuming you don't have complex finances and if you have rudimentary Excel skills there is fast and roughly right way to determine your annual needs.

Once a year from my current account online banking I export the last 12 months of transactions to Excel. Next I sort the transactions in value order. Then I top and tail it i.e. at the top I delete all the +ve values, being deposits which I'm not concerned with.

At the bottom I delete the large value -ve items which I know to be non recurring items. What's left is my regular annual spend. That takes about 5 minutes to complete.

Beyond that, if I'm feeling very bored, it only takes about a further half hour, using word search filtering, to break that down into broad categories of spend.

Before finishing work I did this exercise for the prior 3 years and the annual spend was quite uniform for all 3 years. It also provide some clarity on the contingency needed for the one offs spend.

It's comforting before making that big change to have a really good handle on what one's basic needs cost and how much is left over for fun

[DuncanM]

Other expenses will appear too. Private health insurance for one, used to get that as a workplace benefit.

Discussed elsewhere, but MrsF paid for this for years, I reckon BUPA had £50k out of her until 2020 when she finally stopped it. She had a couple of minor claims about 20 years ago.

Since then she's had a Private MRI, Xray (required for the MRI as she does silversmithing), and a few visits to physio/podiatrists. Total cost just less than a year of premiums.

Paul

Agreed, always cheaper if nothing serious goes wrong. This is more likely the case for under 60s. However, if the worst happens it is good to know you will be seen quickly and receive timely treatment and care in a location near to home. Given the current state of the NHS, this is a must have for us. Well worth the premium in our view.

I will compile a spreadsheet of expenditure - Must have, should have, could have and won't have. To be honest I have already started trimming costs that were unnecessary.

Assuming you don't have complex finances and if you have rudimentary Excel skills there is fast and roughly right way to determine your annual needs.

<snip>

It's comforting before making that big change to have a really good handle on what one's basic needs cost and how much is left over for fun

So, I have completed the exercise. It works out at around £2,000 per month for UK and Spanish property costs (taxes, energy, water, insurance and maintenance fees), UK and Spanish car costs (tax, MOT, service, insurance and airport parking), entertainment costs (internet, TV licence, sky, spotify, amazon music, amazon prime, netflix, mobile phones, unlimited cinema etc.), UK and Spanish sports and social costs (gym memberships, personal trainer, golf memberships, golf union fees etc.) and other costs (dental insurance, health insurance, holiday insurance, non-resident tax and other miscellaneous recurring expenses).

This should leave us around £4,000 a month for food, clothes, petrol, holidays, unplanned expenses etc.

There is a lot that has been budgeted that can be cut so I am pretty comfortable that I will be in a decent position come January 15th. Anything glaring that I have missed?