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Early-retirement wannabe

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  • atush
    atush Posts: 18,719
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    This is a very interesting thread indeed, having just completed my pension planning.

    I am at the tender of age of 28 but am aware how important it is to start early, and so far have been enrolled in my company pension contributing between 2 and 4% myself which has either been doubled or more by my employer.

    Well you havent completed your pension planning, you keep updating and changing your plans as life goes on ;)

    If you put in 3% (halfway between your figures), and the double and a bit, I make that 10% in total (but exact % from you w ould have been helpful here). At 28, if this is your first pension, then you should put in 14% in total as a rule of thumb. But if you started at these percentages when you were 20, they may be OK.

    !5% is probably reasonable, but dont forget the rest of your life- you need emergency cash of several months outgoings, and can use your S&S isa allowance too.
  • justme111
    justme111 Posts: 3,508
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    What if one lives on 50% of one's income now and that including work expenses and mortgage? The rule of half ones age would not apply and would lead in the best of cases to a big review of one's plans and in the worst to many years of unnecessary and damaging frugality and years wasted in a not enjoyable job
    The word "dilemma" comes from Greek where "di" means two and "lemma" means premise. Refers usually to difficult choice between two undesirable options.
    Often people seem to use this word mistakenly where "quandary" would fit better.
  • jamesd
    jamesd Posts: 26,103
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    edited 11 July 2017 at 11:45AM
    If living on fifty percent then that fifty percent would be a better starting point for whole income. The usual rules of thumb don't do very well for people highly committed to early retirement.

    For a 28 year old a hundred to a hundred and ten is likely to be a reasonable thought for planning horizon at the moment but life expectancy trends need to be monitored. It doesn't make a lot of difference to the safe withdrawal rate, though. It's also quite unlikely that both people in a couple will live to a sensible final planning age, with that perhaps being a one in twenty event, depending on age chosen. That implies that while provision is needed it would be a misallocation of resources to allocate the same amount of money for it as for younger ages when probability of being alive is still high. If using a tool like cfiresim you can add fake income at various ages to simulate a deliberate cut in income target.

    Compound growth is the great friend of those who start early. Don't sacrifice unduly but the more you can put in early, the easier it is overall and the better your options will be for early retirement.

    While a higher retirement income can be good, there's a significant trade off between income level and age of retirement. You need enough and ideally some more but being retired while relatively young and healthy is very good.

    The historic average return for the main UK stock market is about five percent plus inflation before fees. Four percent or so is a reasonable value. Small cap stocks might do one percent or so better and use of them is a good long term move. They do well near to the start of an economic cycle - say 2009 on - and more badly than large caps at the end, which we're probably fairly close to now.

    I suggest picking a desired income level and early retirement age on the ambitious side and using flexibility in those things to adjust based on how things go. If you make a really determined first five to ten years the effect of compounding makes it far easier for the rest.

    Investing instead of making mortgage overpayments can really help a lot. The longer you make the mortgage term, the better, because it maximises your compounded gain on the difference between mortgage cost and investment returns. Also as part of that it helps inflation do its job of reducing the real value of the debt, which stays the same instead of increasing with inflation. One major exception to this is if the mortgage loan to value is above 75% because the interest saving on the whole mortgage balance of getting below that can be substantial.

    Also learn about VCTs, a form of smaller company investing with tax benefits that can greatly cut your effective income tax rate. Thirty percent initial relief capped at tax paid during the year of purchase that has to be repaid if you sell within five years. At 28 you can recycle the money many times to repeatedly get that 30% on the same money, or a gradually increasing amount. Way better than the once only pension relief, though you do need to keep a balance of investments.
  • Marine_life
    Marine_life Posts: 1,059
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    A new travel post in the blog!

    http://earlyretirefree.com/dubrovnik-july-2017/
    Money won't buy you happiness....but I have never been in a situation where more money made things worse!
  • The_Doc
    The_Doc Posts: 110
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    @Gonzo230:
    Having a CETV of £1.4m at age 38 means a significant LTA charge when you come to crystallise this, which you may have got away with if you had stayed in the DB scheme. What was the DB scheme expected pension at scheme retirement age and what was that age?
  • atush
    atush Posts: 18,719
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    I've always wanted to go there, here's to retirement so I can too lol
  • atush
    atush Posts: 18,719
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    Interesting, think i'll try may or june so as to have less in the way of crowds.
  • atush
    atush Posts: 18,719
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    The_Doc wrote: »
    @Gonzo230:
    Having a CETV of £1.4m at age 38 means a significant LTA charge when you come to crystallise this, which you may have got away with if you had stayed in the DB scheme. What was the DB scheme expected pension at scheme retirement age and what was that age?


    Yes, I w as thinking that, there is going to be a pretty big tax bill therefore reducing this tidy sum.
  • ukdw
    ukdw Posts: 280
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    atush wrote: »
    Yes, I w as thinking that, there is going to be a pretty big tax bill therefore reducing this tidy sum.

    Agreed. At present assuming no protection the above LTA amount is about £400k - so the minimum tax liability at 25% would if I have understood how LTA tax works be about £100k which is about 7% of the pot.

    If the OP makes real terms growth of say 3.5% for the next 20 years then the £1.4m could have grown to £2.4m in real terms.

    If we assume that the LTA penalty tax rate stays at 25%, and the LTA level increases only in line with inflation, the above LTA amount in 20 years time could be as much as £1.8m with a minimum penalty tax liability of £450k - which would be then be about 16% of the pot.
  • Marine_life
    Marine_life Posts: 1,059
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    atush wrote: »
    Interesting, think i'll try may or june so as to have less in the way of crowds.

    Yes, and also possibly less heat. I don't tolerate heat well so anything over 30 is too warm for me.
    Money won't buy you happiness....but I have never been in a situation where more money made things worse!
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