Early-retirement wannabe

slopemaster

I’ve just read all the way through this interesting thread.
I seem to be sort of sleepwalking into early retirement. (I’m 54.)
I’ve been ill the last few months and assuming I would eventually get back to work when better. I am now facing the fact that this may not be realistic and I may not be able to work any more. (But it is nothing life-threatening, I could live as long as anyone else.)

So now I’m trying to make some sort of plans, and figure out if we have enough money.
I wouldn’t know how to do a spreadsheet, and can’t figure out what assumptions to make about inflation and interest rates. Obviously with real interest rates being negative at the moment that makes things difficlt.

That rule of thumb about 25x income is at least easy to understand. But thing is, the income needed will change over time as different pensions start to be paid.

PLEASE Could anyone hazard a guess (prferably with some explanation!) of how much lump sum we might need in the following circumstances?
Or see if my back-of-the-envelope calculation makes sense?

We want/need about £18000pa to live on.

Current income (not counting any interest from savings)
Me nil, OH approx £5000 from work
In 5 years time I will get a pension of £8400, but around that time OH will prob need to stop work so his income will be nil.
In 11 years time I will get my state pension.
In 16 years time OH will get his state pension.
(So from that point on, we only need a small amount to top up the pensions.)

I suppose if you said that over that time real interest rates were zero, then you could just add up the extra what we need to get through the next 16 years, and say that’s the minimum size of the lump we need?
Does that make sense?
So we would need to have £153 000 to get us through to state pension age, and then it would all be gone?
Is that optimistic or pessimistic though???

jamesd

You can assume about 5% income from investments, easy to get that. Not savings accounts, proper investments.

So start off thinking that you have £100,000 to start with.

Year 1: £18,000 - £5,000 from work - £100,000 * 0.05 = £5,000 investment income leaves an £8,000 shortfall. Reduce capital from £100,000 to £92,000 as you take that £8,000 out of it.

Year 2: £18,000 - £5,000 from work - £92,000 * 0.05 = £4,600 investment income leaves an £8,400 shortfall. Reduce capital from £92,000 to £83,600 as you take that £8,400 out of it.

Year 3: £18,000 - £5,000 from work - £83,000 * 0.05 = £4,150 investment income leaves an £8,850 shortfall. Reduce capital from £83,600 to £74,750.

Year 4: £18,000 - £5,000 from work - £74,750 * 0.05 = £3,737 investment income leaves an £9,262 shortfall. Reduce capital from £74,750 to £65,488.

Year 5: £18,000 - £5,000 from work - £65,488 * 0.05 = £3,274 investment income leaves an £9,725 shortfall. Reduce capital from £65,488 to £55,763.

Year 6: £18,000 - £0 from work £8,400 pension - £55,763 * 0.05 = £2,788 investment income leaves an £6,812 shortfall. Reduce capital from £55,763 to £48,951.

Carry on like this year by year until you run out of money. If you do and haven't reached the end, start again with a higher starting amount. I've assumed that all incomes increase with inflation, so that eliminates the need to consider inflation in the calculations.

I've assumed that each of you will get £7,000 a year in state pensions. Get state pension forecasts online to get a better idea. It could be more or less.

With that assumption you'd have £22,400 income with the £8,400 pension and two £7,000 state pensions so you'd be over your target. So no subsidy needed then.

To last that long with £18,000 spending you'd need £102,000 and would have about nothing left at the end.

target income		18000		
	lump sum		102,000		
	income percentage		0.05		
					
					
					
Year	Employment income	Pension income	Investment income	Shortfall	New investment value
1	5000	0	5100	7900	94,100
2	5000	0	4705	8295	85,805
3	5000	0	4290	8709	77,095
4	5000	0	3854	9145	67,950
5	5000	0	3398	9602	58,348
6	0	8400	2917	6683	51,665
7	0	8400	2583	7017	44,648
8	0	8400	2232	7368	37,281
9	0	8400	1864	7736	29,545
10	0	8400	1477	8123	21,422
11	0	8400	1071	8529	12,893
12	0	15400	645	1955	10,938
13	0	15400	547	2053	8,884
14	0	15400	444	2156	6,729
15	0	15400	336	2264	4,465
16	0	15400	223	2377	2,088
17	0	22400	104	-4504	6,593

Marine_life

jamesd wrote: »

You can assume about 5% income from investments, easy to get that. Not savings accounts, proper investments.

So start off thinking that you have £100,000 to start with.

Year 1: £18,000 - £5,000 from work - £100,000 * 0.05 = £5,000 investment income leaves an £8,000 shortfall. Reduce capital from £100,000 to £92,000 as you take that £8,000 out of it.

Year 2: £18,000 - £5,000 from work - £92,000 * 0.05 = £4,600 investment income leaves an £8,400 shortfall. Reduce capital from £92,000 to £83,600 as you take that £8,400 out of it.

Year 3: £18,000 - £5,000 from work - £83,000 * 0.05 = £4,150 investment income leaves an £8,850 shortfall. Reduce capital from £83,600 to £74,750.

Year 4: £18,000 - £5,000 from work - £74,750 * 0.05 = £3,737 investment income leaves an £9,262 shortfall. Reduce capital from £74,750 to £65,488.

Year 5: £18,000 - £5,000 from work - £65,488 * 0.05 = £3,274 investment income leaves an £9,725 shortfall. Reduce capital from £65,488 to £55,763.

Year 6: £18,000 - £0 from work £8,400 pension - £55,763 * 0.05 = £2,788 investment income leaves an £6,812 shortfall. Reduce capital from £55,763 to £48,951.

Carry on like this year by year until you run out of money. If you do and haven't reached the end, start again with a higher starting amount. I've assumed that all incomes increase with inflation, so that eliminates the need to consider inflation in the calculations.

I've assumed that each of you will get £7,000 a year in state pensions. Get state pension forecasts online to get a better idea. It could be more or less.

With that assumption you'd have £22,400 income with the £8,400 pension and two £7,000 state pensions so you'd be over your target. So no subsidy needed then.

To last that long with £18,000 spending you'd need £102,000 and would have about nothing left at the end.

target income        18000        
    lump sum        102,000        
    income percentage        0.05        
 
 
 
Year    Employment income    Pension income    Investment income    Shortfall    New investment value
1    5000    0    5100    7900    94,100
2    5000    0    4705    8295    85,805
3    5000    0    4290    8709    77,095
4    5000    0    3854    9145    67,950
5    5000    0    3398    9602    58,348
6    0    8400    2917    6683    51,665
7    0    8400    2583    7017    44,648
8    0    8400    2232    7368    37,281
9    0    8400    1864    7736    29,545
10    0    8400    1477    8123    21,422
11    0    8400    1071    8529    12,893
12    0    15400    645    1955    10,938
13    0    15400    547    2053    8,884
14    0    15400    444    2156    6,729
15    0    15400    336    2264    4,465
16    0    15400    223    2377    2,088
17    0    22400    104    -4504    6,593

However, it is a very brave person who:

a. Makes a plan which assumes they burn through all their capital.
b. Makes no allowance for unexpected expenditures (i.e. outside of normal living expenses)

Not being critical as I agree with the maths in your model but just a point for the poster to consider

slopemaster

Thank you so much James, that's just what I needed.
(And, funnily enough, that's about how much we have in cash.)

Only now I need to work out how to get 5% real rate of return,
as at the moment it is getting from +0.25% to -2% after inflation

But that is a whole other question!

Take your point Marine Life, but we do have a house which, if we needed to, we could sell or mortgage.

gadgetmind

slopemaster wrote: »

Only now I need to work out how to get 5% real rate of return,
as at the moment it is getting from +0.25% to -2% after inflation

Buy a copy of Smarter Investing by Tim Hale. Yes, you can get an *average* of 5% real return BUT this assumes you take on a degree of risk that you'll get less, perhaps much less, and negative in some years.

cyclonebri1

Marine_life wrote: »

A couple of weeks ago a colleague at work dropped dead - at 46 years of age. Its things like that which really make you think. I wouldn't call it a wake up call but more a reaffirmation that at my age its time to start being careful about diet, exercise etc.

Most people in retirement see themselves there in the postion they are today (with good health, active etc) but I suspect the reality is far from that. Similarly, whilst a reasonable budget may be to look at todays expenditure and deduct of the things that will clearly fall away - I suspect the majority will not take into account the additional costs of getting old.

I agree with the previous posts - best bet is to plan for uncertainty and allow a buffer which allows for the unexpected. Whilst day to day expenses are easiest to estimate - it is the size of the buffer that is the biggest uncertainty in my calculations.

I have a slant on the highlighted bits;

Ist 1;
there are as many normal healthy individuals in the graveyard as there are fat/thin/or just plain unfortunate ones.

and 2;

Yes there are costs to getting old, and I suspect you mean care/heating/help about the garden etc, but, you abilities deteriorate and your hobbies become impossible. In short you actually spend less enjoying yourself. God do I sound a morbid basket:o.

The last paragraph I totally agree with:T

slopemaster

gadgetmind wrote: »

Buy a copy of Smarter Investing by Tim Hale. .

Is it written for the intelligent-but-uninformed punter or does it assume prior knowledge of investing?

gadgetmind

slopemaster wrote: »

Is it written for the intelligent-but-uninformed punter or does it assume prior knowledge of investing?

It's very, very readable and only gets complex (though jargon free) where required.

jamesd

slopemaster wrote: »

Only now I need to work out how to get 5% real rate of return, as at the moment it is getting from +0.25% to -2% after inflation

With investments. There's enough money there for it to be worth visiting unbiased.co.uk and interviewing two or three IFAs then perhaps going with what one of them suggests.

The sort of thing that you should expect is a mixture of corporate bond funds and equity income funds.

For some of it there's the 8% regular saver account from First Direct. Need to open their normal saver account as well to avoid charges for the mandatory current account. You don't need to transfer to them for your normal current account use.

If thinking of moving, best to do it earlier when you're both well capable of handling it and so that you get the presumably lower costs after the move as soon as possible. You can do things like look for easy access that will make life easier later, at minimal cost now.

Marine_life

Well here we are at close to an end of year report with potentially just 1007 days to go to retirement.

It has been a period of extreme ups and downs.

Shortly before Christmas I was diagnosed with testicular cancer. Aside from anything else it was a huge shock both to myself and my family and there were fundamentally very few signs of illness. After two days of very intense activity (including having one testicle removed) a test revealed that the cancer had not spread and as a result the prognosis is good.

I won't say this has been a wake up call as to be honest everything happened so quickly that I almost did not have time to dwell on the consequences. Nevertheless, it has left me with two thoughts:

1. Not to overcommit to saving now at the expense of having a nice life.

2. To take extra care of general fitness and health.

So be ready to retire at 50 but also be ready to carry on if necessary.

Financially it has not been a bad year with three major chunks of saving - approximately 40,000 going into my early retirement savings plan, 20,000 extra payment off the mortgage and a further 80,000 of cash which I have yet to decide finally how to invest (but likely to go into a short term savings account for paying off the mortgage when the fixed term ends in two years).

So financially very much on track but mentally starting 2012 with an altered view.