Early-retirement wannabe

jamesd

WannabeEdouard wrote: »

So the risky scenario would be taking transfer and pot would be roughly 800k in 3 years.

A transfer is risky in the sense that if you live through worse times than seen since around 1900 you might need to take a reduced income that's unlikely to be as low as the DB income. The usual drawdown rules and income levels handle things if they aren't worse. Meanwhile the spouse gets 100% and there's usually a lot left over for inheritance.

It's easy to retire tomorrow on your target income if you don't want to bet on that unlikely outcome.

Assuming 1.5% a year in costs (Triumph13 used less) the 4% rule for the UK pays 3.2% of capital a year increasing with inflation while the more modern Guyton-Klinger rules pay 5% but some times skip inflation increases or add extra 10% cuts or increases. 4% rule can also be increased if you've found that you haven't been living through worst times.

CETV value = 522k
DC Value £160k putting in £31k per year for next 3.
Isa savings £45k
Full State pension at 67
No mortgage

DB guarantee 18.8K a year at age 65

Edit to add ideally i would like £28k a year to live on

Total of £727k now.
Guyton-Klinger 5% is £36,350 a year variable before tax effects for a 40 year plan. Assuming 15% tax (25% of pension not taxed) and 12500 personal allowance that's (36350 - 12500) * 0.85 + 12500 = £32773 a year after tax.

That's before adding any allowance for the state pension. You can add around two thirds of that now because you won't need to pay it out of investments later, another 8700 * 0.8 * 0.67 = £4663 a year.

That's £37,436 variable a year after tax starting tomorrow.

Which gets us to the meat of the problem: how much later and on how much lower income do you want to go to avoid dealing with investments and variable income? Everyone has different shades of preference.

After a transfer you can get back some guaranteed income if you like:

1. best value is usually state pension deferral, which adds 5.8% of the state pension per year of deferral. Deferring an £8,700 state pension for ten years adds £5,046 taking the state pension to £13,746. CPI for the £5,046, not triple lock.

2. you can do gradual level annuity buying, spending say 30k every two years. Level - no inflation increases - is because regular buying does much buying after any inflation and to allow a bit for the normal decrease in spending as people get older.

3. starting around age 80-85 annuities pay more because people start to die faster. This can be a good time to make the rest of your core income need guaranteed and inflation protected.

For investment while in drawdown you'd start with a mixture of equities and bonds and part of the bonds bit would be cash. If you started out at 65% equities, 35% bonds and cash you'd have about 38k in cash for a year (ignoring tax for simplicity) and 216k in bonds. Dividends and interest on the whole 727k would be around 3%, 21.8k. Leaves you drawing 38k - 21.8k = 16.2k from the cash a year. If the downturn lasts longer than two years you start to do some bond selling and continue that until the bonds run out, only then moving on to equities.

Triumph13

WannabeEdouard wrote: »

So been trying to understand this but still can't quite get it. So i would get £4375 and need to get shortfall from pension plus isa . Wouldn't i only be able to withdraw 8125 from pension tax free ? £4375 + £8125 = personal allowance and so need to make up to 28k from ISA (15.5k) which wouldn't last the 7 years i'd need to do this?

Mea Culpa. Apologies, I was clearly having a bad day and missed the £27k odd of tax you'd have to pay. Why you should never believe random strangers on the internet without checking the sums yourself!

WannabeEdouard

jamesd wrote: »

A transfer is risky in the sense that if you live through worse times than seen since around 1900 you might need to take a reduced income that's unlikely to be as low as the DB income. The usual drawdown rules and income levels handle things if they aren't worse. Meanwhile the spouse gets 100% and there's usually a lot left over for inheritance.

It's easy to retire tomorrow on your target income if you don't want to bet on that unlikely outcome.

.

James thank you for the detailed response. Really interesting stuff. A lot to ponder. You are kind of saying even with a downturn in the markets . I could ride the storm. On the face of it I'd get more bang for my pot moving. (I know not advice just comments). £32K a year from 58 is certainly better than £28k.

WannabeEdouard

Further thoughts on my situation. If i retire at 58 and live off DC . Do i need to act on a possible transfer before 65? Or can i defer DB until either need it or then transfer at later age. Are CETV likley to be higher as i get older everything else staying the same i.e. |Gilts etc.

ggmf

Age 61 (nearly 62!), I keep look at when to fully jump, so:

I have 3 small DB pensions: -
Pension #1 - £6,800 this is in payment (as available from 60yrs), annual increases linked to CPI, 50% survivor’s pension on my death.
Pension #2 – I have a part-time contract that pays £12,000 gross, that continues to add to this 2nd DB pension. I’ve assumed the pension will be approx. £4,500 when available at 65yrs, annual increase linked to CPI, 50% survivor’s pension on my death. The contract ends 31/03/2020 but I could be offered a 2 year extension (if I want or need it)
Pension #3 – Deferred, I’ve assumed this will be approx. £3,200 when available at 65yrs due to growth and increases, when in payment, annual increase linked to CPI will be applied, 50% survivor’s pension on my death.

State Pension forecast (SP age is 66yrs), from online estimate up to April 2019 – currently £7893/yr. Forecast if I contribute another 4 years will be £168.60 a week, £8,797 a year. Due the current part-time working (stated above) I will be credited a full year for 2019-20, leaving 3 years to make up (or purchase).

SIPP Current value £320,000, managed by an IFA (the value of investments can do down as well as up!).

Savings (emergency fund for treats, unexpected events etc.) £90,000, £80,000 of which is in a cash Isa, remaining £10,000 in an instant access savings account.

Mortgage free, no debts.

OH (57yrs) has her own small NHS DB pension (that will include a 25% tax-free sum) available at age 60yrs, but she wishes to continue working, and has enough credits now for a full state pension of £8,797 a year, but not payable until age 67 yrs.

(Jamesd will know more about this than I can work out) Running these figures through cFIREsim, with an end date of 2053 (aged 95– if I get that far!) Withdrawal Analysis suggests: First 5 Years - £29,684, Beginning Third - £30,009, Middle Third - £37,947, Final Third £49,441. Failures: - 1 in the Final Third.

Based on the above, I would like to achieve £26k gross now ideally lasting for the 33 yrs. My spreadsheets suggest that the SIPP will run dry at age 84 yrs, however its assumes zero growth of the funds held in the SIPP (Pessimistic?), pension taken as flexible combination of existing DB in payment and SIPP, with SIPP drawdown adjusted as the 2 remaining DB’s and SP become payable, later. Pension requirement increasing by 3% pa for inflation, all 3 DB pensions and SP projected to increase by 1% pa when in payment (optimistic?). Spreadsheet and assumptions do not include any reduction of spending in later life.

Do you think my plan is achievable? thanks in advance.

jamesd

WannabeEdouard wrote: »

£32K a year from 58 is certainly better than £28k.

That's really £37.5k variable from 54 once allowance is made for the state pension, not 32k from 58.

Besides being three years earlier and more, the variability is the difference.

One part of the Guyton-Klinger rules says that if the percentage you're drawing from the current pot value is more than 20% higher than the starting percentage, you take a 10% cut. Here's a worked example of a very bad start:

Using 37.5k of 727k that's 5.1582% initially. 20% lower is 4.1456% and gets you a 10% raise while 20% higher is 6.2184% and gets you a 10% cut.

Year 2, OK version. Say inflation is 4%, year 2 income is 1.04 * 37.5k = 39k. If your pot grew by the same 37.5k you took out it'd still be 727k. 39k is 5.3645% so still below 6.2184% and your second year income is the 39k. But lets look at a bad sequence...

Year 2, crash version. Same 4% inflation so 39k is first take at the year two income. But say the 65% in equities fell by 50%, from 472.55k to 236.275k, while bonds and cash fell by 17k, mostly your income taken after dividends and cash, from 254k to 237k. Total portfolio value is now 236.275k + 237k = 473.275k. 39k is 8.2405% of 473.275k and that's above 6.2184% so instead of 39k you get that cut by 10% to 39k * 0.9 = 35.1k.

Year 3, no recovery version. Inflation still 4% so initial income calculation is 1.04 * 35.1k = 36.504k. No equity recovery, still worth 236.275k. Bonds and cash fall by another 17k (for simplicity I'm not adjusting this with income changes) to 220k. New portfolio value is 456.275k. 36.504k is 8.0004%, still over 6.2184% so 10% cut to 32,853.60 for year 3.

Year 4, no recovery version. 0% inflation, first income calculation 32,853.60, pot value down another 17k to 439.275k. 7.4791% so 10% cut to 29,568.24 income for year 4.

Year 5, equities recover 25% adding 59.069k taking equities to 295.344k and total pot to 498.344k. Deduct 17k takes it to 481.344k. No inflation. 29,568.24 is 6.1429%, not over 6.2184% so no cut and income this year is 29,568.24.

That's how a very bad 50% equity drop that doesn't recover for three more years could play out.

For simplicity I've ignored some rules to illustrate how income gradually adjusts down if bad times persist.

If equities had dropped by 17.43% (or less) to 390.175k taking portfolio to 627.171k there would have been the usual inflation increase to 39k in year 2. Or a bigger drop with enough recovery.

Now probably isn't a good time for 65% equities.

jamesd

WannabeEdouard wrote: »

Further thoughts on my situation. If i retire at 58 and live off DC . Do i need to act on a possible transfer before 65? Or can i defer DB until either need it or then transfer at later age. Are CETV likley to be higher as i get older everything else staying the same i.e. |Gilts etc.

At 58 retirement it'd be better to wait because age increase leads to value increase. At 54, just wait until the day after the next birthday.

[Deleted User]

I am approaching 50. Wife similar age. Living in Canada. I am working, good salary but not feeling like I am doing anything useful like I did in the good olden days. Wife is doing occasional work, maybe a few days a month.

We have low seven figures (in pounds), no debt. The youngest kid will graduate next year.

DB pensions will start from 10k in 5 years’ time, more will kick in at different times and go up to about 40 k total eventually (in 2037, when UK state pensions kick in). More than half of our DB pensions carry currency risk (paid in GBP, we spend in CAD).

We bought a small hobby farm three years ago. Actually had a meaningful amount of sales this year, about 25k, having started from zero in 2017. That income goes into equipment now but will be used as profit after retirement. Learning and working outdoors has been fun.

Our expenditure isn’t high, I could retire now and just carry on with the farm. Don’t think I can last past 55 with the office job but perhaps more than a year. Still thinking about it. 55 would certainly add to the safety margin and spending capacity.

Part of me thinks that retiring with potentially half of your adult life in front of you is dangerous. 40 years is a long time, a lot could happen. So we focus on being diversified.

cfw1994

Deleted_User wrote: »

I am approaching 50. Wife similar age. Living in Canada. I am working, good salary but not feeling like I am doing anything useful like I did in the good olden days. Wife is doing occasional work, maybe a few days a month.

We have low seven figures (in pounds), no debt. The youngest kid will graduate next year.

DB pensions will start from 10k in 5 years’ time, more will kick in at different times and go up to about 40 k total eventually (in 2037, when UK state pensions kick in). More than half of our DB pensions carry currency risk (paid in GBP, we spend in CAD).

We bought a small hobby farm three years ago. Actually had a meaningful amount of sales this year, about 25k, having started from zero in 2017. That income goes into equipment now but will be used as profit after retirement. Learning and working outdoors has been fun.

Our expenditure isn’t high, I could retire now and just carry on with the farm. Don’t think I can last past 55 with the office job but perhaps more than a year. Still thinking about it. 55 would certainly add to the safety margin and spending capacity.

Part of me thinks that retiring with potentially half of your adult life in front of you is dangerous. 40 years is a long time, a lot could happen. So we focus on being diversified.

I certainly relate to that first point!
What is a “hobby farm”? You grow hobbies? :rotfl:

You sound in a good place (I don’t just mean Canada, although that is very nice....I once spent a student summer on a farm in Strathroy, Ontario....carefree days!).
Once the offspring are making their way, the “pressures” should ease, I suspect....ours also completes next summer, although the older here is considering a masters (puts off finding work, eh....), so not entirely done with “support”....

WannabeEdouard

jamesd wrote: »

That's really £37.5k variable from 54 once allowance is made for the state pension, not 32k from 58.

Besides being three years earlier and more, the variability is the difference.

One part of the Guyton-Klinger rules says that if the percentage you're drawing from the current pot value is more than 20% higher than the starting percentage, you take a 10% cut. Here's a worked example of a very bad start:

Using 37.5k of 727k that's 5.1582% initially. 20% lower is 4.1456% and gets you a 10% raise while 20% higher is 6.2184% and gets you a 10% cut.

Year 2, OK version. Say inflation is 4%, year 2 income is 1.04 * 37.5k = 39k. If your pot grew by the same 37.5k you took out it'd still be 727k. 39k is 5.3645% so still below 6.2184% and your second year income is the 39k. But lets look at a bad sequence...

Year 2, crash version. Same 4% inflation so 39k is first take at the year two income. But say the 65% in equities fell by 50%, from 472.55k to 236.275k, while bonds and cash fell by 17k, mostly your income taken after dividends and cash, from 254k to 237k. Total portfolio value is now 236.275k + 237k = 473.275k. 39k is 8.2405% of 473.275k and that's above 6.2184% so instead of 39k you get that cut by 10% to 39k * 0.9 = 35.1k.

Year 3, no recovery version. Inflation still 4% so initial income calculation is 1.04 * 35.1k = 36.504k. No equity recovery, still worth 236.275k. Bonds and cash fall by another 17k (for simplicity I'm not adjusting this with income changes) to 220k. New portfolio value is 456.275k. 36.504k is 8.0004%, still over 6.2184% so 10% cut to 32,853.60 for year 3.

Year 4, no recovery version. 0% inflation, first income calculation 32,853.60, pot value down another 17k to 439.275k. 7.4791% so 10% cut to 29,568.24 income for year 4.

Year 5, equities recover 25% adding 59.069k taking equities to 295.344k and total pot to 498.344k. Deduct 17k takes it to 481.344k. No inflation. 29,568.24 is 6.1429%, not over 6.2184% so no cut and income this year is 29,568.24.

That's how a very bad 50% equity drop that doesn't recover for three more years could play out.

For simplicity I've ignored some rules to illustrate how income gradually adjusts down if bad times persist.

If equities had dropped by 17.43% (or less) to 390.175k taking portfolio to 627.171k there would have been the usual inflation increase to 39k in year 2. Or a bigger drop with enough recovery.

Now probably isn't a good time for 65% equities.

Hi James,

Thanks you for a very detailed response. I still need to fully digest all these figure but seems unless I am very unlucky and get market conditions worse than ever before I may well be far better off transferring. Your comment at the end it's not the time to be in 65% equities worries me as your whole post assumes that. Is this because of a market correction event is high probability in near future?