Early-retirement wannabe

hugheskevi

As my 43rd birthday later this month rapidly approaches, it will hopefully mark the beginning of the end in terms of early retirement with about a year to go. My wife (already 43) and I plan to retire and go traveling for up to 3 years, then return and retire in Wales. We have no children. We are both still working from home, and there is no sign of a return to the office anytime soon - probably return around April.

We are planning on retiring at Christmas 2021, as that largely avoids higher rate tax for the year. We could probably retire earlier, but we both had some plans for autumn 2021 that were postponed due to COVID (eg Great North Run), so Christmas looks ideal. We could also carry on after that date, and perhaps leave in June 2022 which would use up Personal Allowance for 2022/23 and give a National Insurance qualifying year for both of us.

My wife's inheritance money has now been received, and I have also received most of the likely income for 2020/21 from my consultancy, so finances are a little more certain now. For several years now I have maintained a lot of nil fee, 0% interest credit card debt, typically a bit over £50,000 and sometimes up to £80,000. This accelerated investment plans involving pensions and ISAs, and also ensured any inheritance could be put to a readily available productive purpose. Somewhat coincidentally, the inheritance almost exactly equaled the outstanding debts we have. However, I may as well continue with the debts, as it is all costless borrowing that can be put to some use.

Our financial plans now centre around a few different scenarios. The first is the hypothetical scenario under which we retire immediately, sell our house and go traveling - we are not sure how long we will spend traveling, I doubt it will be 3 years but want to budget for that to allow flexibility. The table below shows the annual income and house purchase capital desired for each future stage of life. All income figures are in today's price terms, are post-tax and assume full State Pension (SP) for both of us (some future arrangements will be required to ensure we both get full records). Note we both have DB pensions with protected minimum pension ages of 50 and the figures include actuarial reduction for early commencement.

The table above shows the minimum amounts I would like at each future stage. The reserve figure is set to cover £70,000 p/a spend on traveling and a £500K house purchase should that be required. That should be plenty, and surplus from the reserve should be available to bolster income until DC pensions become available at age 58 (assumed minimum pension age).

Our eventual income once we reach State Pension will be a bit above £50,000 (post-tax) which I think will be comfortably more than we need as we currently spend about £30,000 p/a. We already have enough DC savings to provide an amount equal to State Pension for the period between age 58 and 68, so it is only the period between age 43 and 58 which is significant for planning purposes.

The table below is more in line with what I would like to have in future. As well as saving extra cash, our DB pension income from age 50 should increase by around £2,000 p/a by the time we leave. I suspect we won't quite hit the targets set out here, but there is enough padding in the numbers for that to not cause any issues (and the padding is the reason the reserve figure is much lower in this table - the negative cash available figure is just me being lazy, in practice it would of course lead to lower figures elsewhere, particularly in later years).

From here I will monitor and tweak the figures, with the primary intention being to retire at Christmas 2021, and a contingency option of June 2022. Earlier than Christmas 2021 or later than June 2022 are possibilities, but I think they are unlikely at the current time.

AlwaysLearnin

I have no doubt that you'll be absolutely fine whatever you decide!

I loved the .06 in the post travel years (22 days?) - that's detail!  I did wonder though; I'm not sure what your 'year' periods are/will be (from your birthday?) , but might you need a bit of cash in the first year of DB's to fill the gap between yours and your wife's starting payment, or will you time it to start together? 

hugheskevi

AlwaysLearnin said:

I loved the .06 in the post travel years (22 days?) - that's detail! 

Very close - 23 days! That is automatically calculated in my spreadsheets, based on the number of days remaining until my 50th birthday after adding 3 years to my current age to account for the planned period of travel.

I did wonder though; I'm not sure what your 'year' periods are/will be (from your birthday?) , but might you need a bit of cash in the first year of DB's to fill the gap between yours and your wife's starting payment, or will you time it to start together?

All the year periods run from my birthday. My wife is a few months older than me, which I ignore in the spreadsheets (but still base actuarial reductions back to her 50th birthday), ie, assuming our DB pensions start at the same time. In practice she will have a few extra months of DB payments, which will add up to maybe about £4,000. Just for simplicity I don't take this into account given it is a fairly small amount.

The most significant understatement is almost certainly assumed investment returns, which is simply an implicit assumption of CPI increases after accounting for all fees/charges (ie, that whatever we have now is what we will have in real terms in any future year). This will mostly affect the period 58-68, as I would expect our DC pensions to grow by quite a lot more. However, given that increases will add resources to a period I don't have any concern about, it doesn't really matter. We have about £260K in ISAs so hopefully the growth in that will help out in the years up to age 58, although we will be drawing on that in a fairly short period of time, so there will be less invested to grow and I also invest it more cautiously reflecting the much shorter horizon until it is needed.

gadgetmind

Dunno if anyone is interested, but I took my 1st pension payment from my SIPP in November 2018, have now taken 26 payments at a rate of just over 6% pa, and have 2.9% more in my pot than when I started. It peaked at 6.5% up in August 2019 (slightly higher late January 2020 but I only record once per month) and troughed at -10% in April 2020 as lockdown one started. I'm at a 50:50 equity to bond ratio, with rebalancing twice per year as I have to sell something to get enough cash for another six months' of payments. ISTR on one occasion doing a small purchase too but would have to check my records.

Balanced portfolios are a good thing!

michaels

6%?! are you able to spend much less in future if need be or does the pot not need to last very long? 

mark55man

But if the pot is marginally bigger surely that says that gadgetmind has been too conservative in his withdrawals as (no offence intended) none of us live forever and he now has 2 less to go with the same starting pot (with about the same inflation adjusted buying power)

nirajn123

gadgetmind said:

Dunno if anyone is interested, but I took my 1st pension payment from my SIPP in November 2018, have now taken 26 payments at a rate of just over 6% pa, and have 2.9% more in my pot than when I started. It peaked at 6.5% up in August 2019 (slightly higher late January 2020 but I only record once per month) and troughed at -10% in April 2020 as lockdown one started. I'm at a 50:50 equity to bond ratio, with rebalancing twice per year as I have to sell something to get enough cash for another six months' of payments. ISTR on one occasion doing a small purchase too but would have to check my records.

Balanced portfolios are a good thing!

You have done well to come through one of the worst drawdown periods in the history and so early in your drawdown journey, fair to say the central bankers deserve huge credit. 6% withdrawal is certainly higher than what I am targeting myself but as long as it works for you in the long term good for you! 

If you don't mind sharing what do you use for the 50/50 portfolio? Some one decision fund or DIY of all world equity + global aggregate bonds?

nirajn123

mark55man said:

But if the pot is marginally bigger surely that says that gadgetmind has been too conservative in his withdrawals as (no offence intended) none of us live forever and he now has 2 less to go with the same starting pot (with about the same inflation adjusted buying power)

Size of pot has no bearing on higher % withdrawal unless you plan to reduce it in future. It is all down to how long one plans to do such withdrawal, which could be a factor of other expected future cashflow or shorter expected retirement period (no offence intended here either).

gadgetmind

michaels said:

6%?! are you able to spend much less in future if need be or does the pot not need to last very long? 

6% of my pension, much more of my wife's, but sub 3.5% of all non-property assets. When state pensions trickle in in a decade, we can reduce pension withdrawals to avoid tax for my wife and 40% tax for me. 

gadgetmind

nirajn123 said:

If you don't mind sharing what do you use for the 50/50 portfolio? Some one decision fund or DIY of all world equity + global aggregate bonds?

VWRL and VGOV for the most part, but I added VFEM and VAPX to the equities to get more emerging/Asia, and added SLXX to to bonds to add some corporate, and also IGLS and IS15 to reduce duration. I also hold some INFR, RIT Capital Partners and Scottish Oriental Smaller Companies, but some of this is historical. I also like picking up Investment Trusts in deeply unloved sectors that are on big discounts and then waiting years/decades for the hot money to pile back into them. This has worked *very* well for me and I wish I'd been bolder with allocations, but that's always the way.

Sorry for ticker codes, but those interested can google them.