Early-retirement wannabe

hugheskevi

michaels said:

What is your exposure to house price inflation while you are out of the market - have you considered any specific investments to hedge this risk?

(I know we always look at this market and assume it is so high it can only go down/sideways and yet even with a pandemic it has been up over 10% in the last year, probably higher on retirement type properties (assuming these are 'retire to the country' type choice so your 525  would only buy a much smaller house than anticipated if this were to happen again whilst you were travelling)

I will be 100% exposed to house-inflation in Wales whilst traveling unfortunately. The only way I could really mitigate this would be to buy a house in Wales before leaving, but the sort of property I want (a remote rural property) wouldn't make a good rental, and I don't want the hassle whilst away of even a fully managed estate agent service. I could partially hedge the risk by retaining my London property and renting it out (covering property prices in general, but not regional differences), which was a serious consideration, but I don't want the hassle of returning from travel and having to sell it.

In terms of properties I want to live in, prices range from £325,000 as a minimum (meets all key criteria, but with several compromises) to about £650,000 (would move in tomorrow and change nothing). So if it is necessary we could accept quite a lot less. In a disaster scenario, we could return to work briefly and get a mortgage to be paid from DC resources once we reach age 55.

So it ends up being a risk to tolerate, so will monitor house prices carefully whilst away. The cost of travel is an additional £20,000 of resources each year, funded for 3 years, so coming back after 1 year would free up an extra £40,000 of resources. Also, the target number of £41,400 is about £10,000 higher than I think will actually be needed, so there is spare there to 'borrow' from the ISA and result in lower future income. So if the risk does occur, it basically gets managed by redirecting resources from elsewhere. Clumsy and not ideal, but you can't hedge every risk.

gtat

hugheskevi said:

4 months ago in my last update (3rd April 2021, a couple of pages back) I said:

hugheskevi said:

Plan for the coming years is: Leave employment on unpaid leave (if employer agrees, to give an option on return I don't expect to take but also enhanced death and ill-health pension should anything happen whilst traveling [for an assumed period of 3 years], else resign) around December, and sell house. We will be aged 44 then.

The situation with COVID and North America has not improved as I had hoped. A US-UK air-corridor is still not in place, although the Canada-USA border is due to re-open in September for non-USA nationals. I had always penciled in 31st July as a 'Go / No go' decision date, and have had the rule that I won't anticipate anything that has not yet been announced (if not enacted) given how much anything COVID related changes.

So I have re-planned departure, with key dates now being:

• Market house in mid/late February 2022 (apparently marketing house after February half-term is best time of year for my type of property)
• Set off traveling in mid May 2022, although this may be delayed depending on house sale.
  
• Last day of service at work after using leave is planned to be Monday 13th June (ensuring wife and I use Personal Allowance for 2022/23, get a NICs qualifying year, and take advantage of all the Bank Holidays and Privilege Days in April - June period  as well as benefiting from being paid for the weekend)

I've also re-planned finances a little, allocating the small extra amount arising from the delay across a variety of categories. So I have made a few tweaks to smooth things out (and improved presentation of the chart), which should deliver an annual net income of £41,400 which increases by forecast earnings growth (3.84%) to age 68 and by a bit more than prices (due to Triple Lock) from age 68. Survivor benefits will be at least 70% of combined income.

I'm very relaxed by the delay, as it is always helpful to have extra resources to allocate, and it puts of focus on each part of the plan to identify the weakest parts and what can be done to improve them. Although I hope further delays are not required, as there are diminishing returns to this exercise. Also, the revised plan just fits better in terms of when to sell house and leaving date 'efficiency' in terms of getting income tax free salary in 2022/23.

The key period of uncertainty is between age 44 to age 57, with key assumptions being:

• Sale of current house yields around £530,000 after costs of sale
  
• Annual cost of travel for my wife and I will be a bit over £60,000 p/a and last for 3 years
• ISA returns of 3% p/a after charges (nominal terms)
• Unwrapped cash yields 0.75% (nominal terms)
• Inflation between 50-55 is important, as our DB pensions do not increase in this period. They are CPI-linked to age 50, and will get all inflation increases for the previous 5 years when we reach age 55 (but no backdated payment, just increase to future pension). Hence high inflation in that period would reduce available funds in real terms.
  
• I can access DC pension from age 55 - either via my existing scheme having a protected minimum pension age of 55, or being able to make a partial transfer before April 2023 of sufficient funds for the period 55-57 to a scheme that has a protected minimum pension age.

Based on the above, the outcome would be funds available for house purchase (including costs and furnishing) after returning from travel of around £525,000. Any surplus or deficit arising from variance in assumptions above will affect this figure, with limited ability to 'borrow' some funding from ISAs intended for funding for future years if desired.

The rate of return on DC pension is increasingly becoming less important. The chart above requires a growth rate of 2.5% after fees (nominal) which should be routine with low volatility investments. So the period after 57 is unlikely to pose any issues, given receipt of a decent amount of DB pension plus the flexibility of DC.

I've also been short-listing places to visit on the first part of our trip, although a lot of the trip will be researched and planned whilst on the road so I'm only planning north and central America and the Caribbean in advance of leaving. These are just the 'big ticket' things to see, and we will visit other things in areas as we move overland between the things we want to visit. It now looks like starting in Calgary / Edmonton area, visiting the nearby National Parks then heading up into Alaska in the summer months of 2022.

This is amazing- very impressive! What do you mean by being paid for the weekend?

And what are voluntary DB pensions? Is that like added pension,  for example?

hugheskevi

gtat said:

This is amazing- very impressive! What do you mean by being paid for the weekend?

And what are voluntary DB pensions? Is that like added pension,  for example?

I like optimisation, even at trivial levels - if my last day of service was Friday 10th June, I would get paid 10/30=33% of my monthly salary. Setting my last day of service as Monday 13th June means I get paid 13/30=43%.

Voluntary DB pensions are indeed Added Pension, between my wife and I we should have about £17,000 p/a of Added Pension before actuarial reduction, which will go down to about £11,000 from age 50 with the reduction for early payment. Really useful to have that extra guaranteed income.

gtat

hugheskevi said:

gtat said:

This is amazing- very impressive! What do you mean by being paid for the weekend?

And what are voluntary DB pensions? Is that like added pension,  for example?

I like optimisation, even at trivial levels - if my last day of service was Friday 10th June, I would get paid 10/30=33% of my monthly salary. Setting my last day of service as Monday 13th June means I get paid 13/30=43%.

Voluntary DB pensions are indeed Added Pension, between my wife and I we should have about £17,000 p/a of Added Pension before actuarial reduction, which will go down to about £11,000 from age 50 with the reduction for early payment. Really useful to have that extra guaranteed income.

Understood- thanks!

That's good to know - I always assumed salary was calculated on week days per month,  not all days.

How did you decide how much to save into a SIPP vs Added Pension? It is of course personal preference, but it would be interesting to understand your experience,  given how well you have planned things out!

hugheskevi

gtat said:

That's good to know - I always assumed salary was calculated on week days per month,  not all days.

It could be calculated like that - I tend not to bother with detailed research on trivial points, just put myself into a position of 'heads I win, tails I don't lose'

How did you decide how much to save into a SIPP vs Added Pension? It is of course personal preference, but it would be interesting to understand your experience,  given how well you have planned things out!

I started extra saving into a pension back in 2008/09. Prior to that I had avoided higher-rate income tax by taking unpaid leave to go traveling - pretty much everything I have done has been influenced by tax avoidance to some extent strangely enough.

Initially I put all higher-rate tax into a SIPP. The plan was always for the DC pension to essentially replace State Pension for the period 58-68 (anticipating an increase to Minimum Pension age). I could use Added Pension to increase my total pension level, but there would always be a gap between retiring and State Pension age that Added Pension couldn't fill as it is inflexible (the flip-side of being guaranteed income).

I wasn't much attracted by Added Pension initially, as this was around the time of the RPI-CPI change in 2010, which led me to question the reliability of the counter-party in the transaction given the change was to take advantage of legal drafting to significantly reduce accrued pension scheme liabilities. However, once there didn't appear to be further changes of that nature, the pricing and ability to access Added Pension from age 50 was compelling. Around that time, the declines in markets also made investing in SIPP more attractive.

My wife then reached higher-rate tax, but initially only slightly over, so she started to use her higher rate tax income to purchase Added Pension whilst I continued with SIPP contributions. That avoided two sets of SIPP fees, and spread our investment across DB and DC.

Up to 2014 purchases of Added Pension were all lump sums, but in 2015 when public service pensions changed, it was necessary to calculate how much to contribute and enter into a contract to pay each month, which would continue following the 2015 changes after which lump sum purchases of pre-2015 scheme Added Pension were no longer possible. That amount was calculated based on avoiding the Annual Allowance  for both myself and wife, trying to leave some spare in case of further Annual Allowance reductions and aiming to get to Added Pension limits around the time we were planning to leave. Spare Annual Allowance could then be used for DC contributions.

Then time did its thing, as we continued with Added Pension purchases each month, whilst strong investment returns meant the amount planned to replace State Pension for the period 58-68 proved to be enough for the period 55-68, and it looks like protection to get DC pension from age 55 will be possible. Hence we stopped putting all higher rate income into pensions and shifted to ISA instead.

Even so, we were headed for far more pension than we needed (I was too greedy to turn down such amazing value in terms of Added Pension pricing and higher rate tax relief). Then the McCloud judgment happened, which was absolutely perfect for us, as it meant our 2015-22 service will now be accessible from age 50 (and is more valuable than post 2015 pension anyway). That of course reduces the pension due to early access, but given we were headed for much more than needed it is a great trade.

So the decision about SIPP vs Added Pension was continuously evolved, changing in light of legislative change and pension offerings, just reviewing things each year to keep broadly on track. As I got closer to the end I increasingly viewed all the various ISA and pension investments as 'buckets' - early on in saving it didn't matter which bucket I poured extra resources into, as all buckets were empty and so I went with whatever was most efficient at the time. As I got closer to the end, there were dangers of each bucket overflowing, so there was more benefit in building things up more equally even if it wasn't the most tax efficient. The big increases to ISA contribution limits in 2010 and 2017 were also great for us, as they enabled us to put lots into ISAs just at the time we needed, which we had previously not focused on due to the tax advantages being so much lower than for pensions.

cfw1994

hugheskevi said:

gtat said:

This is amazing- very impressive! What do you mean by being paid for the weekend?

And what are voluntary DB pensions? Is that like added pension,  for example?

I like optimisation, even at trivial levels - if my last day of service was Friday 10th June, I would get paid 10/30=33% of my monthly salary. Setting my last day of service as Monday 13th June means I get paid 13/30=43%.

Voluntary DB pensions are indeed Added Pension, between my wife and I we should have about £17,000 p/a of Added Pension before actuarial reduction, which will go down to about £11,000 from age 50 with the reduction for early payment. Really useful to have that extra guaranteed income.

Ha! Not just me then….I ought to have left at the end of April, but decided to stay a week in May for a “paid” Bank Holiday and that weekend thing 🤣
Felt cheeky, especially as I used 4 days leave so I wasn’t *actually* working that week, but my boss didn’t care 🤪

bownyboy

So in my last post in April the plan was to check out when my contract finishes at the end of this month. However Covid still hangs over us severely restricting our options for slow travel across the world, which was key to our plans. 

I then got offered an extension to my contract with an agreement that I could take a month off as soon as travel looks less risky (hard to make plans with amber+/red list changes) AND that I move to a 4 day working week. 

I see this as a good compromise. A chance to add to our stash which will help with lots of additional 'fun money' when travelling as well as helping with some work on the house we need to do and a 50% increase in weekend time. 

tigerspill

hugheskevi said:

I've also been short-listing places to visit on the first part of our trip, although a lot of the trip will be researched and planned whilst on the road so I'm only planning north and central America and the Caribbean in advance of leaving. These are just the 'big ticket' things to see, and we will visit other things in areas as we move overland between the things we want to visit. It now looks like starting in Calgary / Edmonton area, visiting the nearby National Parks then heading up into Alaska in the summer months of 2022.

Looks like an amazing trip (or trips).
I appreciate that you may not have completed your planning, but wondered if you would be able to share more detail of the places and what you plan to visit?

MallyGirl

@hugheskevi maybe start a diary type thread - it looks like a great trip

barnstar2077

MallyGirl said:

@hugheskevi maybe start a diary type thread - it looks like a great trip

I second this.  I do wonder how that might go though!

"I am not going to purchase any more bags of peanuts from this particular hotel as after counting the total nuts in the previous three bags I have determined that..." :  )