Early-retirement wannabe

gfplux

I think that Donald Rumsfeld understood retirement when he said

"Now what is the message there? The message is that there are no "knowns." There are things we know that we know. There are known unknowns. That is to say there are things that we now know we don't know. But there are also unknown unknowns. There are things we do not know we don't know."

He wasn't talking about retirement at the time but his words do describe retirement before the event.

ermine

mgdavid wrote: »

However before downsizing I would need to dispose of a motorhome

Seems a strange item to get rid of before retiring , you've now got the time to use it. You can travel slower (cos you have the time) and reduce costs by self catering. Plus you get to see some of the wilder places without treking back at night. Or you can camp near a fine pub and indulge, then kip down without needing to drive

It's not for nothing that you see a lot of them on UK and European campsites with retired folk sitting outside drinking...

jamesd

dreaming wrote: »

I'm not entirely sure it is the correct thing for me.

It may not be. Each person is different, so even though it's likely to be the optimal financial approach, in part because it shifts income to when you're in best shape to use it, it may not be the best blend for you.

dreaming wrote: »

Apart from the psychological/emotional satisfaction I would have from owning my house outright

That's something I just don't have. It's just a place to live and a cost to deal with. I could pay off my mortgage at any time but just won't because it would increase my overall financial risks to do it.

dreaming wrote: »

I don't think I would generate enough income to do more than service the mortgage payments.

You could probably get 6% or so from mixed investments of various sorts. But perhaps more importantly, you can draw on the capital gradually to top up income, knowing that eventually it'll be replaced by state pension income.

dreaming wrote: »

I am meeting with an IFA in a few weeks so it will definitely be considered.

An IFA should have a very strong focus on both risk tolerance and capacity for loss. It's pretty unlikely that an IFA will suggest this sort of approach, though the state pension income is guaranteed, or life assurance payout is, so the actual risk level isn't high: one of those will pay out.

If you do want that considered, you should probably ask the IFA about techniques to smooth income before and after the state pensions start, since that's where this sort of approach can add significant value.

dreaming wrote: »

However it doesn't "sit right" with me somehow

If it really doesn't sit right even after looking at the figures you really shouldn't do it. Even though I think it's likely to be financially optimal. Because you have to live with it and if you're not comfortable, you'll just end up regretting it until the mortgage is gone later.

dreaming wrote: »

I am not sure that this is going to be the most financially stressed time of my life. I think I lived through that when the children were young and interest rates were sky high

I'd be surprised if it was, but I did include the words "the rest of your life" to look just towards the future.:) Those interest rates and inflation were a tough time, even though inflation-related increases in income then went on to make it comparatively cheap to repay, compared to a low inflation environment. I included dealing with that sort of thing in my own mortgage contingency planning because sustained rates over ten percent for years aren't impossible in the future.

mgdavid

ermine wrote: »

Seems a strange item to get rid of before retiring , you've now got the time to use it. You can travel slower (cos you have the time) and reduce costs by self catering. Plus you get to see some of the wilder places without treking back at night. Or you can camp near a fine pub and indulge, then kip down without needing to drive

It's not for nothing that you see a lot of them on UK and European campsites with retired folk sitting outside drinking...

...which is precisely why I'm not thinking of downsizing for another maybe 10 years, in fact OH is talking of changing it for a better one.

Marine_life

jamesd wrote: »

You could probably get 6% or so from mixed investments of various sorts

I am intrigued by this comment. In an environment of low interest rates (where rates are likely to stay low for some time), do you really think that getting 6% is a realitic aim for the type of low risk portfolio that a retired person wants (and needs)?

dreaming

jamesd wrote: »

It may not be. Each person is different, so even though it's likely to be the optimal financial approach, in part because it shifts income to when you're in best shape to use it, it may not be the best blend for you.

That's something I just don't have. It's just a place to live and a cost to deal with. I could pay off my mortgage at any time but just won't because it would increase my overall financial risks to do it.

You could probably get 6% or so from mixed investments of various sorts. But perhaps more importantly, you can draw on the capital gradually to top up income, knowing that eventually it'll be replaced by state pension income.

It's a strange thing, isn't it. trying to "plan" a life you don't know yet? As I said before, when it was first announced that my work was to be relocated I was quite worried. I had thought I would continue in my job until I was 60 then perhaps go part-time until state pension age, but I am quite excited now at the thought of not "having" to work. People keep asking me what I'm going to do (what is this obsession with doing?) - I'm just going to "be" - at least for a few months.
I had never felt strongly attached to any house until this one - even the one where my children grew up. This place just seems right but it isn't just the place itself - it's the security of knowing that it's mine. Added to which it is quite cheap to run (and solar panels will shortly be giving me a small income), in a very convenient place with shops just around the corner and bus stop to town across the road - so I could do without my car if necessary although I do want to keep it if possible.
I know I am extremely risk averse, and the thought of investing what to me is a large sum of money in "possibilities" seems totally alien. My severance pay is just over £60k but I am paying the excess of £30k into my pension and taking the lump sum. This should be about £20k (I have also paid various bonus payments in over the last year) and the mortgage will be just over £21k in September, so that will nearly cover that. So, taking off a couple of thousand for a few bits I want for the house and self I will have approx. £26-27k which I need to organise in the best way. The pension I will be drawing is just under the tax threshold so I will max out my ISA allowance each year whilst I can to make sure I don't go over. With my lack of interest in shopping/acquisition of stuff etc. I am hoping I don't have to use this reserve regularly but it is comforting to know it is there if needed.
As I said at the start, I'm trying to make the best plans I can for a life I don't know yet. I might find I am climbing the walls in 6 months and desperate to get a job, or the roof might need replacing (actually unlikely as it was checked thoroughly when the solar panels were fitted but who knows?), or I might just sit on the grass with my (Aldi) Pimms looking at the sunset - although knowing me I will end up doing the weeding.
I do find it interesting though to hear other people's views which is why I read this thread. I have learned a lot from it - even if it is to consider an idea but then reject it - it all adds to the decision making. So thanks to everyone who contributes even if some of it goes over my head at times.

ukjoel

ermine wrote: »

Planning to pay the mortgage off short sounds like a bad idea to me, it represents a lost opportunity cost to get a 20% bump up on that by paying what you don't have to overpay into your wife's SIPP, and then using your pension commencement lump sum to discharge the mortgage when you get your pension at 65-ish.

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While I understand and agree with the financials behind this its worth considering a change in circumstances. We have the same mortgage amount we had 10 years ago and have upsized a couple of times since. My concern is that then they were offering 6 x earning multiples whereas now they are far less flexible.

With this in mind we made the decision to reduce the mortgage down to a level where we could still renew or extend if one of us lost a job or was seriously ill. My worry was we would have a greart pension pot but couldnt touch it until 55 and then lose the house as the banks decided to stop lending.

Am possibly over worrying as LTV ratio is now below 30% but for people with a large mortgage (especially with historic low interest rates) it may play on their mind.

jamesd

Marine_life wrote: »

In an environment of low interest rates (where rates are likely to stay low for some time), do you really think that getting 6% is a realitic aim for the type of low risk portfolio that a retired person wants (and needs)?

At the moment I see 34 funds listed on Trustnet with historic yields of at least 6% and another 52 at least 5%. But that's just yield, not total return. Most of those funds are bond funds of various sorts, but not all are. A few examples:

6.90% Schroder Asian Income Maximiser, equity
6.74% Schroder Global Property Income Maximiser, property
6.67% Schroder Income Maximiser, equity
6.00% Artemis High Income, about 75% bond, 25% equity
5.62% Invesco Perpetual Monthly Income Plus, 85% bond, 15% equity

Savings accounts should also be used for at least part of it. There's at least one paying 6%, though the amount that can be put in is pretty limited.

I'm currently running at over 30% return from some foreign P2P lending, though the loan book is a bit young and that'll probably drop after a while. Not something to use for a lot of money though a potentially nice adjunct.

I don't agree that a retired person needs a low risk portfolio. The risk level needs to be appropriate for the person and what their objectives and other assets are.

In the case at hand, a possible objective is for the capital and income to be used to boost income for ten years until the state pension payments start. Strict capital preservation not required because the initial plan was to spend all of the capital, so having any amount remaining would be a gain.

jamesd

dreaming wrote: »

It's a strange thing, isn't it. trying to "plan" a life you don't know yet?

And stranger still for me, because I don't even know your pre-retirement life, so the most I can do is present options to consider.

dreaming wrote: »

I know I am extremely risk averse, and the thought of investing what to me is a large sum of money in "possibilities" seems totally alien. ... the mortgage will be just over £21k in September

Lets think of a lowish risk combinations.

I'll pretend that the mortgage is interest only at 5%, don't know what it really is. If you were to keep that balance it'd cost £1,050 a year in interest. Ignoring interest on savings accounts, you could spend the capital over ten years to state pension age at £2,100 a year, leaving you with £1,050 a year more to spend. Then you could clear the mortgage with part of the state pension income. All of this except the interest rate is guaranteed and you could even look at interest rates on ten plus year fixes for say a mortgage deal ending around 85, but look to clear it much earlier than that.

Or you could use an equity release mortgage that rolls up the interest instead of paying it and boost your spending power by the full £2,100 a year, then use the state pension to pay down the equity release mortgage.

Or an equity release mortgage that lets you draw on demand, where you could start at nearly zero balance using some of the capital and allow yourself to draw up to £2,100 a year just until the state pensions start. A potentially nice thing about this one is that you don't have interest to pay if you don't use the money, instead you have total flexibility to use it or not. In a way it's just buying a safety margin that you can use if you want to, or not.

All of those are pretty predictable and just shift money around, from later when you have more money coming in to the next ten years when you don't.

N1AK

jamesd wrote: »

At the moment I see 34 funds listed on Trustnet with historic yields of at least 6% and another 52 at least 5%. But that's just yield, not total return. Most of those funds are bond funds of various sorts, but not all are. A few examples:

I heard on the news about a lottery syndicate who just won over £2.5million each...

Unless you are suggesting that those funds can be relied on to give a 6% or better yield in future then that really doesn't mean anything. There are plenty of funds that didn't achieve 6% so cherrypicking the winners with hindsight is pointless. You might as well advise someone to bet on the Lions winning the next tour because 100% of Lions tours in 2013 ended up as wins...