will £200k give me £1500 per month for next 20 years?

pmcx9

I have been playing with an idea for a while now and cant figure out how to do the equation accurately. I would like to retire early.

Lets assume I could get mortgage free and have a sum of £200k leftover. This would need to generate my sole income.

Would a sum of £200k be enough to give me £1300 per month income for 20 years assuming the monthly income keeps pace with inflation. I realise I would only achieve about 9k interest from a savings account in the first year on the 200k so would be drawing another 6.5k down from the capital and so on each year.

Therefore I am wondering how many years this would give me an income until the capital was exhausted? Is 4.5% interest achievable over a long period with very little risk?

Any pointers on the formula to work this out would be appreciated.

bandraoi

£1300 at 4.5% per month on a capital sum of £200,000 (no allowances for tax etc) seems to me to give 18 years 11 months before running out.

I work it out in Excel which isn't very efficient.
£1300 won't be worth very much in 20 years time though.

pmcx9

hi bandraoi, thx for the reply.

Yes, I was trying to work it out with the income keeping pace with inflation so obviously in 10 years time it may require £2000 per month.

As you can see its quite a complicated equation.

pmcx9

and clearly incapable of giving me 20 years at 4.5% yield. With the correct formula I may be able to work out a required yield to project a 20year income

Xbigman

One option is to invest it in the stockmarket in good dividend paying shares. Dividends rise roughly in line with inflation which would overcome your biggest problem - which is of course inflation. This would give you 9k per year, tax free. I assume you want 1300 net income so with current tax/NI thresholds you could do a part time job, enough for 6k per year, and pay minimal tax/NI.

What you have suggested so far, just stick the money in a savings account, is a non starter. Allowing for 3.5% average inflation your money runs out in 14ish years.
Regards



X

dunstonh

Tax and investment returns are going to be your issues here. 5% net with a cautious or higher spread is a good guideline rate to use without eating the capital. A decent investment spread at say medium risk certainly has potential to go to 7.5% which gets you closer. However, £1500 a month would almost certainly see capital erosion.

The problem with capital erosion is that it is a spiral effect that each month you will be drawing more and more of your capital.

If you took £1500pm and achieved 5% p.a. net your capital would be eroded totally between year 18 and 19. If you got 7.5%p.a. then you wouldn't erode the capital in full as you would have £81,940 after year 20. However, to get that potential growth rate would require a medium risk portfolio.

The other issue you have is inflation. In 10 years time, the spending power of £1500 will be £1050. So, you will probably have to increase your withdrawals as time goes on which will erode your capital more. By year 20, the income would be £735 in real terms.

Therefore I am wondering how many years this would give me an income until the capital was exhausted? Is 4.5% interest achievable over a long period with very little risk?

You would run out of money in year 16 if you get 4.5%. Probably a lot earlier than that in reality as tax would have to be taken into account. Lets say you get an equivalent of 4% after tax, your money would run out during year 15.

Another problem is going to be interest rates. They are moving up higher by modern standards so any rates you get today are not likely to be sustainable over the long term. Rates are double what they were a few years ago so with interest rates you should be using a figure of around 3% as an average. That would see the money running out after year 14.

So, what you want is potentially achievable with an investment spread but not achievable using cash deposits. However, you need to factor inflation into it as well.

EdInvestor

This US calculator is quite helpful:

http://www.firecalc.com/


It assumes you are drawing down capital as well as dividends. In the UK, dividends tend to be higher and thus the need to take from capital is less, giving a potential safe withdrawal rate of perhaps 4.5-5% rather than 4%, for a low- medium risk portfolio.

Tax does play a big role, as DH says.

Tax free N&SI inflation linked certificates are a useful weapon in the armoury of anyone living off their savings and investments, as are equity share dividends, as mentioned.

Put as much into ISAs as you can while saving, the full 7k a year if at all possible.A big PEP/ISA pot is invaluable.

pmcx9

great advice as usual from this excellent and friendly forum. thanks you

I dont mind eroding the capital as I would expect a small inheritance before year 20 and would anticipate downsizing once more to free further capital. I also have 14 years pension contributions to freeze which could provide me some income at year 20 onwards.

My whole purpose of this exercise is to see if i am able to give up work at 40!

jamesd

pmcx9, it looks as though 42 would be more prudent but that it is achievable.

If you're overpaying your mortgage to get as mortgage free as possible you can usefully stop doing that and start investing the money instead. You'll pay 5-6% on the mortgage money but to achieve your aims you're going to need to achieve 8%-10% gross on your investments, leaving you ahead if you start now.

You also don't need to wait for the target 40 years old. You could draw down some of the mortgage money to start investing at say 20,000 a year to get those higher returns and prove that the plan can work.

Since you're doing this investing before you're 100% committed you can prudently take higher investment risk and increase the starting capital.

Don't go and do it with all of the equity immediately - that increases your risk if there's a stock market drop. Better to spread it out over every year between now and 40, assuming there are several of them.

avantra

In your opinion, a person that retires at 40-42 will spend less than a working person of the same age? I think the capital erosion will be actually faster assuming that in our consumer oriented society new temptations (especially for someone who plan to live on £1300 a month) are many and probably get more expensive in the future.

I guess my question is can you be a 42 years old pensioner but spend like someone at the age of 70?

I would take age and lifstyle into the story and not just look on current expences.

Don't you get bored retiring at 42 on £1300?

pmcx9

good points from everyone. The figure of £1300 a month is to maintain a comfortable lifestyle is achievable I think. I remember reading that many people retire early to their properties in spain on 1000 euros a month.

Would I be right in estimating average household income to be around £2000 and average mortgage to be £700 so to maintain the same lifestyle mortgage free this gives £1300pm needed.

@avantra only boring people get bored. I can honestly say I cant ever remember saying my life is boring. I am healthy and have many healthy sporting interests.

@jamesd i am not actively overpaying my mortgage at present. I have a fairly hefty amount of equity and should i chose to downsize (Isle of Wight being my favoured destination) would be mortgage free with at least 200k leftover. That is how i base my "can i retire at 40 on 200k?" question.

I would anticipate an inheritance, a small work pension, and a further downsizing around the 20year mark to provide for my years from 60+ so the crux is whether I could give up work now!


A little flesh on the bone on my reluctance to work till I die!

I had a golfing buddy who died of a sudden and massive heart attack recently at 59. A very fit man. He had no pension and so had spent the last 15 years upsizing and developing his homes. He died with a house worth over £1.25mil. No bloomin' good to him now!