How much to stop working?

nobblyned

How much would you need to stop working now, and maintain whatever standard of lifestyle that you need?

I'm talking total net wealth. House equity, savings, pension pot etc.

Currently making a good income of which I save a lot, and trying to work out what the walk away goal is...

Appreciate that there are numerous subsidiary considerations, eg could you be happy with no work, can you downsize or are you geographically constrained etc. etc

But, in principle, is there a number where you could reach it and feel safe for evermore?

In my case I am 40 with 4 small children, so think number will be substantial...

hugheskevi

You first need to ascertain your target annual consumption requirements, both currently and in the future. Take into account changing requirements as children get older, etc.

Decide whether you want to include State Pension or not, and decide whether to include house or not. State Pension system could change, and you may not wish to liquidate house to fund later life. If you are happy to rely on State Pension and plan to liquidate house, include both. Also reduce the future requirements in the appropriate years by any Defined Benefit pension which will be received.

Then decide on expected rate of return - that will be related to tolerance for variance. Then simply discount all future income needs by the rate of return to get the capital figure.

Personally, as a 37 year old household with 2 adults and no children, with a target consumption (excluding mortgage, after all taxes) of £26,700 per year, increasing in line by average earnings (4.75%) to age 70 and by RPI (3.2%) thereafter, and not factoring in any State Pension or Defined Benefit pension income, my net wealth (excluding house, as I have no desire to liquidate property prior to death) required to retire immediately would be £1.1m. That is based on a 6% rate of return (including inflation, so just a simple 6% increase each year). Using a 4% rate of return the figure would be £1.8m. If the target consumption was £35,000 p/a the figure would be £1.4m (based on 6% return). This assumes death of both household members by age 93.

jamesd

House equity doesn't count unless you're selling because that money is not available to generate income.

A commonly used guide for income is 4% of the investable assets value increasing with inflation for retirement at about 60. Takes a bit more for earlier ages but once it gets down to 3% that's at or below the normal return of the UK stock market so more is not likely to be needed.

So you'd first work out the long term income you want after state pension age, deduce the state pension - say 8500 - from that and then divide the shortfall by 0.04 to get the lump sum you need for this part of the story. To work out the future value of your current investments use say Windows calculator and if you assume 4% investment growth (1% below UK stock market long term average) you'd use 1.04 (x^y button in scientific mode) (number of years until reaching state pension age, say 60). Then multiply your current investment value by that number to get to the future value in today's money.

Is the answer more than you need? If so, the excess is available for early retirement use. If it's short, use a regular savings calculator to find out how much it takes paying in each month to get to the target.

Once you know how much you need to do to get to your target at state pension age you can then move on to calculating for early retirement. That can be crudely done by multiplying years to go by 2/3, then by target income, only valid for about ten or more years due to the crude 2/3 allowance for investment income. You'd really want to use a spreadsheet to remove that crude approximation but this is good enough to get started. As before use a regular savings calculator to work out what it takes to get to this target pot size.

Once you can achieve both pot sizes and have a safety margin of say 50% on top you can decide to retire.

atush

Basically, you are doing this back to front.

First you need to ascertain your income level required (and this may mean having paid off your mtg). Once the income level is determined, then the 4% figure will tell you how large a pot of money you need (not taking into acct property unless or until After you have downsized as you dont know what if anything this will bring).

If your 'walk away' timetable is anywhere near age 55-57 then you could look to pensions to increase your pot of money as you will get TR on the way in, and eprhaps 2x a PA tax free on the way out.

enthusiasticsaver

We are three years off early retirement hopefully I (I am 55 next month and my husband is 57 this year) and have not calculated net wealth but desired monthly income. We reckon we could comfortably manage on £1500 - £2000 net per month with a buffer of additional savings for large ticket items needing replacing, big holidays etc and at present our projected pension income in 2018 is calculated at £32k+ gross (from a combination of company db schemes and dc scheme) with additional investments and lump sums from pension totalling around £200k. We do not want to move so not including our house in that which is an additional £250k but we could downsize if necessary to release more capital. No debt or mortgage.


That may not be enough for some people and more than enough for others, it is all relative so it is very difficult to put a figure on it for everyone as we all have different needs and aspirations for after we finish work.

nobblyned

Thanks very much for the replies, gives me a good point to start the calculation end of things. Will run through some scenarios and see where I get to.

There is also I guess the implicit softer side to the question which atush identifies, the fact that you need to work out your income level you require. Easy enough to see what your current outgoings are, but what changes upon retirement, particularly at a younger age? One of the benefits of work is, in addition to the income, is that it keeps you out of trouble and off spending money for a majority of the week. Asides from my saving on my annual season ticket, most futures I envision if not working would surely involve spending more money on hobbies/travel to stay occupied?

The maths is there to be calculated, what other factors have you taken into account to reach your forward required income level?

Thanks.

sleepless_saver

Have you had a look at this longrunning thread which covers all these issues in detail?

atush

yes I was going to suggest the Number thread.

In any case, you probably arent thinking of all the expenses associated with work. Incl travel (you've got that) but do you run 2 cars now? Could you go to one? then there are clothing expenses for work, food, and what about where you live? Do you live closer to work than you need to, and is it more expensive (such as commuting distance to London)? Some move house (not necessarily downsizing) further out to lower prices, or even buy a wreck to do up. That will keep you busy making money rather than spending it.

I did this when I could not work as I had twins in nappies as tax and child care would have eaten more than 100% of my salary. So I built a house lol. Kept me too busy if anything. And you can develop hobbies that dont cost money or even save money (such as gardening and cooking).

keith969

nobblyned wrote: »

In my case I am 40 with 4 small children, so think number will be substantial...

Err, a lot. Kids are very expensive these days what with the peer pressure on gadgets, school trips, entertainment etc.

My son cost about £30K through university. No because I had to - he could have gotten a loan - but because I didn't want to see him saddled with debt for the rest of his life.

But you pays your money etc... etc...