3,4 or 5 year journey to financial freedom

frugal90

Anyone in the same boat please share your steps. Maybe we can help motivate, share good ideas to get to our targets.

Me and spouse will retire ( we hope) in 2018/19 or 20. I will be 56/57 or 58 and wife will be50/51 or 52. We aim to use sipps/isas/savings to cover until I am 60 when my public service pension will start. My wife will also take her public service pension when 60. I will have 36.5/37.5 or 38.5 years in an 1/80 th scheme, so will get 36.5/80 x salary currently 42k +3xpension as tax free lump. Mrs will have 26.5/80 x42k + 3x pension tax free lump.

We have no debts and achieving financial freedom has become number one aim. We have a target of 400k for Sipps/isas and currently have about 270k mostly in equities. Our plan is to save 2.5k per month if not more into sipps/isas and once we hit 400k we,'ll bail out. We plan to be seriously frugal to achieve our aim. We don't have an expensive lifestyle, enjoy the best free things in life but need more time. We plan to cycle tour/walk/ garden etc

If you want to join us on our journey and have similar timescales the please join us.

Frugal

AlwaysLearnin

Strikes me that you have already reached at least a level of 'financial freedom' (e.g you already have enough for >£30k gross equiv p/y), therefore from here on it's presumably just about increasing your levels of comfort, unless you have a large chunk of your current investments earmarked for spending in the next 7 years...

robin61

Our target is Jan 2017. I will be 57 my wife will be 56.

I am putting as much as I can into a smart AVC which is linked to my DB pension scheme which should give me a healthy PCLS of maybe £160k ish when I take my pension. I make sure i dont pay any 40% tax and that i retain our child benefit ! I have a small FSAV worth about 25k with a GAR of 7% but the GAR isn't available until I am 60. I would also hope to get a voluntary redundancy payment of about £40k (fingers crossed).

My wife doesn't currently work but has a SIPP currently worth about 135k and a personal pension worth £10k with a GAR of 5% which she can get at when she is 55.

We have over £60k in other savings and investments mainly in cash ISA but some equities. I am pretty much of the opinion that we have enough exposure to the stock market due to my Wife'SIPP even though it is in a cautious portfolio which includes equities and bonds.

The big choice we have is on whether to use the redundancy payment and either savings or to convert my FSAVC to a SIPP and live off that for 3 years or to take my pension at 57 instead of deferring it to age 60 and avoid a 15% actuarial reduction.

We really need £30k per annum net between us to retire and that is very doable in two and a half years time.

One day we might inherit money from parents but I hope not for a long time and we have not factored this into any of our plans.

Our house is owned outright and worth about £600k but we have no plans to move.

All things considered I think we are in a fortunate position and I am definately looking forward to not having to put up with the stress and corporate bull**** at work which gets worse every year.

kangoora

You don't say what your target retirement income (very important!) is but going by your minimum of £33k in DB pensions at age 60 and the £400k SIPP requirement it looks like you want circa £50k/year in retirement - assuming SWR of 4% on the £400k. On top of that you will get a further £100k in TFLS at age 60 generating another £4k taking you to £54k/year.

Also, you don't appear to have accounted for SP at age 67 (for you) and 68 (for wife), assuming you get basic SP of £113/week each due to being contracted out that will be another £12k/year between you at SP - that will take your income at SP age to £66k/year!

That is, IMO, far in excess of a frugal retirement enjoying mainly 'free' entertainment unless you have some serious spending plans going on somewhere or your definition of free/cheap is completely different to mine.

I think you could almost certainly retire at your lowest age limit and maybe even earlier depending on what your retirement income needs actually are.

I’d suggest creating three spreadsheets, one each for 56, 57 and 58 retirements, you could use the same template for each, which is what I have done. Columns would be years, the top rows would have capital increments as you receive it and under that would be rows for pension income as it accrues (including a row for interest/divi income from capital). You can then plot a capital drawdown rate which smooth’s your income over the next 30-40 years. For example, years 1-4, relatively large drawdown from SIPP as no other income. Years 5-12, reduced drawdown as DB pensions kicking in. Years 13 onwards – only enough drawdown to maintain a SWR and maintain your capital after SP kicks in.

This approach has the benefit of smoothing out your income over your entire retirement and you not ending up with lower income in your 50’s/early 60’s and a massive pension income in your late 60’s/70’s when you are more likely to be slowing down and brings forward a lot of cash into the earlier years when you may be more inclined to spend on holidays, cars etc?

What I found doing this, originally I was forecasting around £33k/year rising to circa £56k/year at SP age (so less money initially which then ramps up as pensions kicked in) – now I’ve smoothed it out to circa £40-42k/year whilst still leaving a fairly substantial inheritance for the kids.

Obviously, this assumes you take appropriate measures like having a large cash sum on hand to live off if the market crashes so you don’t overdraw your pension pots. Having a pretty large proportion of your pension income as a DB pension gives you a very decent safety net also – minimum of £33k at 60 increasing to £45k at 67/68 when you/wife SPs kick in.

In summary, I think you could probably go very shortly, especially if you could obtain a 'decent' redundancy package

jamesd

How do the numbers look if you retire now and use equity release to do the topping up? Then if you want you can repay the equity release money slowly when you're both getting your state pensions and have your highest retirement income. It's a move to shift income from when you have it after state pension age to when you need it now or soon.

It appears that you're considering using having enough in equities as a reason not to use a pension. That would be a bad move. You can pay into a pension, get the tax relief and save the income tax on the 25% tax free lump sum. Provided the income tax rate for paying in is the same as or higher than when taking it out this works and gives you an advantage.

You might also consider some VCT use. There are at least a couple of VCTs still open that pay 10% or a bit over 11% tax free after allowing for the effect of the initial 30% income tax relief on the purchase price. The 10% is fully secured, the 11+% partially. The 30% is capped at income tax actually payable for the tax year of the purchase and has to be repaid if shares are sold within five years, except after the death of the buyer.

VCTs can also be used to reduce your income tax burden when all of your retirement income is paying out. The most cautious use for that is to buy, hold for five to seven years then sell each year's tranche. This way you never go over that five to seven years worth of deferred income in the VCT investments.

A GAR of 5% looks poor if she's willing to take investment risk. I'm assuming it's a level annuity. Lots of investments beat that level.

Hopefully your wife is paying her maximum of £3600 into a pension in her name, unless that money can be used for contributions by you at higher effective tax relief. Both of you should probably make pension contributions until you hit age 75 or rules change to make t undesirable.

Edit: Kangoora interesting that we were writing posts on the same sort of basis at the same time. shows what those who've run the numbers for this sort of situation think is doable without too much difficulty!

kangoora

To the OP - have you also considered the following -

Point 1. Any inheritance that may be due? I've put in a lump sum based on dear mum getting to 100 as I'm now an only child (sister passed away recently) - something to consider when planning although it's one of those 'how long is a piece of string' guesses. How do others tackle this subject, just ignore it?

Point 2. Downsizing and freeing up capital in your home? We have no intention of keeping a 4 bed house in retirement and we will downsize to a 2/3 bed bungalow which should release about £120k in equity.

robin61

Thanks James. Some interesting ideas. I may well explore the idea of VCTs.

At the moment it is more beneficial to put money into my AVC than my wife's pension as I will get 40% tax relief plus NI relief and I can get the whole lot or at least most of it out entirely tax free by maximising the PCLS. But yes a good idea to both keep contributing.

I think I can put up with another couple of years of work so I am not sure the equity release idea is of interest at the moment but if circumstances change who knows _ it is an option I had not thought of.

I agree with you about the 5% annuity although it would provide her with a bit of guaranteed income it would not be much so maybe not the best use of this money.

justme111

OP , I have done quick calculation and according to it you could stop working today and have at least £30 000 yearly between two of you till the end of your days.

frugal90

We still have to do 3 more years to accrue the years in the pensions as well as paying off the buying back of years - we are paying these up monthly at the moment, but aim to pay them off as a lump sum by next summer latest. With the information/advice I have been getting today I think we are now going to look at summer 2017 when I hit 55 or summer 2018. Life is too short and teaching is getting me down at the moment. We need to build a cash buffer in case the stock market bombs so that will now become our focus. This forum is great - I have received better advice/information on here than from any financial adviser that I have ever seen. Thanks all
Frugal

jamesd

robin61 wrote: »

At the moment it is more beneficial to put money into my AVC than my wife's pension as I will get 40% tax relief plus NI relief and I can get the whole lot or at least most of it out entirely tax free by maximising the PCLS.

Yes, definitely a good move to give yours priority in that situation.

I don't know how your employer works out the NI split but even with just the employee NI saving you can get 32% combined income ta and NI saving on your basic rate income band. Or up to 13.8% more if the employer shares all of their own NI. It can make basic rate salary sacrifice a really good deal. It's what I'm doing at the moment myself, down to a bit over minimum wage.

robin61 wrote: »

I think I can put up with another couple of years of work

Yes, the temptation to get higher safety margins or higher income is always there provided the work doesn't get unacceptably bad. The trade-offs are interesting when it's possible to go but you're not certain that you quite want to.

robin61

jamesd wrote: »

Yes, definitely a good move to give yours priority in that situation.

I don't know how your employer works out the NI split but even with just the employee NI saving you can get 32% combined income ta and NI saving on your basic rate income band. Or up to 13.8% more if the employer shares

Yep we do pretty well I get 12% NI saving as well.