How to best use my flat to retire and help family member

jamesd

Pollycat wrote: »

It might be the way I'm reading this (apologies if I've missed something) but the OP will not be eligible for her state pension until she's 66:

That's when I had it start. If you take a look at the cFIREsim site you'll find that there is scope for adding Social Security (the state pension in UK terms) at a certain start date. Here's the data entry for the £600k case after spending £200k on a flat in a lower cost area.

Basics
retirement year: 2016
retirement end year: 2054
Data options
Investigate: Max Initial Spending
Minimum success rat: change from 95 to 99%
Portfolio
Portfolio value: 600000
Spending plan
Spending plan: Guyton-Klinger
Initial yearly spending: 40000
Spending floor (inflation adjusted): Defined value 25000
Social security (state pension)
Annual: 8000
Start year: 2022

And run simulation.

After a few seconds the result box will come up saying that the maximum initial spending would be $31,223 and since we're working in Pounds that's actually in Pounds not Dollars.

The charts show the results for pot value for each possible start date, lots of lines for that, one for each start date.

The statistics show that the success rate is 99.06% and the individual dips it in the bottom right shows the two start years that would have resulted in failure and when the failure would have happened. The bigger of the two had failure after 39 years, so age 99, just before the planning end date of 40 years assumed life remaining. The other failure was one year earlier.

Also of interest is that the average ending portfolio value was £661k, average income £39k. Median ending pot size £528k and income £34k.

jamesd

denisekingston wrote: »

I would feel pity not able to leave this flat as an inheritance if I go for the equity release option, but then to pay that amount in inheritance tax is just absurb. Maybe I should enjoy the money from equity release while i am still alive and not worry about it after i am dead.

If you look at my last post you'll see that the median average pot size 40 years from now would be £528k. That's a very decent inheritance. Just about all cases would mean a substantial inheritance because the planning has to assume a long life but you're really likely to die sooner than that, before you've spent the money.

The planning has to be around bad investment cases because that's how you avoid running out of money. But those bad cases are not normal cases and in normal situations you do way better.

While there is a small chance that it won't happen, the likely case is that you both get the decent income and leave a substantial inheritance.

jamesd

denisekingston wrote: »

If I were to change my mind in the future and sell the flat and move to a cheaper area, say with £500K profit after purchasing a cheaper flat, what should I do with 500K? Do I just keep it in savings account and use it slowly for the rest of my life?

That would seriously harm the income you could take. Assuming a 40 year life it would drop to £12,500 plus your state pension each year. It would also greatly reduce the likely inheritance value. The investment model I used is for a mixture of shares and bonds with only a little in savings accounts.

You should spend some of the capital to defer your state pension. That increases it by 5.8% for each year of deferring and five years or more is likely to be a good deal.

You also need to get a state pension statement to find out your current position and whether you might need to buy more years or do something else to get the £8,000 I assumed you'd have.

kidmugsy

jamesd wrote: »

Also of interest is that the average ending portfolio value was £661k, average income £39k. Median ending pot size £528k and income £34k.

Jamesd, is there a calculator that you can run in a mode that starts with a sum of capital, and finishes with a final pot of money equal to the nil rate band for IHT (which, I'll grant, you'd have to guess)? The slack would be taken up by varying the annual income. I suppose that if you add another constraint e.g. no annual income above the higher rate threshold, you might have to introduce slack by means of, say, lifespan.

It would be quite good fun to be told that you can get an annual income of, say, between £35k and the higher rate threshold, and leave a sum equal to or greater than the HRT nil rate band, and live to be 156, with a 99% probability. There would have to be a bit of extrapolation of the actuarial tables of course.

kidmugsy

denisekingston wrote: »

Appreciate all the comments and I think equity release sounds like a very viable suggestion which I have never heard before this. Will definitely look more into it.

My memory is that there is a mode of equity release where you don't need to drawdown the whole amount from the mortgage company at the beginning. You could start with, say, £50k, and then take a bit more year after year as your earnings and expenditure pattern changes.

kidmugsy

I'd better emphasise that I am no expert on these mortgages.
Here's a link to the trade body for the equity release business.
http://www.equityreleasecouncil.com/home/


Here are links to recent American thoughts on the topic.

http://retirementresearcher.com/should-i-stay-or-should-i-go-housing-decisions-in-retirement/

http://retirementresearcher.com/aging-in-place/

http://retirementresearcher.com/how-did-reverse-mortgages-get-such-a-bad-reputation/

kidmugsy

Is there anyone here equipped to comment on this mob? Could they be useful in this case?
http://societyoflaterlifeadvisers.co.uk/find-an-adviser/

For the OP: I suppose that Age Concern UK might be useful as a starting point.

grey_gym_sock

note that how much you can get from equity release depends on your age. they'll give you much less than £800k in return for your flat when you die, because they probably won't get the flat for several decades. you'd get a higher proportion at age 70, for instance, than at 60. (though you do have the advantage that there is only 1 of you - you'd get less again for dual life.)

equity release is a way of getting something out of the property if you really don't want to move somewhere cheaper. but at quite a big price (i.e. the discount to the full value of the property).

what about a cheaper flat, still in central london? there are perfectly pleasant, central areas where a small flat wouldn't cost that much. freeing up a few £100k would give you a lot more options (e.g. to invest it in the ways that jamesd mentions).

kidmugsy

grey_gym_sock wrote: »

what about a cheaper flat, still in central london? there are perfectly pleasant, central areas where a small flat wouldn't cost that much. freeing up a few £100k would give you a lot more options (e.g. to invest it in the ways that jamesd mentions).

I agree. And then if it turns out that more money is required later in life, equity release could be done on that cheaper flat, taking advantage of being older.

jamesd

kidmugsy wrote: »

Jamesd, is there a calculator that you can run in a mode that starts with a sum of capital, and finishes with a final pot of money equal to the nil rate band for IHT (which, I'll grant, you'd have to guess)? The slack would be taken up by varying the annual income. I suppose that if you add another constraint e.g. no annual income above the higher rate threshold, you might have to introduce slack by means of, say, lifespan.

Yes. cFIREsim can be told to keep a certain amount is available at the end by adding it as once-only spending in the last year of the plan.

It's a bad idea to be rigid about it because it restricts the income too much. Better to accept the potential for well below that if the unlikely really poor performance case, knowing that:

1. Average is going to be above that.
2. Dying before the end date is also more likely than not and that would also cause the amount to be above that level.

In the previous £600k post I didn't give some numbers I'm mentioning later in this post. Median ending pot size was £537k, median income was £30.8k for first third of retirement, £35.8k for second third and £40k for the final third.

I plugged that nil rate band remaining constraint into cFIREsim in addition to the earlier numbers for 600k to invest.Other spending, £325000 not recurring in 2054. Also left as inflation-adjusted assuming it does continue to increase.

With the 99% success requirement the initial spending dropped from £30,849 to £24,327. That's below the specified minimum of £25k so the income floor was active for a lot of the cases. Median average ending portfolio value only increased from £528k to £579k but of course this time with the planning trying to protect the value even in the bad cases. Median income was £25k for first third, £32k for second third and £39kl for final third.

Since the floor was clearly too high I ran it again with the floor reduced from £25k to £20k. That raised the initial spending from £24,327 to £27,004. Median ending portfolio value fell to £503k. Median income was £27k for the first third, £32k for the second third and £42k for the final third.

I also looked at dropping the success rate from 99% to 95% with that 20k minimum income. Starting income increased to £27,631. Median income was £27.6k for first third of retirement, £33k for second and £42.8k for final third. Median final pot size was £466k. In the failure cases the failures were after around 37 years, so around age 97. Similar but a bit later for the 99% requirement runs.

Of course those failures were without adjusting spending to a lower level later in life, something we know tends to happen. I put in a £2k reduction of income starting at age 75. Starting income rose to £28,520. The I raised the success rate requirement back up to 99%. Starting income then was £27,604. So being a bit more realistic with how spending needs change with age can do quite nice things to the initial income level and success rate.