Drawdown Strategy for early retirement. could this work?

jamesd

Some things to do that will help:

VCT investing to eliminate your income tax burden. On the current plan you're not using your full ISA allowance each year. Adding VCT to the mix lets you can can generate some ongoing tax exempt income while taking more of the taxable portion of the pension out. Perhaps instead of personal allowance only, aim in the initial years to go to the top of the basic rate band with the income tax eliminated via the VCT buying. This will produce a faster transition to having all of your income tax free in the ISA wrapper and since that's a use it or lose it allowance it's nice to be using it. With 558k in the 75% pot it's still not going to be fully achievable since it takes 28 years at 20k/year and growth will prevent you getting there. But you will be able to get a lot closer.

I suggest top of basic rate band initially to front load the VCT buying in the early years, so the five year lock-in ends as soon as possible. It'll leave some money outside any tax wrapper but if it's invested for growth the bed and breakfast approach every year can eliminate the potential CGT cost.

Much lower ongoing VCT buying later to continue to get rid of the tax cost while generating ongoing tax exempt income, but now without using the full basic rate band.

Long term this should get and keep your whole income free of income tax.

Ongoing pension contributions at the 2880/3600 level to generate some extra pension pot you can draw on later.

Maximum possible pension contributions while still working, to get the tax relief. I think you need at least one and perhaps two or more extra working years if you keep your income target.

But this is without adjusting your income need to reflect the loss of the mortgage payments. You can do that in cfiresim by adding some "fake" non-inflation linked income once the mortgage goes away. That should make your target significantly more achievable and you might actually be able to do it on your original schedule.

Also consider whether you really do want to live long term where your home currently is and whether you really want the space it presumably has. A move to a smaller place in a cheaper area might be a good one for reduced costs and more money being freed up. You can also perhaps plan for longer term cost reduction with improved insulation and solar power and/or hot water, since reduced costs are not taxed.

sunnyjim1234

jamesd wrote: »

I don't think that you can comfortably plan on 36000 net from this sort of plan when the 95% gross is 37829 and 99% 29186 with the original horizon.

Now I try original time horizon with 36000 floor. The results are not encouraging. Almost all years have income at the floor and indicated maximum initial spending is 2219, which is a way of indicating "no way". How about 90% success rate? 14382 initial income, so still "no way".

So think again about the achievable level of income.

James,
Thank you so much for your very detailed answer.
It is much appreciated.
Regards

Sunny

atush

sunnyjim1234 wrote: »

Thank you for your very succinct reply.
I agree.
Retiring at 55 was always going to be pie in the sky!
I just needed you guys to confirm it.
I don't think I'm a million miles away, but I think you've hit the nail on the head. One, maybe two years extra would give me a more realistic margin of error.
I think I always knew that, I just needed to hear it from someone else.
Thank you to all who have contributed to this post
Back to the grindstone, but I can see light at the end of the tunnel.

Good to hear, I thought you may have been determined lol.

Esp with the possible shock to the economy in 2 years+ time when we actually brexit, no one knows what will be happening with the economy, markets, the pound etc.

that was our time frame for retiring, which we may have to adjust, we just dont know yet.

Triumph13

sunnyjim1234 wrote: »

Thank you for your very succinct reply.
I agree.
Retiring at 55 was always going to be pie in the sky!
I just needed you guys to confirm it.
I don't think I'm a million miles away, but I think you've hit the nail on the head. One, maybe two years extra would give me a more realistic margin of error.
I think I always knew that, I just needed to hear it from someone else.
Thank you to all who have contributed to this post
Back to the grindstone, but I can see light at the end of the tunnel.

It's not pie in the sky at all. We've only been looking at the income side, not the expenditure side and £36k net is a pretty hefty sum, especially once the mortgage gets paid off. The average figures on The Number' thread for what people calculate they need for a comfortable retirement are well below that.
If you really are seeing work as a grindstone then I'd suggest heading over to Mr Money Mustache who may convince you that you need a whole lot less and could cheerfully retire tomorrow...

jamesd

Earlier you wrote about your mortgage being paid off by the time pensions start, it's probably sooner, and needing only 12k over the state pension and GMP's 12k. Which means a 24k net target and 12k of spending from 2016 to 2030 not inflation linked. So I ran the simulation again using that information.

Retirement year 2016 end year 2056. Investigate none, portfolio value 744k, fees/drag 0.68%, Guyton-Klinger, initial spending 24k, floor defined value 19200. Social security 10320 start year 2035. GMP 4k start 2028 inflation-adjusted. Other spending (the mortgage) 12000 start 2016 end 2030 not inflation adjusted.

At 95% the maximum initial withdrawal rate was 42725. Quite a few runs at minimum income. At 99% dropped to 38885 and an OK number of runs at minimum.

So I raised the spending floor to 24k. At 99% initial spending was 23582 (so not quite viable but close). At 95% 29201 and a moderate level of runs at the minimum.

Then I added 40k to the starting pot, assuming lots of saving before retirement. At 95% with the 24k floor the initial income was 37000 and not too many runs at the 24k floor. At 99% it was 30305 and a moderate number of runs at the 24k floor.

That's a considerably more healthy picture and does suggest that your plan is viable without a delay, with or without the 40k I added.

Why the difference? This calculation doesn't make the mortgage spending inflation-adjusted and for your whole life. That greatly reduces the inflation-adjusted spending need.

So plug in some more accurate mortgage cost and end date numbers and see what happens.

sunnyjim1234

jamesd wrote: »

Earlier you wrote about your mortgage being paid off by the time pensions start, it's probably sooner, and needing only 12k over the state pension and GMP's 12k. Which means a 24k net target and 12k of spending from 2016 to 2030 not inflation linked. So I ran the simulation again using that information.

James,
Thank you so much for taking the time to do that for me, it has been a huge help.
My back of a fag packet calculations didn't take nearly enough factors into consideration.
I have received some really constructive advice from all the posters on here, and what I have taken away is that by delaying retirement a couple of years and maximising my pension contributions in those two years, I will have a much greater chance of achieving my target drawdown income.
Regards
Sunny

Silvertabby

Sunnyjim -you say that you have already qualified for the full single tier pension, but then mention that you have a GMP. Were you contracted out (of SERPS/SP2) at some point? If so, then you may want to re-visit your State pension forecast. If you work for another 2 years, to 57, that will add another £8+ per week to your foundation amount, but may not take you up to the full £155 per week.

atush

Triumph13 wrote: »

It's not pie in the sky at all. We've only been looking at the income side, not the expenditure side and £36k net is a pretty hefty sum, especially once the mortgage gets paid off. The average figures on The Number' thread for what people calculate they need for a comfortable retirement are well below that.
If you really are seeing work as a grindstone then I'd suggest heading over to Mr Money Mustache who may convince you that you need a whole lot less and could cheerfully retire tomorrow...

And sometimes what people say they need on that number, if they dont have enough cash reserves, is foolhardy.

atush

jamesd wrote: »

Earlier you wrote about your mortgage being paid off by the time pensions start, it's probably sooner, and needing only 12k over the state pension and GMP's 12k. Which means a 24k net target and 12k of spending from 2016 to 2030 not inflation linked. So I ran the simulation again using that information.

Retirement year 2016 end year 2056. Investigate none, portfolio value 744k, fees/drag 0.68%, Guyton-Klinger, initial spending 24k, floor defined value 19200. Social security 10320 start year 2035. GMP 4k start 2028 inflation-adjusted. Other spending (the mortgage) 12000 start 2016 end 2030 not inflation adjusted.

At 95% the maximum initial withdrawal rate was 42725. Quite a few runs at minimum income. At 99% dropped to 38885 and an OK number of runs at minimum.

So I raised the spending floor to 24k. At 99% initial spending was 23582 (so not quite viable but close). At 95% 29201 and a moderate level of runs at the minimum.

Then I added 40k to the starting pot, assuming lots of saving before retirement. At 95% with the 24k floor the initial income was 37000 and not too many runs at the 24k floor. At 99% it was 30305 and a moderate number of runs at the 24k floor.

That's a considerably more healthy picture and does suggest that your plan is viable without a delay, with or without the 40k I added.

Why the difference? This calculation doesn't make the mortgage spending inflation-adjusted and for your whole life. That greatly reduces the inflation-adjusted spending need.

So plug in some more accurate mortgage cost and end date numbers and see what happens.

But how would such assumptions have done, in 2006/7? Just before the crunch? Both capital values and income suggestions fell dramatically.

And this could happen to those retiring on the next 2/3 years as we dont know what is going to happen?

I jut feel there has to be more of a cushion, knowing there Might be a shock coming up.

But if you plan for something bad and it doesnt happen, you are in for a good time.

jamesd

The safe withdrawal rates are already planning for a bad start. That's part of their point, including the worst cases that happened historically.

For a bad case consider just using the simple 4% rule in 2000 and the people doing that are on track still. That's even though they had equities at the highest cyclically adjusted price/earnings ratio recorded.

The calculations are actually a bit more pessimistic because they ignore Guyton's approach to reducing sequence of returns risk.; Though it'd be good also to do a run with no state pension deferral since that might not be around or at the current rate and it's nice to know what happens.