Sense check on retirement plans

Dino_Charger

Hello
Been reading for a while, but first time poster, and I’ve benefited immensely from your various advice on finance. I will try to make this short and fill in details as requested. Purpose of post is for a sense check on my ‘early-retirement’ strategy and advice on optimisation/blind spots. I intend to be at that point by end 2018. Stats below
Age 37, spouse, 3kids: 11,8,5
Earning ca 100k (worked my way up from 11k)
Pension DC: 330k. To add additional 100k by end 18.
Investment: 3 properties. Value/equity/mortgage/rent as follows (350k/150k/400/1300; 250k/100k/280/900; 115k/0/220/700). All IO, linked to base rate. I put away 1k/mo to cover insurance, expense, tax,etc, and has been sufficient so far.
S+S Isa: 80K (Vanguards)
Cash1: 70K. Must remain in cash. Cast iron
Cash2: 60K. Happy to invest in something low risk/good return/business. Can keep in cash if required.
Cash 3: 70k. Fund for school fees, unexpected issues, etc
All cash in high interest, premium bonds, etc. Avg return ca 3%.
House I live in: 300k value, 60% mortgage: cost 400pm IO, new 10yr fix
Spouse: Just returning to work, earning ca £30k.

Goals when retired/strategy:

• 20k net cash flow
• Retrain (e.g teaching). Work adhoc basis / doing consulting work as much/little as I want. Money will provide extra holidays, outings, car
• Stocks/pension is diversified worldwide. About 75:25 stock: bond ratio
• Rough income allocation plan: stocks/cash+business/property = 4k/6k/10k. Don’t feel like committing much more to s+s isa (sufficiently exposed in pension; also don’t want to worry about volatility). I’ve been landlording for 10+yrs so have a degree of handle on property
• At 4% growth (numerical) pension will be worth ca 900k in 20yrs. Will use 25%TFLS (or however the rules are then) to pay off mortgage
• Happy to sell/rationalise properties if required. Looking also at fixing rates to derisk interest rate rises. Not fussed if accessible wealth depletes somewhat btw ages 40-60 since DC Pension+ state pension should continue to provide income.

Thanks

Linton

I dont think you have a strategy yet, just a series of bullet points. At first sight there is a lot of money floating around but it's difficult to see how it will work overall. Perhaps it would be worth the effort building a spreadsheet year by year financial model showing income, assets, expenditure and debts over time. You would need to make many assumptions, eg on tax rates and inflation rates, but at least it would form a basis which works against which you can assess the effects of any changes.

What would really fighten me is the amount of IO mortage debt (£645K) against illiquid assets which is not being repaid. Perhaps the financial plan would make that clearer.

From your figures you will have 75% of £900K = £675K and 2XSP to live on in retirement. Say the £675K returns a safe-ish and more or less inflation linked 3.5% which gives you £23.6K/year plus total SP of say £16K/year, so a total of say £40K/year before tax. Is this sufficient for you to meet your desired standard of living? Do you know what your desired annual expenditure is?

The above would rely on the pension rate of return being 4% above inflation. This is certainly possible but arguably a little risky for the basis of a plan. Of course you wont be able to access your Pension until you are 55 or later, and your SP until 65-68 or whatever the age is. If you are to retire early you need to work out how you will fund yourself from when you stop working.

It is too complex for me to get my head around - that's why I would like to see a real plan. However I feel you are taking on a lot more risk than you seem to realise. Perhaps you can use your plan to see what happens when interest rates and inflation rise significantly. What happens were you to lose your job and not be able to find one at the same salary?

Dino_Charger

Thanks Linton. You are right. I think I need to crystallise the plan in spread sheet mode and do a year by year assessment together with some stress testing. The amount of IO debt is higher than I'd ideally like hence thinking of fixing rates for longer or liquidating one of the properties. I'll revert with something more succinct. Thanks again.

Dino_Charger

I have done a bit of tinkering and stress testing with interest rates and have come up with a ‘plan’ as follows. Aim is to generate income of 20k/yr (Based on tracking expenses over past 3yrs, although no one know how 'expensive future will be). Approach is

For ages 40-60

• Own 1 property outright. 350k value. Rent= 16.5k/yr. Draw income of 10k (with 6.5k reserved for ‘expenses’)
• S+S ISA. Value 100K. Draw 5k/yr
• Cash 100k (‘high interest’ accts). Draw 5k/yr

This give 20k/yr for. At 60, assume S+S, Cash depleted.
[I will also have emergency cash/earmarked for school fees, etc of 50k.]

Btw 60-70
DC pot; Value 900k. Less TFLS= 675K. Assume 500k in todays money

• Drawdown@ 4% = 20K
• Property = 10k

This gives 30k/yr.

Post 70,

• 2x SP kicks in assume 10k (5k each. May not have full XX yrs required)
• Property and drawdown (as above): 25-30k, depending

This gives 35k+/yr


Current mortgage is 180k, fixed at 2.5% for 10yrs. Assume after this, next 10yrs rate is 6.5%, average over the 20yrs is 4.5% hence payment = 675pm (money for this is from elsewhere. not included in the 20k/yr expense). This is the amount I plan to earmark for mortgage payment on a monthly basis. After 20yrs @ 60, I’ll be entitled to the TFLS of 225k which will clear the mortgage debt of 180k

The above is the broad framework and there’s scope for a tweak here or there. I haven't specifically put inflation/rent increase etc. into the mix for simplicity)
Any thoughts appreciated.
Thanks

Linton

"TFLS= 675K. Assume 500k in todays money"

This is 1.5% average annual inflation. Do you think this is realistic?

Dino_Charger

Thanks for your reply. My thinking is
Pension pot by 2018 will be 430k
Many assumptions can be made about growth rate, inflation, or significant drop in value by the time of drawdown etc.
Taking a growth rate of 2% above inflation, value after 20yrs will be 639k. After TFLS, value will be 479k. (I agree it is also possible for growth rate to be negative, but my basis is cautious best estimates). Thanks

Thrugelmir

Have you factored into your thinking the impact of the forthcoming tax changes for the offsetting of interest against rental income?

Dino_Charger

Re Taxes, this is included.
Rental income = 16.5k, less true expenses of ca 3.5k (insurance and repairs) and personal allowance of ca12k. Taxable due= 1k x 20% = 200. This means I'll still be able to draw 10k pa.
If I go on to work p/t, tax will be deducted on work income at 20%/40%, but this will be additional money to the target of 20k/yr.

atush

What % are your mtgs?

Have yo factored in savings for University for the children? Lump sums to help with life/property?

BTL is very tax inefficient. Are you at least sharing ownership with your spouse?

What is your spouse's pension arrangements?

Dino_Charger

Hi.
Btl house will be mortgage free. This is currently in my name but looking to change to joint names in near future and specify % ownership depending on tax implications.
House i live in is 2.5% fix for 10yrs.
Lump sum for family/uni etc currently 50k and will look to increase it as much as we can afford. No specific goal/target figure in mind with this atm.
Spouse is just returning to work. No pensions atm but will join scheme.
Based on my situation..how will you allocate the funds/investments optimally. What will you do differently . Thanks

jamesd

Looks as though you're considering taking only as income only about half of what would be sensible with modern retirement rules. Currently for US investments with the Guyton and Klinger decision rules being used the projected safe withdrawal rates are:

Conservative: 4.88% (25% equity, 95% success rate)
Moderate: 5.44% (50% equity, 90% success rate)
Aggressive: 6.10% (75% equity, 80% success rate)

UK safe withdrawal rates are about 0.3% lower than US so deduct that. Assuming you're also sensible and use Guyton's sequence of return risk reduction method that'll either increase the amount you can take or increase the success rate. Those are for 30 years, reduce by another 0.5% given your age unless you don't expect to have normal life expectancy. All are allowing for inflation, expected to increase with it each year barring poor market conditions when the rules can suspend that or even cause a drop if returns are bad enough.

I don't see a mention of P2P. Via places like MoneyThing it's practical to expect to be able to sell around £10k a day or more at present, quite likely a good deal more than that. With rates of around 12% before bad debt that seems likely to be 1-2% it's worth considering allocating a fair chunk of cash-like money to that sort of thing. Many loans there are on six month renewing contracts so if the secondary market demand drops you'll be able to get out quite rapidly anyway just by not ticking the auto-renew box. To give some idea, here are my current maturities there:

02 Dec 16
06 Dec 16
10 Dec 16
24 Dec 16
25 Dec 16
05 Jan 17
18 Jan 17
21 Jan 17
25 Jan 17
06 Feb 17
10 Feb 17
12 Feb 17
19 Feb 17
25 Feb 17
07 Mar 17
10 Mar 17
13 Mar 17
14 Mar 17
17 Mar 17
24 Mar 17
26 Mar 17
10 Apr 17
24 Apr 17
25 Apr 17
10 May 17
12 May 17
19 May 17
24 May 17
26 May 17
20 Sep 17
04 Nov 17
07 Nov 17

At the moment I'm getting around 16k of income a year on around £125k of non-pension P2P. That isn't inflation linked.