Can I retire at 45

GavB79

The recent post about the OP asking about retiring at 40 was met with a universal 'no chance'.

As my own plans are similar, would you say the same about my expectations? To keep it simple, let's say I want to retire at 45 with a £300k pot that returns 5% pa. At NRA I will have a DB pension (LGPS) that will cover my requirements, regardless of the amount of SP I will get. So the pot can deplete completely by, let's say 68.

I anticipate £18k per annum (tax free; the pot is in a S&S ISA) to be sufficient. From age 50 there will be no mortgage, but son will be entering a more expensive phase (secondary school), so from 50 onwards drop the £18k to at most £15k. Partner intends to continue working part-time throughout.

5x 18 plus 18x 15 = £360k so I reason I only really need to [STRIKE]keep pace[/STRIKE] make a couple of % plus inflation to succeed? At best I should have a comfortable amount remaining at 68, or at worst I expect to be able to pick up short-term agency work if I really need to, to cover any unforeseen expenses or big holidays. We are not ones for new cars or designer labels, though we do like to eat out. I've even thought of going with £250k and doing the agency work early on for short periods to keep things topped up.

A_Nice_Englishman

That £255,000 would buy three properties in somewhere like Ebbw Vale. Live in one and rent the other two out to provide a modest income just below the tax threshold.

tacpot12

Your proposal has a number of problems with it:

- The return of 5% is not guaranteed and will fluctuate over time. A stock market crash in the early years could reduce the value of your pot significantly. If you then take £18K pa from your pot, you will be getting your return on a smaller, and diminishing portfolio. This will require you to sell capital more quickly, and there is a risk that you will run out of money before your other pension kicks in.
- Transaction Charges. You will either incur transaction charges every month or have to forego the return on any porpotion of your pot that you keep as cash.
- To beat inflation you will need a REAL rate of return of more than 5%, how much more will depend on where inflation goes.

Bear in mind that since the financial crash in 2008, stocks have done very well. Your portfolio may have produced 8% pa over the last 10 years, but this is better than the average return. If they continue to do well, you might stretch the pot to age 65 or even 68 but I doubt you will have anything left after 65.

All that said, I think you could make this work under most market conditions providing you are prepared to live off this pot for no more than 15 years.

Your situation is not too disimilar to my own. I've just retired (at 55) and am drawing down from a pension pot of £360K. My living expenses are around £15K pa. I expect my pot to produce £15K rising with inflation (CPI) until I claim my state pension at age 67, after which I expect it to produce £8K rising with inflation indefinitely. Crucially though, I expect to be able to flex my income reducing it from £15K to £10K pa (adjusted for inflation) for the odd bad year.

Having a cash float of two years income, that you can draw on in bad years, will radically increase your chance of success.

Thrugelmir

GavB79 wrote: »

To keep it simple, let's say I want to retire at 45 with a £300k pot that returns 5% pa.

There's also statistically a 1 in 3 chance that your portfolio will lose money in any given year. Smoothing of returns is overly simplistic

tacpot12

Ok ignore the 5% returns as that's not actually critical to the scenario. I only technically need to make £6k over the period, plus inflation, to not run out of money too soon?

Correct, but what it the stock market return is negative for the next couple of years. Your £300K could become £180K in a couple of years time - are you sure the stock market isn't going to react very badly if Brexit turns out to cause serious economic harm to the UK?
If it does, you will then need much higher returns in the later years. Thrugelmir's point is that a simply smoothing or averaging of returns won't work. If you google "Sequence of return risk" you will see the problem.

Ultimately unless you have a guaranteed return, you can't guarantee that the plan will work, but according to cFIREsim it would have worked in 83% of all previous US stock market conditions. Reducing your withdrawls to £16.1K pa would increase the chances of success to 100% (under all previous US stock market conditions). Increasing the value of the pot to £387K would also increase the chance of success to 100%, but in the best scenarios, your pot would grow to over £2M (even with withdrawals of £18K pa adjusted for inflation), so it is a balancing act.

kidmugsy

This might all be comfortable and secure if you were to take enough agency work to keep your hand in at your trade (a wise investment in your "human capital"). You could aim to earn just the Personal Allowance - so there's no income tax to pay - or even just the magic amount that earns you NIC credits without requiring you to pay anything substantial in NICs (about £8,500 at the moment, I believe).

It would be quite a gamble to let your trade skills atrophy. But each to his own.

Naturally you'd contribute all your earnings to a personal pension of some sort so you'd get the advantage of the 25% tax rebate even though you will have paid no tax.

kidmugsy

A_Nice_Englishman wrote: »

That £255,000 would buy three properties in somewhere like Ebbw Vale. Live in one and rent the other two out to provide a modest income just below the tax threshold.

Once upon a time that was a well known strategy for widows. Husband would die, insurance payout would arrive. Buy two or three terraced houses or flats.

And then Mr Lloyd George interfered with the rents: in other words he stole some of the property rights of the landlords. The widow and orphans were left to whistle. The 1915 Act, which he assured everyone would be temporary, wasn't finally binned until 1989.

There's always a case for diversifying.

John_Jones

What sort of life are people looking for with these tight retirement budgets? When I retire I want to drive an open topped sports car through the alps, I want to visit exotic places, and swim in warm seas, eat fine foods, learn to fly, and shoot off to Rome on a whim to stay in a nice hotel.

It just seems like such a strange aim to me, to want to get out as soon as possible even if it means forty years living carefully.

kidmugsy

John_Jones wrote: »

What sort of life are people looking for with these tight retirement budgets? When I retire I want to drive an open topped sports car through the alps, I want to visit exotic places, and swim in warm seas, eat fine foods, learn to fly, and shoot off to Rome on a whim to stay in a nice hotel.

It just seems like such a strange aim to me, to want to get out as soon as possible even if it means forty years living carefully.

But what about those of us who have done all that?

Alexland

Sadly I believe these threads are rooted in people's deep unhappiness in their current employment situation. I agree it seems a waste to condem yourself to eternal poverty when a bit more work for not necessarily the same wage would make such a big difference to your future quality of life.

John_Jones

kidmugsy wrote: »

But what about those of us who have done all that?

Do you not want to keep doing it? Why did you get your pilot’s license if not to fly your plane off for the weekend, for example?

I work too many hours at the moment to do these things often, so if I do stop work, or step back a bit in my fifties, then I will want to enjoy myself.