What if I retired today / financial independence 'game'

michaels

Not really a game but just looking at my retirement assets now and assuming they were all available when needed figuring out what constant income I could have for the rest of my life if I never worked again.


My rules are simple, include state pension for self and dw when it becomes available, assume pension/other savings need to cover this amount until it starts and subtract this from the total saving pot and then work out 4% of the remaining pot as a safe 'forever drawdown'. Work in todays pounds assuming capital growth and state pension growth will deal with inflation.



For example suppose I get full state pension of 8.5k in 6 years, dw gets it in 8 years means we need 'bridge' of 8.5 x 6 plus 8.5 x 8 = 119


Deduct this from savings and pensions pot of 500k gives 381 x 4% = 15.25k pa. Add to the state pension gives pre tax annual income 32.25k


Our actual number is 27.5 at the moment, although I have not yet reached 55 so in theory couldn't start drawdown in reality using our offset mortgage repaid using the tfls I could retire on this figure today (and actually it would be a fair bit more given tax credits until our kids are 18).


Do other people know their retire today/financial independence number?


EDIT: No one else seems to know there FI/Jack it all in tomorrow number off the top of their head, does this tell me something about me?

Mnd

Are you saying taking the 25% tax free now from you pension

I don't think you can, sorry

michaels

Mnd wrote: »

Are you saying taking the 25% tax free now from you pension

I don't think you can, sorry

I can bridge the gap using my mortgage if I wanted to but that is really an extra detail, the main idea is what would be your 'flat' income for life if you stopped earning income today.


Our figure of 26k is 80% of our annual spend so we are not currently 'financially independent'

tgon

I've a 6 year rolling forecast on an Excel spreadsheet I created which includes outgoings, savings, state pension, private pension and defined benefit pension, tax and other stuff. Essentially, a yearly balance sheet that I update yearly. Its helped me arrive at a desired point of retirement/independence but, not being an Excel guru, it is quite useless for what-if scenarios.

kidmugsy

A 4% 'safe withdrawal rate' for the UK is probably a bit optimistic, especially if you were to start from a market that's valued quite highly (and with a US market that's valued very highly).

Anyway, your main point: we'd find an after-tax £26k too tight to live off. We could manage on it if there were never any "unexpected" expenditures but there always are. Most recently a dental bill, before that a wedding, before that a change of car, before that some money spent on the house, ... And we really don't want to move house.

michaels

kidmugsy wrote: »

A 4% 'safe withdrawal rate' for the UK is probably a bit optimistic, especially if you were to start from a market that's valued quite highly (and with a US market that's valued very highly).

Anyway, your main point: we'd find an after-tax £26k too tight to live off. We could manage on it if there were never any "unexpected" expenditures but there always are. Most recently a dental bill, before that a wedding, before that a change of car, before that some money spent on the house, ... And we really don't want to move house.

Isn't that the answer to the number rather than my question which is what is your current no further earnings annual income?

Guerillatoker

Interesting thread, I'm far too young (or too poor, I suppose) to even consider this but look forward to seeing what others have to say.

Malthusian

kidmugsy wrote: »

A 4% 'safe withdrawal rate' for the UK is probably a bit optimistic, especially if you were to start from a market that's valued quite highly (and with a US market that's valued very highly).

I decided to look at just how unsafe it could be if you started taking 4% per annum of your initial capital in the worst case scenario. I looked at what would happen if you started taking £4,000pa from a £100,000 fund right before the last dot-com crash, and increased it by inflation each year, with no Guyton-Klinger cleverness or any other attention paid to the markets. Performance was based on the sector average of the Mixed 40-85% Shares sector.

By early 2003 the fund would have crashed to around £53,000 - meaning your safe 4% withdrawals would now in reality be rather unsafe 7.5% withdrawals.

From 2003 to 2007 the fund would recover somewhat, despite the withdrawals - though only to around £80,000 by the time the credit crash rolled around.

The 2008-09 crash would further hammer the fund down to about £50,000. At this point, inflation has dictated that your income has increased to £5,600 a year - so 4% withdrawals have now turned into 11.2% withdrawals.

Withdrawals are now too high for even the post-2009 bull market to recover the fund value. After a brief, illusory stabilisation in 2009-2010, the fund value steadily drops from 2011 to 2018 and by today's date you would have about £33,000.

You would of course still be a stockmarket winner as if you'd started with £100,000, you would have spent £106,000 and still have £33,000 left in the pot.

Say you started this strategy at 65 - the average 65 year old man who drew 4% (inflation-linked) each year would not be particularly concerned about only having a third left in the pot 19 years later, as they'd be dead. But a large number of the men in that average don't have drawdown funds to live on for their entire lifetime so that's rather irrelevant. Those who did make it to 84 would still have on average another 6 years to look forward to (and actually more than this because you've got money so you have an above average life expectancy).

Of course some might say that this proves that 4% is actually safe because even in the worst-case-scenario, choosing the worst possible starting point, the money still hasn't run out by the time most people would be dead. But a lot of retirees won't be dead after 19 years.

If they were hoping to draw 4% each year (increasing with inflation) for 25, 30, 35 years they can forget it. With the withdrawal rate now 24% per year, all that's left is to spend the rest of the money and hope the council will still find a place for you in Overmydeadbody Grove.

Note that I am not saying that starting to draw 4% per annum from your retirement fund is a bad idea because a crash is about to happen. Nobody knows that. What we do know is that anyone thinking about safe withdrawal rates should ask themselves how they'd feel if they had a phone call from their IFA (if they don't use one, the imaginary IFA in their head) telling them that if they had any sense they'd stop taking income immediately and wait for the storm to blow over.

michaels

Malthusian wrote: »

I decided to look at just how unsafe it could be if you started taking 4% per annum of your initial capital in the worst case scenario. I looked at what would happen if you started taking £4,000pa from a £100,000 fund right before the last dot-com crash, and increased it by inflation each year, with no Guyton-Klinger cleverness or any other attention paid to the markets. Performance was based on the sector average of the Mixed 40-85% Shares sector.

By early 2003 the fund would have crashed to around £53,000 - meaning your safe 4% withdrawals would now in reality be rather unsafe 7.5% withdrawals.

From 2003 to 2007 the fund would recover somewhat, despite the withdrawals - though only to around £80,000 by the time the credit crash rolled around.

The 2008-09 crash would further hammer the fund down to about £50,000. At this point, inflation has dictated that your income has increased to £5,600 a year - so 4% withdrawals have now turned into 11.2% withdrawals.

Withdrawals are now too high for even the post-2009 bull market to recover the fund value. After a brief, illusory stabilisation in 2009-2010, the fund value steadily drops from 2011 to 2018 and by today's date you would have about £33,000.

You would of course still be a stockmarket winner as if you'd started with £100,000, you would have spent £106,000 and still have £33,000 left in the pot.

Say you started this strategy at 65 - the average 65 year old man who drew 4% (inflation-linked) each year would not be particularly concerned about only having a third left in the pot 19 years later, as they'd be dead. But a large number of the men in that average don't have drawdown funds to live on for their entire lifetime so that's rather irrelevant. Those who did make it to 84 would still have on average another 6 years to look forward to (and actually more than this because you've got money so you have an above average life expectancy).

Of course some might say that this proves that 4% is actually safe because even in the worst-case-scenario, choosing the worst possible starting point, the money still hasn't run out by the time most people would be dead. But a lot of retirees won't be dead after 19 years.

If they were hoping to draw 4% each year (increasing with inflation) for 25, 30, 35 years they can forget it. With the withdrawal rate now 24% per year, all that's left is to spend the rest of the money and hope the council will still find a place for you in Overmydeadbody Grove.

Note that I am not saying that starting to draw 4% per annum from your retirement fund is a bad idea because a crash is about to happen. Nobody knows that. What we do know is that anyone thinking about safe withdrawal rates should ask themselves how they'd feel if they had a phone call from their IFA (if they don't use one, the imaginary IFA in their head) telling them that if they had any sense they'd stop taking income immediately and wait for the storm to blow over.

So for my game as it is based on 'retiring today' regardless of age we need a safe withdrawal rate that could carry on for potentially 70 years if someone who is 25 decided to play - is 3% better?

michaels

Guerillatoker wrote: »

Interesting thread, I'm far too young (or too poor, I suppose) to even consider this but look forward to seeing what others have to say.

But assuming you have some assets could they not be equally spread over the remaining years to state pension age to give a 'pack it all in and go live in a tent' number?!

Guerillatoker

michaels wrote: »

But assuming you have some assets could they not be equally spread over the remaining years to state pension age to give a 'pack it all in and go live in a tent' number?!

I'd be lucky to have a tenner a week I think!