Early retirement calculations help

bowlhead99

sluisdejesus wrote: »

Planning to retire in 15 years
My age 28
DH Age 25

Current costs (don't think I've missed any):
Housing and utilities - £1050
Food - £250
Car - £150
Phones/mobiles/internet - £120
Kids - £150


Planning on using Vanguard LS100 to fund first 20 years of retirement by investing £350pcm each for the next 15 years?

Investing into stocks and shares LISA £150 each (plus 25% bonus while it lasts) for the next 22(me)/25(husband) then letting it mature for a further 10 years when it can be accessed.

Mortgage will be paid until we're 60 unless we decide to overpay.

Do these calculations seem realistic taking into account compounding and growth.

Planning for a drawdown of 1.5k each per month maybe?

Doesn't seem realistic to me. Lets say your investments achieve 5% a year over and above inflation and you keep increasing the £350pm with inflation. And you are doing this investment inside a pension so that each £350 you add is turned into £437 with tax relief.

If you start from £0 now and add £437 a month (growing the contribution in real terms each year) and you will each contribute 78,660 and each end up with £116k. (total £232k). Then you will be at age 43 and he at age 40, so having retired and given up your jobs you will have 17 and 20 years left to age 60 respectively.

Call it 18.5 years , on average, for you to bridge to age 60. In order to draw out £1500 a month (£18000) a year when you have retired from your jobs, you will be burn through £333k. As the pot only contains £232k in 15 years time, and you know you are going to spend £333k, you are going to need to get £100k from somewhere. If the 5% rate of return is maintained, you will start off earning about £10k from the £200k+ but you are withdrawing much faster than that so that after 17-18 years it is only making £2k then £1k then 0.5k and you're spent, all in about 18.5 years, just as you hit 60 and lose the mortgage repayment obligation and can start to access your LISAs, and then you have state pension seven years later.

It's feeling like this might just work, if the stars align ... But wait!

You can't access pension at the age of 40, so you can't use a pension wrapper for this investing even though it's usually the most efficient way of investing. So you do really only have £350 a month going in, to the S&S ISAs, not £437. So the contributions (hopefully being increased in real terms) are only £63k each and would be worth £93k each at the end of 15 years, for £186k total instead of £232k. Oops we are heading for a serious shortfall as there is less capital and less growth on the capital as you start drawing it out. You won't be able to pull out the £332k you want to be able to take out at £18k a year for 18.5 years.

If you did want £1500 a month EACH, so not £9000 each per year for £18000 total a year, but £36,000 a year? If you pull £36,000 a year out of a £186k pot, it doesn't last 18.5 years. You can only afford five annual withdrawals and probably just squeeze a sixth one with the growth generated at 5% a year on the remaining balance during the drawdown cycle. So good that you didn't really want that much.

But your outgoings are over £1700 a month, plus planning to be funding LISAs at £150pm each, so that's £2k, how could you survive on £1500 a month after giving up work? £2k a month is £24k. Even the 'more like £20k if I'm honest' is not being fully honest


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Just to add, that if you did increase your ISA contributions to 437 a month each instead of 350 a month, and you did manage to have the right amount of luck for 5% growth annualised on your investment for the full 15 years, and you did only need to draw £18k out a year not £20k or £24k - because you carried on being frugal and didn't ever buy holidays or presents or clothes etc...

... then you would be on track to have enough ISA money to burn through in those 18.5 'bridge' years between age 40/43 and 60, and be left with nothing at age 60 but your LISA money and any work/personal pension. And making those remaining investments last from age 60 to say, age 105, would seem a tall order.

But even making it through to 60 is not guaranteed at all. Because you might not get 5% growth, while investing over the next decade and a half - you might only get 3% growth, so you don't have enough in the pot at retirement. And if you do make it to retirement with what seems like 'enough' in the pot, you still might not make it to 60 because of 'sequence of returns' risk.

In other words, investment returns don't happen smoothly at 5% a year, you will get a +25 and a -17% and a +6% and a -42% and a -1% and a +0.5% and so on. Left long enough, they might average 5% over 18 +years. But if you are drawing money out each year and you get some big negative years and some flat years early on, each £18k you pull out of the pot would be a really big proportion of the remaining pot at that point, and there wouldn't be enough left in the pot to get enough growth to be able to last until the end of the 18 years. You wouldn't last long enough to get to the 'long term' 5% real return.

jonnygee2

how could you survive on £1500 a month after giving up work? £2k a month is £24k. Even the 'more like £20k if I'm honest' is not being fully honest

It does seem low. After mortgage and utilities it's just £70 a week each, for life. With little eligibility for benefits, and only a partial state pension as a safety net later in life. That's an extremely basic lifestyle. Even small luxuries like a train ticket to London or a cheap holiday in the UK would be difficult to afford.

sluisdejesus

bowlhead99 wrote: »

Doesn't seem realistic to me. Lets say your investments achieve 5% a year over and above inflation and you keep increasing the £350pm with inflation. And you are doing this investment inside a pension so that each £350 you add is turned into £437 with tax relief.

If you start from £0 now and add £437 a month (growing the contribution in real terms each year) and you will each contribute 78,660 and each end up with £116k. (total £232k). Then you will be at age 43 and he at age 40, so having retired and given up your jobs you will have 17 and 20 years left to age 60 respectively.

Call it 18.5 years , on average, for you to bridge to age 60. In order to draw out £1500 a month (£18000) a year when you have retired from your jobs, you will be burn through £333k. As the pot only contains £232k in 15 years time, and you know you are going to spend £333k, you are going to need to get £100k from somewhere. If the 5% rate of return is maintained, you will start off earning about £10k from the £200k+ but you are withdrawing much faster than that so that after 17-18 years it is only making £2k then £1k then 0.5k and you're spent, all in about 18.5 years, just as you hit 60 and lose the mortgage repayment obligation and can start to access your LISAs, and then you have state pension seven years later.

It's feeling like this might just work, if the stars align ... But wait!

You can't access pension at the age of 40, so you can't use a pension wrapper for this investing even though it's usually the most efficient way of investing. So you do really only have £350 a month going in, to the S&S ISAs, not £437. So the contributions (hopefully being increased in real terms) are only £63k each and would be worth £93k each at the end of 15 years, for £186k total instead of £232k. Oops we are heading for a serious shortfall as there is less capital and less growth on the capital as you start drawing it out. You won't be able to pull out the £332k you want to be able to take out at £18k a year for 18.5 years.

If you did want £1500 a month EACH, so not £9000 each per year for £18000 total a year, but £36,000 a year? If you pull £36,000 a year out of a £186k pot, it doesn't last 18.5 years. You can only afford five annual withdrawals and probably just squeeze a sixth one with the growth generated at 5% a year on the remaining balance during the drawdown cycle. So good that you didn't really want that much.

But your outgoings are over £1700 a month, plus planning to be funding LISAs at £150pm each, so that's £2k, how could you survive on £1500 a month after giving up work? £2k a month is £24k. Even the 'more like £20k if I'm honest' is not being fully honest

It looks like you're serious about these calculations... perfect! (now on laptop, replying is much easier)

Following the MSE budget sheet I'll break things down further - costs are current as we are renting but almost have enough deposit to buy current rental property at 160k.

Rent- £750
Council tax - £156
Gas and Electricity - On key meter averaged over 12 months (taking last 4 years into account) £70
Water and sewerage - £43
Car insurance, tax, fuel - £150
Food - £250
Phone, internet, mobiles - £90
2x ISA (for house deposit) - £400
Loan payment (and overpayment) - £300
Home education and associated costs £150

Husband income 18.2k basic (plus around £200 pcm bonus)
My income £6k (maternity leave) then back to £10k
Child maintenance - £2.6k
UC top up £500 pcm
Matched betting - around 1k per month WE DO NOT RELY ON THIS

By my calculations when we manage to buy the property we will have lower mortgage payments than the rent but the surplus will be taken up by insurances etc

The money currently being paid into ISAs and loan payment can then be used to invest into POT1 and we will then have to find £300 pcm for POT2.

UC top up will disappear when we are no longer renting but I will be back to work by then.

Thoughts?

Thrugelmir

Buy a home and focus on clearing the mortgage as quickly as you can. This will remove one of your biggest monthly outgoings in your budget.

sluisdejesus

Thrugelmir wrote: »

Buy a home and focus on clearing the mortgage as quickly as you can. This will remove one of your biggest monthly outgoings in your budget.

Yes I have had that thought but with mortgage rates as low as they are it doesn't seem worthwhile to overpay for now.

jonnygee2

Rent- £750
Council tax - £156
Gas and Electricity - On key meter averaged over 12 months (taking last 4 years into account) £70
Water and sewerage - £43
Car insurance, tax, fuel - £150
Food - £250
Phone, internet, mobiles - £90
2x ISA (for house deposit) - £400
Loan payment (and overpayment) - £300
Home education and associated costs £150

This might be what you spend each month right now, while you are saving. But it doesn't represent what you will spend long term.

Houses need maintenance. Between the ages of 40-90 you can expect some pretty big repair bills: boilers every 15 years, structural maintenance, windows and doors, interior decorations etc.

Cars don't last 50 years without needing repairs or replacements

You might want to go on holiday at some point at some point between age 40 and death. Or go out for a meal. Or buy some new clothes.

Your kids might get into trouble and need some cash. Or move abroad and expect the occasional visit etc

You might be hit by something unexpected - a lawsuit, a stock market crash etc. You need reserves before you consider stopping work. The absolute worst case is that you run out of money before 60 or so, and then haven't made enough state pension contributions to get a decent state pension at retirement - then you have nothing apart from whatever the state deigns to give you.

Finally have you considered mortgage rates? With no income, remortgaging is going to be a struggle. It's likely you'll have to pay the whole debt off to avoid mortgage rates which are equal to or higher than your investment returns.

I think as a first step you need to work out a more realistic long term budget. Then you can work out roughly how much you need to save in investments before you retire. To summarise all the posts above: your current plans are overly optimistic and would not give you enough money to retire by 40.

SmashedAvacado

Maybe i should be less cynical, but the OP seems like a wind-up to me.

sluisdejesus

SmashedAvacado wrote: »

Maybe i should be less cynical, but the OP seems like a wind-up to me.

Why is that?

Marcon

SmashedAvacado wrote: »

Maybe i should be less cynical, but the OP seems like a wind-up to me.

Ambitious, possibly to the point of naivety, but not I think the wind up you seem to believe.

sluisdejesus

jonnygee2 wrote: »

This might be what you spend each month right now, while you are saving. But it doesn't represent what you will spend long term.

While I understand what you're saying about long term costs (which I am taking on board) can I make it clear that no one is starving or going without in order for these saving figures to be achieved.