Planning for Early Retirement - what do you think?

NumberMan

I last posted back in September 2018 with my plan for early retirement and got lots of interesting views and feedback. I thought it might be interesting to give an update and see whether views have changed.

If you are interested my initial thread is here: https://forums.moneysavingexpert.com/discussion/5899500/planning-for-early-retirement/p1

I am (just) 39 years old and planning to retire early in the 40-45 age range.

I currently earn £75k and wouldn't expect any significant increases to that before retiring. My wife does some casual work but I'm not allowing for any income from this in retirement planning. We have one child who will start school shortly. Our annual expenses excluding mortgage are consistently in the range £15-£20k pa and my target is to build up sufficient funds to have a reasonable expectation of supporting an income of £20-£25k pa which includes a margin for increased expenses or investments performing worse than expected.

I am now in a position where I feel we are well covered for the period after age 58 (£450k in DC pensions plus state pensions). I will continue to add to this through my work to avoid leaving money (employer contributions and tax relief) on the table, but don't think this is strictly necessary to meet my objectives.

For pre-58, we have £250k total in ISAs (passive global equity) and plan to contribute £20k pa to this. The £20k for 2021's contribution is already sitting in Premium Bonds and we have no other significant savings at the moment. Our house is worth £350k and has £130k outstanding on the mortgage fixed at 2.2% for three more years and we're paying £9k pa.

My thinking is that I have a reasonable expectation that around age 42, we could have £350-£400k in an ISA and owe around £100k on the mortgage. I suggest that this is enough to provide for an income of over £20k until I can access my pension money at age 58. Clearly, investment performance over the next couple of years will have a large impact and could delay my plans, but it would take very negative performance for me to not be in a position to retire before age 45.

The questions I am thinking of are:

• Is there anything I have missed in my conclusion that post-58 is covered?

• Is a balance of £350k to £400k at age 42 sufficient to retire - if not, what would your figures be to provide my target income?

• What strategy would you use with the mortgage if I do retire - keep it and hope to benefit from higher investment returns or pay it off to reduce risk?

Alexland

Even by age 45, sceptical that retirement is feasible

I don't really understand how you are going to get your ISAs up from £250k (+£20k PBs) to £350-£400k in the next 3 years while also (1) repositioning your portfolio to be more conservative ready for drawing income and (2) still making tax efficient contributions to your workplace pension. But getting there by 45 seems possible but of course it would need to be more due to inflation.

Won't the drawings you need to make in your 40s/50s(/60s?) also need to include the repayment of the mortgage? Is that in the £20k pa you need to live on or do you need £30k pa?

Do you intend to help your child with university costs, house deposits, weddings, first car, etc?

Do you need to factor in additional NI payments for SP?

Will you ever spend any capital on the house again? New drive, kitchen, boiler, etc?

Will you own a car in retirement?

What level of growth above inflation and fees are you expecting for each asset class? It seems unlikely that the capital growth seen on passive global equities will continue at the recent extraordinary rate.

green_man

Somewhat optimistic but with a few tweaks could work

Yeh, I think you plan is a bit tight.  

Again the cost of bringing up a child could add significantly to your outgoings.  There are things you may not have thought of like:
- extra holiday costs due to not being able to go off season etc
- your child might like an expensive hobby or two (my lad does MX motor biking - expensive)
- might you have another child?

Your plan is just about doable by 45, but I’d be wanting a bit more contingency, it’s a long way (hopefully) from 40 -> Death.

NumberMan

Alexland said:

I don't really understand how you are going to get your ISAs up from £250k (+£20k PBs) to £350-£400k in the next 3 years while also (1) repositioning your portfolio to be more conservative ready for drawing income and (2) still making tax efficient contributions to your workplace pension. But getting there by 45 seems possible but of course it would need to be more due to inflation.

Won't the drawings you need to make in your 40s/50s(/60s?) also need to include the repayment of the mortgage? Is that in the £20k pa you need to live on or do you need £30k pa?

Do you intend to help your child with university costs, house deposits, weddings, first car, etc?

Do you need to factor in additional NI payments for SP?

Will you ever spend any capital on the house again? New drive, kitchen, boiler, etc?

Will you own a car in retirement?

Overall you might be working on a high assumed rate of growth above inflation and fees in particular it seems unlikely that the capital growth seen on passive global equities will continue at the recent extraordinary rate.

I am contributing 20k pa to my isa (and have been doing for a number of years so there is no doubt on affordability even allowing for continuation of pension contributions). Thus i would expect to have around £330k in three years plus investment return. I would suggest £20k to £70k returns over that period is well within plausibility.

My plan would be to not change investment policy until i retire. My view is that having to work a few more years if there was a crash just as i got to age 42 wouldn't be a disaster.

I am targeting £20-£25k income excluding mortgage. Whether i pay off the mortgage entirely just before retirement or continue paying is an open question.

We run a car and include large payments in our average spending to date. I am thinking tbe £20-25k pa target leaves enough room to cover these along with topping up ni payments.

I definitely agree the high rate of growth in equities is unlikely to continue. I have seen real returns of c.8-9% over the past ten years or so however i believe only around 4% returns would be necessary in my plan.

NumberMan

green_man said:

Yeh, I think you plan is a bit tight.  

Again the cost of bringing up a child could add significantly to your outgoings.  There are things you may not have thought of like:
- extra holiday costs due to not being able to go off season etc
- your child might like an expensive hobby or two (my lad does MX motor biking - expensive)
- might you have another child?

Your plan is just about doable by 45, but I’d be wanting a bit more contingency, it’s a long way (hopefully) from 40 -> Death.

This is definitely the area where i am slightly worried about spending levels although pre-school hasn't been cheap and spending is still below £20k so there is some margin already. I am only concerned about the period 42-58 which doesn't feel that long as have well over what i need for post-58.

Alexland

Even by age 45, sceptical that retirement is feasible

NumberMan said:

I am contributing 20k pa to my isa (and have been doing for a number of years so there is no doubt on affordability even allowing for continuation of pension contributions).

I don't understand how you will be doing that if you are keeping your adjusted net income under £50k to be efficient with income tax and child benefit which means you will be taking home around £37.5k of which you are spending £20-25k and have a mortgage of £9k pa. That doesn't leave £20k for ISA contributions? Unless you are including your wife's income in the model?

NumberMan said:

My plan would be to not change investment policy until i retire. My view is that having to work a few more years if there was a crash just as i got to age 42 wouldn't be a disaster.

OK provided you are willing to take that risk markets sometimes take some time to recover.

NumberMan said:

Whether i pay off the mortgage entirely just before retirement or continue paying is an open question.

How would you pay it off without using money you have already identified for other purposes?

NumberMan said:

We run a car and include large payments in our average spending to date. I am thinking tbe £20-25k pa target leaves enough room to cover these along with topping up ni payments.

OK but as above it's more like £29-£34k inc mortgage you need or more with inflation.

NumberMan said:

I definitely agree the high rate of growth in equities is unlikely to continue. I have seen real returns of c.8-9% over the past ten years or so however i believe only around 4% returns would be necessary in my plan.

Is that 4% above inflation and fees? If so that's about double what I am planning for my accumulation phase and once in a drawdown asset allocation (as your ISAs would be at the point of early retirement) then I wouldn't expect any real growth given current asset valuations.
In my plans each child is adding about 4 years onto my early retirement age from the increased running costs (they are cheap while they are very young if you are not paying childcare or buying expensive buggies and nursery furniture) and the gifts I intend to give to them to ease them into adult life. As they get bigger the extra parent costs just start creeping into your spend pattern. More food, shoes, more expensive holidays, etc. There's a limit to how tight you can be without damaging their (or your wife's) quality of life.

Also worth considering building in some general contingency to give flexibility and for occasional capital spends.

NumberMan

Alexland said:

NumberMan said:

I am contributing 20k pa to my isa (and have been doing for a number of years so there is no doubt on affordability even allowing for continuation of pension contributions).

I don't understand how you will be doing that if you are keeping your adjusted net income under £50k to be efficient with income tax and child benefit which means you will be taking home around £37.5k of which you are spending £20-25k and have a mortgage of £9k pa. That doesn't leave £20k for ISA contributions? Unless you are including your wife's income in the model?

NumberMan said:

My plan would be to not change investment policy until i retire. My view is that having to work a few more years if there was a crash just as i got to age 42 wouldn't be a disaster.

OK provided you are willing to take that risk markets sometimes take some time to recover.

NumberMan said:

Whether i pay off the mortgage entirely just before retirement or continue paying is an open question.

How would you pay it off without using money you have already identified for other purposes?

NumberMan said:

We run a car and include large payments in our average spending to date. I am thinking tbe £20-25k pa target leaves enough room to cover these along with topping up ni payments.

OK but as above it's more like £29-£34k inc mortgage you need or more with inflation.

NumberMan said:

I definitely agree the high rate of growth in equities is unlikely to continue. I have seen real returns of c.8-9% over the past ten years or so however i believe only around 4% returns would be necessary in my plan.

Is that 4% above inflation and fees? If so that's about double what I am planning for my accumulation phase and once in a drawdown asset allocation (as your ISAs would be at the point of early retirement) then I wouldn't expect any real growth given current asset valuations.
In my plans each child is adding about 4 years onto my early retirement age from the increased running costs (they are cheap while they are very young if you are not paying childcare or buying expensive buggies and nursery furniture) and the gifts I intend to give to them to ease them into adult life. As they get bigger the extra parent costs just start creeping into your spend pattern. More food, shoes, more expensive holidays, etc. There's a limit to how tight you can be without damaging their (or your wife's) quality of life.

Also worth considering building in some general contingency to give flexibility and for occasional capital spends.

In answer to your first point, the only pay deductions are the minimum employee pension contributions required (8%) to get the maximum employer contributions (14%). I have sacrificed more in the past due to the benefits you mention. I don't anymore as i consider myself overprovisioned post-retirement already and would expevt lifetime allowance charges on future contributions so the tax benefit isn't as great.

My target assumes that £350-400k is enough to both pay £20-25k pa income and deal with the mortgage either through settling directly or covering the income for a period before settling.

On investment returns, fees are negligible c.0.12% overall and the 4% is assumed to be above inflation. I think assuming real returns of zero for the next 20 years would be excessively cautious. I accept your point on planning for contingencies but you can always save a little more and no margin would be entirely risk-free. There has to be a point where you accept there is enough margin.

barnstar2077

All seems fine

Looks good.  My only concern in your position would be the mortgage.

Edit:  I am pretty frugal though, so I could easily make that money last a long time.

NumberMan

barnstar2077 said:

Looks good.  My only concern in your position would be the mortgage.

Edit:  I am pretty frugal though, so I could easily make that money last a long time.

I definitely agree things would look better if the mortgage didn't exist!

Do you have a view on whether it would be better to pay off the morrgage in full at retirement or to remortgage for 5(+?) years at around 2% and trust that i should gain on investment returns. This feels like my most difficult decision.

green_man

Somewhat optimistic but with a few tweaks could work

NumberMan said:!

Do you have a view on whether it would be better to pay off the morrgage in full at retirement or to remortgage for 5(+?) years at around 2% and trust that i should gain on investment returns. This feels like my most difficult decision.

Borrowing money to invest never seems like the wisest move to me. Of course with interest rates so low  it does make it a viable option, and more than likely it will make you money. But unless I thought markets looked particularly cheap (which is the opposite of how things look right now) then it’s not something I would be doing, and I certainly wouldn’t be relying on any returns that might come this way.

My own (cautious) philosophy is to just assume my investments will maintain rate with inflation, if I think I’ve got enough funds with no real investment return then I know I’m happy.  Of course I can then use any such returns as cream on the top. (To most this is way too cautious).

Alexland

Even by age 45, sceptical that retirement is feasible

NumberMan said:

Do you have a view on whether it would be better to pay off the morrgage in full at retirement or to remortgage for 5(+?) years at around 2% and trust that i should gain on investment returns. This feels like my most difficult decision.

Do you have a view yet on the asset allocation you will hold when running down the ISAs to ensure you draw at a stable withdrawal rate and don't suffer sequence of return risks which can ravage a portfolio? If the reduced returns you see average at about 2% then running a mortgage might be an unnecessary risk in your plan.