FIREside Chats

Suffolk_lass

@nightwims I don't know if there are calculators out there but what we did to determine how much we needed was to develop and maintain a spreadsheet of all our obligatory costs (food, utilities, council tax, car and life expenses, including things like dentists and pet expenses; not insured for these - and the other hobbies and things we knew we wanted to do) add them all together, allow for 2% per annum inflation and divided by the number of years it needed to cover.

I definitely didn't get it right as we are a bit better off than I was expecting (maybe lockdown...) and clearly the work-wardrobe (handbags and shoes were a weakness), hair and make-up, commuting, eating and drinking after work, tax and insurance all seem to have taken up a much larger part of my income than I thought. We don't have a SIPP but DH has a DC pot as well as a small DB pension so we are splitting that across the pre-SP years. 

The other thing that made a big difference was reducing our outgoings where we could without compromising on life. Food costs were reduced by about 70% for example.

Grogged

@nightswims you also need to be aware that you can usually only access a SIPP within 10 years of your state retirement age.

SuperSecretSquirrel

edinburgher said:

@SuperSecretSquirrel - Yes - I couldn't think up any more sensible way to do it. I'm trying to plan a sustainable model for the relative value needed to replace employment income and that seemed the best way to model it. Granted, there are always doomsters saying the state pension won't survive, but if that's the case I'll adapt (reduce spending, a side hustle, a wee part-time job nobody else wants).

Thanks Ed. I made some alterations to my net worth spreadsheet to factor in the SP, and although the massive numbers that resulted were very nice to see, it was clear that something was wrong...

Our expected annual spend is 18k (based on our April 2017-2018 spending diary, plus a small buffer). Two full state pensions amount to £18,678.40 per year. Adding £18,678.40 x 25 to our net worth, and assuming a 4% withdrawal rate, even if we had nothing at all saved we'd supposedly already be financially independent. This is a fairly extreme example, the distorting effect will lessen as your expected annual spend increases, but it will still be there.

OhIJustLostMyShoe said:

In theory, the best way of modelling it is to come up with multiple "expense periods".  

For the average FIREr that means:
1) Pre-retirement spending
2) Post-retirement spending (e.g. no commuting, dry-cleaning)
3) Post-state pension age spending

Effectively for (3) you can subtract your estimated state pension from the estimated spend.  So if you're getting a state pension of £150 per week, or £7,800 per year, and you expect to spend £14,000 per year in retirement, you can effectively assume post-SP retirement spending of £6,200.

Obviously if you're just trying to do some rough estimates of things, it doesn't matter too much.  The reason why it can matter is because especially for those of us planning to retire fairly early, we need to think not just about overall net worth and safe withdrawal rates, but also where that money will actually come from.

There is absolutely no point in putting all of your money into your SIPP if you want to retire at 50.  Equally, if you put all of your money into ISAs and taxable GIAs you're missing out on tax benefits.  Monevator did a great series on ISA vs SIPP that covers all of this.  Point is, for many of us we will actually have three (potentially different) SWRs.  One for our ISAs, one for our SIPPs, and one for our SIPPs when we also have income from DB / SP.

For what its worth, I haven't got round to modelling this for myself yet, but probably will later on in the year.

EDIT: My overall point, which I neglected to mention, would be that you don't count it as part of your net worth at all - it sits on the other side of the equation as a reduction in your required withdrawal.

Hi OhIJustLostMyShoe, in light of the above I think you are right, but it does lose the very appealing simplicity of the "25 times annual expenses in savings = financial independence" yardstick.

I do have a very simple retirement spreadsheet that I put together to try to get my head around some of this a while back. I was trying to figure out if I should favour ISAs over pensions or not - in simple number terms the pension wins hands down, but in terms of flexibility the ISA absolutely has the edge. My spreadsheet is less to do with different expense periods (I expect a fairly flat 18k plus inflation annual budget throughout, with a separate slush fund to cover the financial assistance when our children transition to adulthood), and more to do with different accessibility periods.

Up until age 58 (estimated) only ISAs and unwrapped savings and investments will be accessible. Between then and 68 (estimated) personal pensions will also become accessible. From then on state pensions will become payable.

The spreadsheet is very simplistic, and I would hope entirely pessimistic... Everything is in today's money, it assumes zero inflation, and zero growth. It's also based on just my "half" of the expenses as OH is happy following a very different strategy to me (easy part time work right up to a fairly normal retirement age). Age 68+ is assumed covered - state pension exceeds expenses (not really as simple as that as the death of one partner halves the income but not the expenses, that's a can I'm kicking down the road for now...). Age 58+ is assumed covered - my personal pensions cover over ten years of expenses. If I continue saving at the current rate, age 43+ is covered - my ISAs and unwrapped savings would cover fifteen years of expenses.

Bearing in mind I need to keep working at least a little a bit until I'm 50 if I want to qualify for the full state pension, and carrying on as I am now until at least 43 suits me fine, it seems there's nothing to worry about. I'll end up overshooting, but that's a good thing as OH might have a change of heart and want to retire earlier, there's a slush fund to build up, there could be rocky employment periods along the way, etc. It does annoy me when I'm measuring progress though. I'd like something as simple as the "4% rule", but factoring in the state pension. I know that's not really possible, how much of an impact the SP has is dependent on your expenses, whereas the 4% rule is based on expected inflation and growth rates and your expenses are irrelevant as far as the multiplier goes. Maybe some tweaking of my existing spreadsheet is all that's needed, replace the 0% inflation and 0% growth values with something closer to accepted wisdom to get something a bit closer to reality. It won't have the simplicity of "25x expenses" but I think that's just the way it goes, real life is messier than a magic number, unfortunately.

OhIJustLostMyShoe

SuperSecretSquirrel said:

Hi OhIJustLostMyShoe, in light of the above I think you are right, but it does lose the very appealing simplicity of the "25 times annual expenses in savings = financial independence" yardstick.

I do have a very simple retirement spreadsheet that I put together to try to get my head around some of this a while back. I was trying to figure out if I should favour ISAs over pensions or not - in simple number terms the pension wins hands down, but in terms of flexibility the ISA absolutely has the edge. My spreadsheet is less to do with different expense periods (I expect a fairly flat 18k plus inflation annual budget throughout, with a separate slush fund to cover the financial assistance when our children transition to adulthood), and more to do with different accessibility periods.

Up until age 58 (estimated) only ISAs and unwrapped savings and investments will be accessible. Between then and 68 (estimated) personal pensions will also become accessible. From then on state pensions will become payable.

The spreadsheet is very simplistic, and I would hope entirely pessimistic... Everything is in today's money, it assumes zero inflation, and zero growth. It's also based on just my "half" of the expenses as OH is happy following a very different strategy to me (easy part time work right up to a fairly normal retirement age). Age 68+ is assumed covered - state pension exceeds expenses (not really as simple as that as the death of one partner halves the income but not the expenses, that's a can I'm kicking down the road for now...). Age 58+ is assumed covered - my personal pensions cover over ten years of expenses. If I continue saving at the current rate, age 43+ is covered - my ISAs and unwrapped savings would cover fifteen years of expenses.

Bearing in mind I need to keep working at least a little a bit until I'm 50 if I want to qualify for the full state pension, and carrying on as I am now until at least 43 suits me fine, it seems there's nothing to worry about. I'll end up overshooting, but that's a good thing as OH might have a change of heart and want to retire earlier, there's a slush fund to build up, there could be rocky employment periods along the way, etc. It does annoy me when I'm measuring progress though. I'd like something as simple as the "4% rule", but factoring in the state pension. I know that's not really possible, how much of an impact the SP has is dependent on your expenses, whereas the 4% rule is based on expected inflation and growth rates and your expenses are irrelevant as far as the multiplier goes. Maybe some tweaking of my existing spreadsheet is all that's needed, replace the 0% inflation and 0% growth values with something closer to accepted wisdom to get something a bit closer to reality. It won't have the simplicity of "25x expenses" but I think that's just the way it goes, real life is messier than a magic number, unfortunately.

It does lose that simplicity, but then the yardstick of 25x expenditure has so many caveats that I'd be wary of using it for anything more than broad sketching out.

Similar to what you said, for my purposes I'm happy to work with very approximate figures for now (thinking ~28x), and start looking at the detail more down the line.  After all, my circumstances could change a lot in the next few years.  But there's no doubt that taking a 25x approach for my state pension, SIPP and ISA would be a disaster for me because I want to retire by 40.  Consequently I need my ISA to last at least 17 years, and I can't afford to be taking out 10% of it each year (even if my total assets inc. SIPP were in excess of 25x expenditure).  

What I'd say is that no approach is ever going to be "correct" - we're just coming up with vaguely representative financial models that will hopefully give us enough confidence to make the leap and enough data to get the amounts and times correct.  I think though, for anyone who is at the point of debating whether to pull the ripcord and retire, it's well worth going through the (admittedly cumbersome and lengthy) approach that I laid out.  Certainly not worthwhile everyone doing it every year when they're still building up a pot, although it might help inform that debate you mentioned of whether to put surplus cash into a SIPP or an ISA!

gallygirl

Love reading about the spreadsheets and assumptions!

I found some online spreadsheets when I was planning but I didn't really understand what they were doing so didn't trust them . Also my retirement plans were based largely on BTL income which didn't fit the 25x theory. I built my own, showing what income I wanted a year, then factored in all income streams (savings, BTL income, SIPP, two small govt pensions at 60, SP at 67). I assumed 0% growth but inflation 1%, 2% etc. and then looked to see when/if I ran out of money. Once I felt I understood it I played with various growth %'s.

The issue with this though is it's assuming growth, inflation etc. are steady, with no allowance for bull/bear markets. I then went back to one online calculator cFIREsim now I understood things a bit better. This allows you to put your figures in then it runs them through historical data so factors in big crashes (which could be very significant if you're planning on withdrawing from a  SIPP or ISA in early years) and gives a % failure (i.e. you will end up in the gutter eating mud) rate. It also does random projections so not just based on historical data. It took a while to get used to it (and it's American so some terms are different) but when I was seeing a less than 1% failure rate I felt happy I was on track. Hope someone finds it useful.

Good luck with your Premium Bonds @hugheskevi - if you only bought them in April they won't have been in the May draw as you need to hold them a full calendar month first. We won 25 on 15k and 50 on 50k and daughter got 75 on 50k so a good month for us!

edinburgher

@gallygirl - risk of catastrophic failure is one of the reasons that I'm happy to be invested in a lifestyle fund that increases the percentage of bonds held over time. Conversely, I'll probably end up needing to increase my holding of equities in a couple of decades once I've "made it". Monevator has had a few interesting looks at setting "floors" over the years - who knows - I might even end up using an annuity?

I have tried to look at BTL less emotionally in recent years, but I still can't bring myself to consider it as an option. The stress of repairs, crappy tenants etc. would feel so "personal", whereas my SIPP going up (and down) and then up again all feels a bit intangible and doesn't worry me too much.

Edit: suspect we'd be priced out before we began, anyway. We have considered renting for six months when we extend our home, but a decent two bed flat is now c. £800/month in Glasgow! This is £200/month more than our mortgage on a nice 3 bedroom house in the suburbs (albeit with a long mortgage).

Retireinten

Sorry this is a long one

I've been thinking about when to take my DB scheme recently. I have never seriously considered taking this before the age of 60 because of the actuarial reduction and my older scheme benefits have full protection at this age too. 


I track my DB value each month (sad I know ) - each month my DB grows by around £40 after tax and actuarial reduction (at 60).  But we have essentially already achieved our income target from 60, so this £40 just adds to that.  This is the main reason why, if I carry on working for another 8 years or so in this job our household income in retirement would be around £41k net when our target is £36k. A nice problem  to have, I know. 


If I were to take the DB at 57 (assuming pension access rules change for DB schemes) then I would lose around £3,120 a year from 60  for life (adjusted for tax). This is a payback of around 14.5 years.  Even with the reduced income though I would have more than my current target of £36k.  So if I live beyond age 74/75 I would be financially better off taking my pension at 60... but I'd be delaying my pension to take a higher income that I don't actually need! And this plan is creating a retirement savings gap for ages 57-59.

I'm am wondering if I can redirect my SIPP money elsewhere to achieve FI sooner. If we decide not to retire earlier I can always pay into a SIPP then and still delay taking my DB to a later date. 

I am thinking of redirecting £500 of my monthly SIPP payment (currently pay £600 net) to AVCs.  That way I start to work on my 'cash' pot savings gap while still trickling something into a personal pension. It keeps my options open at least. 


I have no idea if this makes any sense🙄😁. Decisions, decisions🤔

Suffolk_lass

@Retireinten it makes perfect sense. A lot of my former colleagues took half their DB Pension early and went semi retired, continuing to work 2 days a week (and building back up the actuarial reduction while easing into a more leisurely lifestyle). It is something else you might consider

I think for me, having stopped work, and found we can live comfortably when I always calculated that we needed more, I would have chosen to go earlier, had I known then, what I know now. I always looked at it in terms of what I was losing through the actuarial reduction, whereas the key thing is what you gain by taking it early. If I were an adviser, I would say go for it!

Retireinten

Suffolk_lass said:

@Retireinten it makes perfect sense. A lot of my former colleagues took half their DB Pension early and went semi retired, continuing to work 2 days a week (and building back up the actuarial reduction while easing into a more leisurely lifestyle). It is something else you might consider

I think for me, having stopped work, and found we can live comfortably when I always calculated that we needed more, I would have chosen to go earlier, had I known then, what I know now. I always looked at it in terms of what I was losing through the actuarial reduction, whereas the key thing is what you gain by taking it early. If I were an adviser, I would say go for it!

Thanks for responding Suffolk_Lass.  I think I have to keep my options open to do either/or but at the moment my plans align to the DB pension at 60 route.  I have three savings gaps:  ISAs (ages 55-57ish), my SIPP (57-59) and also a gap in our cash lump sum target.

At the moment I am prioritising the ISA and SIPP on the basis I don't want too much in 'cash' too early.  But I have decided to create two lots of cash pots, one of which will be linked to my DB via AVCs, as its very tax efficient. This also means some of my 'cash' pot will be invested. I can take at least an extra £50k from AVCs tax free when I access my pension which will be used to boost my cash pot.  


But taking my DB at 57 essentially eliminates the SIPP savings gap, whilst reducing my annual income (above my current target). So I think the plan should be to drip feed a much smaller amount into the SIPP for now and redirect the rest into an AVC to work on the tax free cash pot. That way I work on the two savings gaps that I definitely can't eliminate.  

You raise a good point about easing into retirement. I actually doubt we will stop work when we reach FI but I expect to retire from my current day job at least. So we may still be earning something from paid employment in the early years of retirement also.  But this is not something I'm factoring into our plans at all at the moment.  

ElmoR

Was wondering about the impact of inter-generational inequalities and the next generation's chances of achieving FIRE? As a group, we have all stepped carefully around the 'if the state pension is still around' type thoughts. Those of you with children, are any of you thinking of ways to help them? Starting a pension for them? LISA is an obvious boost at 18 but is a pension a good idea? Even a tiny amount trickling in?