Is it realistic to retire on a monthly income of £2000 per month with no rent or mortgage to pay?

Albermarle

However if this happens after I've retired then of course I won't have any money to buy and to make matters worse I will actively be withdrawing 4% per year to sustain my living expenses so that would be a little worrying. 

You should google 'sequence of returns risk' 

Basically a big drop in investments early in your retirement, will have a much bigger effect on how long the funds will last than if the drop occurs later in retirement. For this reason most people will hold a cash buffer, that they can live off for a while and not make any withdrawals at all for a year or two. However as with all these issues, opinions vary.

ColdIron

[Deleted User] said:

Linton said:

[Deleted User] said:

An investment return of 5% above the rate of inflation is optimistically wishfull thinking I'd suggest. Better to err on the side of caution. Enjoy the exceptional moments of good fortune as and when they arise. For historical performance data the Credit Suisse Global Investment Returns Yearbook is worth a read. Helps provide a more realistic perspective. 

Why is it optimistic? 

Average UK inflation is 2.8%, the MSCI World Index average return is 10%. 

10% - 2.8% is a post inflation return of 7.2%. And you're saying 5% is optimistically wishful thinking? 

That's the entire point of the 4% withdrawal rate after retirement, it's designed to keep your pot from declining in value. 

10% - 2.8% - 4% = 3.2%

So in theory your pot should still continue to grow at a rate of 3.2% despite inflation and despite withdrawing 4%. 

Of course none of this is guaranteed and I know that, that's the nature of investing but all we can do is try to make the best guesstimates based on historical results. 

The problem with using average inflation and return figures is that, even if the average is a reasonable guess today, there is a 50% chance that inflation turns out to be higher and a 50% chance that your actual returns turn out to be lower.

You can easily cope with better actual results than you planned but not with worse ones.  So it makes sense to make your plans using pretty pessimistic assumptions.  My retirement plans were based on 3% inflation and 4% (in £ terms) investment returns.

Another reason that relying on historic average equity returns is risky is the volatility of equity investments.  If you withdraw a steady amount from volatile investments when prices are low you will be eating into the core investments you need for future income. So to maintain a steady income you need significantly more capital than a simple average return would suggest.  This would seem especially true in your case when you are proposing to live on a lower income then many people here would be happy with and so presumably have limited scope for reducing expenditure in the bad times.

Finally your calculations assume 100% equity investment.  Many people would lose sleep if not worse during a 40% equity crash as history suggests is inevitable every decade or so.  Could you cope mentally? Or would you sell out in a panic and so turn a paper loss into a very real one?

Another option is to just cut back on spending, I could eat cheaply for a year and cut my grocery bill by a third.

That sounds a pretty grim existence after a lifetime of work

You need a plan that is robust and flexible which doesn't force you into a single course of action that is basically - do without - for even a few weeks let alone a year or more

[Deleted User]

ColdIron said:

[Deleted User] said:

Linton said:

[Deleted User] said:

An investment return of 5% above the rate of inflation is optimistically wishfull thinking I'd suggest. Better to err on the side of caution. Enjoy the exceptional moments of good fortune as and when they arise. For historical performance data the Credit Suisse Global Investment Returns Yearbook is worth a read. Helps provide a more realistic perspective. 

Why is it optimistic? 

Average UK inflation is 2.8%, the MSCI World Index average return is 10%. 

10% - 2.8% is a post inflation return of 7.2%. And you're saying 5% is optimistically wishful thinking? 

That's the entire point of the 4% withdrawal rate after retirement, it's designed to keep your pot from declining in value. 

10% - 2.8% - 4% = 3.2%

So in theory your pot should still continue to grow at a rate of 3.2% despite inflation and despite withdrawing 4%. 

Of course none of this is guaranteed and I know that, that's the nature of investing but all we can do is try to make the best guesstimates based on historical results. 

The problem with using average inflation and return figures is that, even if the average is a reasonable guess today, there is a 50% chance that inflation turns out to be higher and a 50% chance that your actual returns turn out to be lower.

You can easily cope with better actual results than you planned but not with worse ones.  So it makes sense to make your plans using pretty pessimistic assumptions.  My retirement plans were based on 3% inflation and 4% (in £ terms) investment returns.

Another reason that relying on historic average equity returns is risky is the volatility of equity investments.  If you withdraw a steady amount from volatile investments when prices are low you will be eating into the core investments you need for future income. So to maintain a steady income you need significantly more capital than a simple average return would suggest.  This would seem especially true in your case when you are proposing to live on a lower income then many people here would be happy with and so presumably have limited scope for reducing expenditure in the bad times.

Finally your calculations assume 100% equity investment.  Many people would lose sleep if not worse during a 40% equity crash as history suggests is inevitable every decade or so.  Could you cope mentally? Or would you sell out in a panic and so turn a paper loss into a very real one?

Another option is to just cut back on spending, I could eat cheaply for a year and cut my grocery bill by a third.

That sounds a pretty grim existence after a lifetime of work

You need a plan that is robust and flexible which doesn't force you into a single course of action that is basically - do without - for even a few weeks let alone a year or more

It's not grim at all... I'm not talking about eating nothing but soup and ramen for a year. When I say cut back I mean only have fish and steak once a week instead of 3 times a week. Buy some off brand stuff instead of branded. Have 1 takeaway every 2 weeks instead of 1 per week etc.

Outside of working more years or getting a higher paid job, what else is there? 

Stargunner

[Deleted User] said:

ColdIron said:

[Deleted User] said:

Linton said:

[Deleted User] said:

An investment return of 5% above the rate of inflation is optimistically wishfull thinking I'd suggest. Better to err on the side of caution. Enjoy the exceptional moments of good fortune as and when they arise. For historical performance data the Credit Suisse Global Investment Returns Yearbook is worth a read. Helps provide a more realistic perspective. 

Why is it optimistic? 

Average UK inflation is 2.8%, the MSCI World Index average return is 10%. 

10% - 2.8% is a post inflation return of 7.2%. And you're saying 5% is optimistically wishful thinking? 

That's the entire point of the 4% withdrawal rate after retirement, it's designed to keep your pot from declining in value. 

10% - 2.8% - 4% = 3.2%

So in theory your pot should still continue to grow at a rate of 3.2% despite inflation and despite withdrawing 4%. 

Of course none of this is guaranteed and I know that, that's the nature of investing but all we can do is try to make the best guesstimates based on historical results. 

The problem with using average inflation and return figures is that, even if the average is a reasonable guess today, there is a 50% chance that inflation turns out to be higher and a 50% chance that your actual returns turn out to be lower.

You can easily cope with better actual results than you planned but not with worse ones.  So it makes sense to make your plans using pretty pessimistic assumptions.  My retirement plans were based on 3% inflation and 4% (in £ terms) investment returns.

Another reason that relying on historic average equity returns is risky is the volatility of equity investments.  If you withdraw a steady amount from volatile investments when prices are low you will be eating into the core investments you need for future income. So to maintain a steady income you need significantly more capital than a simple average return would suggest.  This would seem especially true in your case when you are proposing to live on a lower income then many people here would be happy with and so presumably have limited scope for reducing expenditure in the bad times.

Finally your calculations assume 100% equity investment.  Many people would lose sleep if not worse during a 40% equity crash as history suggests is inevitable every decade or so.  Could you cope mentally? Or would you sell out in a panic and so turn a paper loss into a very real one?

Another option is to just cut back on spending, I could eat cheaply for a year and cut my grocery bill by a third.

That sounds a pretty grim existence after a lifetime of work

You need a plan that is robust and flexible which doesn't force you into a single course of action that is basically - do without - for even a few weeks let alone a year or more

It's not grim at all... I'm not talking about eating nothing but soup and ramen for a year. When I say cut back I mean only have fish and steak once a week instead of 3 times a week. Buy some off brand stuff instead of branded. Have 1 takeaway every 2 weeks instead of 1 per week etc.

Outside of working more years or getting a higher paid job, what else is there? 

If you make sure that you have 5 years of spending in savings accounts when you retire, you will not need to cut back in retirement if there is a market crash, as you can just use your cash reserves.

Stubod

Just completed an analysis of our spends over the last 23 years. (ie since "records began").

Basically our "essential" spend has increased overall by about 2.5% per year. (By essential, I mean all those items we have to buy, eg council tax, food, energy, water rates,insurance).

By far the biggest single percentage increase has been electricity which in the last 23 years has increased by around 6% per year. Our main essential expense is food, and this has increased by around 2% per year on average.

masonic

Stargunner said:

[Deleted User] said:

ColdIron said:

[Deleted User] said:

Linton said:

[Deleted User] said:

An investment return of 5% above the rate of inflation is optimistically wishfull thinking I'd suggest. Better to err on the side of caution. Enjoy the exceptional moments of good fortune as and when they arise. For historical performance data the Credit Suisse Global Investment Returns Yearbook is worth a read. Helps provide a more realistic perspective. 

Why is it optimistic? 

Average UK inflation is 2.8%, the MSCI World Index average return is 10%. 

10% - 2.8% is a post inflation return of 7.2%. And you're saying 5% is optimistically wishful thinking? 

That's the entire point of the 4% withdrawal rate after retirement, it's designed to keep your pot from declining in value. 

10% - 2.8% - 4% = 3.2%

So in theory your pot should still continue to grow at a rate of 3.2% despite inflation and despite withdrawing 4%. 

Of course none of this is guaranteed and I know that, that's the nature of investing but all we can do is try to make the best guesstimates based on historical results. 

The problem with using average inflation and return figures is that, even if the average is a reasonable guess today, there is a 50% chance that inflation turns out to be higher and a 50% chance that your actual returns turn out to be lower.

You can easily cope with better actual results than you planned but not with worse ones.  So it makes sense to make your plans using pretty pessimistic assumptions.  My retirement plans were based on 3% inflation and 4% (in £ terms) investment returns.

Another reason that relying on historic average equity returns is risky is the volatility of equity investments.  If you withdraw a steady amount from volatile investments when prices are low you will be eating into the core investments you need for future income. So to maintain a steady income you need significantly more capital than a simple average return would suggest.  This would seem especially true in your case when you are proposing to live on a lower income then many people here would be happy with and so presumably have limited scope for reducing expenditure in the bad times.

Finally your calculations assume 100% equity investment.  Many people would lose sleep if not worse during a 40% equity crash as history suggests is inevitable every decade or so.  Could you cope mentally? Or would you sell out in a panic and so turn a paper loss into a very real one?

Another option is to just cut back on spending, I could eat cheaply for a year and cut my grocery bill by a third.

That sounds a pretty grim existence after a lifetime of work

You need a plan that is robust and flexible which doesn't force you into a single course of action that is basically - do without - for even a few weeks let alone a year or more

It's not grim at all... I'm not talking about eating nothing but soup and ramen for a year. When I say cut back I mean only have fish and steak once a week instead of 3 times a week. Buy some off brand stuff instead of branded. Have 1 takeaway every 2 weeks instead of 1 per week etc.

Outside of working more years or getting a higher paid job, what else is there? 

If you make sure that you have 5 years of spending in savings accounts when you retire, you will not need to cut back in retirement if there is a market crash, as you can just use your cash reserves.

Worth bearing in mind though that that is 20% of the OP's target portfolio. It will be a drag on returns and a further challenge on his proposed withdrawal rate.

[Deleted User] said:
Outside of working more years or getting a higher paid job, what else is there? 

There are various strategies and portfolios that can be used to generate returns not far below 100% equities, while reducing start date sensitivity and improving worst case returns. Could be the subject of its own thread.

Stargunner

masonic said:

Worth bearing in mind though that that is 20% of the OP's target portfolio. It will be a drag on returns and a further challenge on his proposed withdrawal rate.

It would still leave the OP with 80% equities. Surely the OP would not be considering being 100% in equities as they reach their retirement date. I certainly won't be, as I like to be able to sleep at night.