Renting during retirement - a no brainer?

Pat38493

mr_apple said:

Pat38493 said:

hugheskevi said:

What are the assumptions about the net return on the capital from the house sale? In particular, the rate of return net of charges, dividend tax, capital gains tax, income tax, etc, depending on how it is saved/invested.

I modelled it using Timeilne software with investing the entire amounts, plus all my pensions and other money, in 100% global equities for the duration of retirement.  CGT and other taxes are calculated by the software.  The software tests the real results of retiring any month since about 1916 or so, modelling real returns and inflation.  I programmed a bed and ISA for the money outside of tax wrappers but frankly this made very little difference to the overall result.  There is also 2 x DB incomes and 2 state pensions in the mix.

For the base case where I buy a new house immediately, my pensions, investments, and the net proceeds of the house downsize are invested roughly 70/30 equities / bonds&cash based on the starting point of a calculated cash flow ladder.

This is really interesting as I have just retired at 60 and am thinking of downsizing or perhaps renting while we travel around a bit for a few years. What software did you use to do the modelling? I’d like to run the figures myself. I’d have around £1.1m to either buy a property or rent and invest the rest - I wouldn’t need to use the proceeds to live off as my pension and existing investments would cover that.

The software is called Timeline and it's generally only supposed to be used by advisers.  Up until a couple of years ago you could get a demo version that only worked for a couple of clients, however these days you have to sign up to a paid account.

You can also use other online tools like cfiresim which are not as comprehensive but do something roughly similar and are free.

I think you could theoretically still use Timeline by signing up for an account with the first month at £1 and then cancelling it, but I haven't tried it.

The ongoing cost is over £100 per month so it's not really feasible for an individual investor.

Shimrod

mr_apple said:

Pat38493 said:

hugheskevi said:

What are the assumptions about the net return on the capital from the house sale? In particular, the rate of return net of charges, dividend tax, capital gains tax, income tax, etc, depending on how it is saved/invested.

I modelled it using Timeilne software with investing the entire amounts, plus all my pensions and other money, in 100% global equities for the duration of retirement.  CGT and other taxes are calculated by the software.  The software tests the real results of retiring any month since about 1916 or so, modelling real returns and inflation.  I programmed a bed and ISA for the money outside of tax wrappers but frankly this made very little difference to the overall result.  There is also 2 x DB incomes and 2 state pensions in the mix.

For the base case where I buy a new house immediately, my pensions, investments, and the net proceeds of the house downsize are invested roughly 70/30 equities / bonds&cash based on the starting point of a calculated cash flow ladder.

This is really interesting as I have just retired at 60 and am thinking of downsizing or perhaps renting while we travel around a bit for a few years. What software did you use to do the modelling? I’d like to run the figures myself. I’d have around £1.1m to either buy a property or rent and invest the rest - I wouldn’t need to use the proceeds to live off as my pension and existing investments would cover that.

You could try Guiide which is free or RetireEasy  - either £60 or £80 for the year depending on plan to cover your circumstances (I don't think the cheapest plan will cover what you want to do).

I've used neither, but bookmarked the products for further investigation after seeing some positive reviews a while back in this forum from people who used them. 

It's worth noting that cfiresim mentioned by @Pat38493 covers DC & DB style pensions and only uses US market data for back testing but is incredibly easy and quick to use. You would need to assume you have sold your house at the start of retirement, or include any rental income as a DB style pension to model it.

kempiejon

As has been said some of the data is using historic numbers from the US. Another user suggested a FIREsim drawdown calculator using UK data. Offered here if anyone is interested https://www.2020financial.co.uk/pension-drawdown-calculator/#calculator

Pat38493

Shimrod said:

mr_apple said:

Pat38493 said:

hugheskevi said:

What are the assumptions about the net return on the capital from the house sale? In particular, the rate of return net of charges, dividend tax, capital gains tax, income tax, etc, depending on how it is saved/invested.

I modelled it using Timeilne software with investing the entire amounts, plus all my pensions and other money, in 100% global equities for the duration of retirement.  CGT and other taxes are calculated by the software.  The software tests the real results of retiring any month since about 1916 or so, modelling real returns and inflation.  I programmed a bed and ISA for the money outside of tax wrappers but frankly this made very little difference to the overall result.  There is also 2 x DB incomes and 2 state pensions in the mix.

For the base case where I buy a new house immediately, my pensions, investments, and the net proceeds of the house downsize are invested roughly 70/30 equities / bonds&cash based on the starting point of a calculated cash flow ladder.

This is really interesting as I have just retired at 60 and am thinking of downsizing or perhaps renting while we travel around a bit for a few years. What software did you use to do the modelling? I’d like to run the figures myself. I’d have around £1.1m to either buy a property or rent and invest the rest - I wouldn’t need to use the proceeds to live off as my pension and existing investments would cover that.

You could try Guiide which is free or RetireEasy  - either £60 or £80 for the year depending on plan to cover your circumstances (I don't think the cheapest plan will cover what you want to do).

I've used neither, but bookmarked the products for further investigation after seeing some positive reviews a while back in this forum from people who used them. 

It's worth noting that cfiresim mentioned by @Pat38493 covers DC & DB style pensions and only uses US market data for back testing but is incredibly easy and quick to use. You would need to assume you have sold your house at the start of retirement, or include any rental income as a DB style pension to model it.

One comment about RetireEasy - last time I looked at it, it was using straight line modelling assuming a constant inflation and rate of return.  Therefore it's not really suitable for what was being requested here which is to model a particular plan against a large number of real historical scenarios - Timeline tries to model each retirement month since about 1915.  I think cfiresim only does calendar years.  I have not used Guiide so I don't know how it works.

Cobbler_tone

I’d personally class a no brainer as something the majority of people do. Unless the vast majority are wrong.

michaels

Here is my take

Sell house pocket £1m

Assume an SWR on £1m invested 70:30 over a 40 year retirement in the UK of 3% then you have 30k a year gross to spend. 30k x 40 years is £1.2m so 200k growth taxed at 20% gives 29k net pa.

So the question is then would the 29k get more or less rental house than I get from my owned house.

Can't just look at rent though as owning incurs extra costs that renting does not.

Shimrod

michaels said:

Here is my take

Sell house pocket £1m

Assume an SWR on £1m invested 70:30 over a 40 year retirement in the UK of 3% then you have 30k a year gross to spend. 30k x 40 years is £1.2m so 200k growth taxed at 20% gives 29k net pa.

So the question is then would the 29k get more or less rental house than I get from my owned house.

Can't just look at rent though as owning incurs extra costs that renting does not.

I'm not sure I understand your calculation that sees a gross income of £30k giving £29k after tax. But assuming a house of £1m is likely to mean a higher pension/investment income, some or all of that £30k is likely to be taxed at 40% which reduces the rent money available.

michaels

Shimrod said:

michaels said:

Here is my take

Sell house pocket £1m

Assume an SWR on £1m invested 70:30 over a 40 year retirement in the UK of 3% then you have 30k a year gross to spend. 30k x 40 years is £1.2m so 200k growth taxed at 20% gives 29k net pa.

So the question is then would the 29k get more or less rental house than I get from my owned house.

Can't just look at rent though as owning incurs extra costs that renting does not.

I'm not sure I understand your calculation that sees a gross income of £30k giving £29k after tax. But assuming a house of £1m is likely to mean a higher pension/investment income, some or all of that £30k is likely to be taxed at 40% which reduces the rent money available.

Sorry. Logic is a 3% safe withdrawal rate means you spend 3% times 40 years equals £1.2m from what was a £1m pot initially. Of this 1m comes from the original pot so no tax and 200k is from growth that is taxed (ignoring inflation and tax on inflation).

On an annual basis that is 30k of which 25k is spending from capital so not taxed and 5k from interest taxed at 20% gives a total tax bill of 1k and a net of 29k.

barnstar2077

Stupid question, but as someone who has never rented before, would you be able to rent somewhere when you are in your sixties without any prior history of renting?  Or is it just a case of show me the money?!

The only way I think I would ever end up renting would be if I wanted to move to a completely new area, and wanted to rent in a few different areas over the course of a few years, to see where I wanted to buy.

Peter_F

Rather than rent a property in retirement, perhaps a less risky option would be to keep ownership of the house but raise capital from it via a interest only mortgage. Whilst these are not available to everyone; those who qualify will have much greater flexibility over how to finance their retirement. Whilst you will have to pay interest on the funds borrowed it allows you to spend some of the capital as income for a number of years (whilst you are young enough to be active and go travelling etc). The remaining debt can then be cleared by downsizing later on in life or replaced with equity release funds. Too many people in retirement have modest incomes and massive home equity probably having overpaid their mortgage during their working life. Why not free up some of this money but retain ownership of the property and thus benefit from future house price increases.