Tell me if this idea is good or bad.

Tabieth

As I say, we all have different levels of risk that we are willing to accept. You’re looking into a high risk / high reward strategy. It could work but it’s very far from guaranteed. I don’t know enough to talk specifics but it falls into the “too good to be true” category. 

Whatever you decide - good luck. 

SneakySpectator

Tabieth said:

As I say, we all have different levels of risk that we are willing to accept. You’re looking into a high risk / high reward strategy. It could work but it’s very far from guaranteed. I don’t know enough to talk specifics but it falls into the “too good to be true” category. 

Whatever you decide - good luck. 

How can it be classed as too good to be true if the average return in 7.8%

Winning the jackpot is too good to be true because the average win is like £5.

Getting a 20% average annual return on the stock market would be classed as too good to be true because it doesn't happen very often.

7.8% is average, is normal and should therefore be expected. Its not wishful thinking or too good to be true, its the standard average return.

Of course that doesn't mean it's guaranteed you're right, but it should be expected.

Tabieth

If it were that easy, don’t you think everyone would be doing it? 

Anyway, good luck. 

sheramber

While you are playing stock market you are paying out rental money that is lost. 

That money could be paid towards a mortgage. 

Remember rents go up. How much  will you pay out in rent over the next 20 years?

SneakySpectator

Tabieth said:

If it were that easy, don’t you think everyone would be doing it? 

Anyway, good luck. 

Everyone is doing it what are you talking about lol? 

Where do you think your private pension is right now? Because it sure as hell isn't sitting in a Natwest savings account accumulating 2% interest per year. It's in the stock market, along with hundreds of millions of other peoples pensions worldwide

All I'm doing is replicating a private pension by investing extra inside of my S&S ISA.

There's a reason pensions are invested in the stock market and not sat in a savings account. It's because the stock market is the absolute best and reliable method of growing your money long term. Long term the stock market beats the housing market, it beats savings accounts, it beats government bonds and it beats premium bonds. 

To be honest you just seem like a stock market sceptic so we're probably not going to see eye to eye on this.

Tabieth

As I say, good luck. 

Herzlos

SneakySpectator said:

Tabieth said:

I think your plan is highly risky and based on a lot of assumptions that may or may not work out for you. You may be happy with that level of risk but it would worry me.  I’d recommend a safer, more conventional route. Sort out whatever financial issues are stopping you from getting a mortgage now. Buy somewhere you are happy living in today (and that will probably meet your needs in the future) with an aim to be mortgage fee when you retire. At that point you’ll have somewhere to live that you can afford as well as a home and an asset. 

There are 2 problems with this. 

1. I am a single pringle on an income just shy of £30k so the amount of money a bank will lend me is ~£130k. Combine that with a £45k deposit that I can stump up and that allows me to buy a property for £175k, which will get me a very basic 1 bedroom flat if I'm lucky. I've browsed around and most flats in my area are in the region of £190k - £220k.

2. The mortgage calculator shows the interest rate after 2 years will be 6.9% or somewhere in that region. So after a 20 year period I'm going to end up paying back an tens of thousands of pounds in interest.

How does that compare with the rent on your existing 1 bed flat? I understand if it's a housing association it's subsidized so the math might not work as well in favour of the mortgage, but with a mortgaged flat you'll be rent free in 20-30 years depending on term with outgoings that may have been similar.

With non-HA subsidized rent it rarely works out better to put money into savings to buy later because house prices are likely going up faster than your savings accumulate and all of your rent money is wasted. At least with a mortgage some chunk of it is building up equity, so for about the same monthly outgoings you should be in a position in 20 years where your mortgage is mostly paid off and you don't need to spend a lump sum from your savings on buying a house outright. You may even struggle to save enough that way to cover your rent increases.

It's also worth noting that all mortgage figures assume that when the fixed rate expires you'll default to the variable rate that's always worse. You're unlikely to be be paying 6.9% apr for most of the mortgage, though I'd expect it to remain around 5%.

I certainly think retiring at 55 on a salary of £30k is optimistic, without having to live really frugally before and after.

Have you accounted for what you want to actually *do* when retired and how you'll fund that?

Do you have a plan B?

Herzlos

SneakySpectator said:

Tabieth said:

If it were that easy, don’t you think everyone would be doing it? 

Anyway, good luck. 

Everyone is doing it what are you talking about lol? 

Where do you think your private pension is right now? Because it sure as hell isn't sitting in a Natwest savings account accumulating 2% interest per year. It's in the stock market, along with hundreds of millions of other peoples pensions worldwide

All I'm doing is replicating a private pension by investing extra inside of my S&S ISA.

The reason pensions are so good is the tax free part in addition to the huge term.

You don't pay tax on the yield from the ISA, but you don't pay income tax on the money going into a pension. Admittedly you're only saving 20% going in so it's not as drastic a saving as someone on a higher rate of tax.

It's otherwise a solid plan, compound interest means money you put in now will be worth significantly more in 20 years, as long as you don't try to cash in on a dip.

SneakySpectator

Herzlos said:

SneakySpectator said:

Tabieth said:

I think your plan is highly risky and based on a lot of assumptions that may or may not work out for you. You may be happy with that level of risk but it would worry me.  I’d recommend a safer, more conventional route. Sort out whatever financial issues are stopping you from getting a mortgage now. Buy somewhere you are happy living in today (and that will probably meet your needs in the future) with an aim to be mortgage fee when you retire. At that point you’ll have somewhere to live that you can afford as well as a home and an asset. 

There are 2 problems with this. 

1. I am a single pringle on an income just shy of £30k so the amount of money a bank will lend me is ~£130k. Combine that with a £45k deposit that I can stump up and that allows me to buy a property for £175k, which will get me a very basic 1 bedroom flat if I'm lucky. I've browsed around and most flats in my area are in the region of £190k - £220k.

2. The mortgage calculator shows the interest rate after 2 years will be 6.9% or somewhere in that region. So after a 20 year period I'm going to end up paying back an tens of thousands of pounds in interest.

How does that compare with the rent on your existing 1 bed flat? I understand if it's a housing association it's subsidized so the math might not work as well in favour of the mortgage, but with a mortgaged flat you'll be rent free in 20-30 years depending on term with outgoings that may have been similar.

It's also worth noting that all mortgage figures assume that when the fixed rate expires you'll default to the variable rate that's always worse. You're unlikely to be be paying 6.9% apr for most of the mortgage, though I'd expect it to remain around 5%.

I certainly think retiring at 55 on a salary of £30k is optimistic. I'm on double that in a cheaper area and I'm not expecting to retire before 65 albeit I'm paying off a 4 bed house by then.

Have you accounted for what you want to actually *do* when retired and how you'll fund that?

You have a 4 bed house? So you probably have a partner and kids? That's where I am able to save compared to a higher earner. 

Someone might be earning £20k or £30k a year more than me but if they have 3 kids to feed, clothe and keep entertained, that's expenditure that I don't have, which I can direct towards investing. Also I don't go on holidays, I have only 2 hobbies, gaming and hiking / exploring. And both of these are incredibly cheap. 

I can buy a £40 video game that I'll play for 3 months... So per year I only spend about £160 - £200, some people have hobbies where they'll spend £200 per month!

Hiking / exploring is also very cheap because you buy the gear once and it lasts for years, the activity itself is free so I only need to pay fuel to get there if it's in the UK or bargain hunt for a last minute flight on skyscanner. Obviously I'm sleeping in a tent so no expensive hotel costs. 

But yeah, I've factored all this into my costs and retirement so I think for the most part I'm in a very unique position, granted by my natural frugality, low cost hobbies and no desire to have a family  

Oh and I don't drink alcohol, smoke cigs / weed or gamble.

FreeBear

Herzlos said: The reason pensions are so good is the tax free part in addition to the huge term.

You don't pay tax on the yield from the ISA, but you don't pay income tax on the money going into a pension.

If you are in a workplace pension scheme, there is tax relief on the contributions, and if you do salary sacrifice, there is a saving on national insurance contributions. Your pension pot is also boosted by employer's contributions (as long as you earn above a minimum level) - This could account for 30% to 50% of the total going in each month.

With a personal pension or an ISA, you'd miss out on the tax relief and employer contribution. Something to bear in mind when considering investments fr retirement.