High risk, high reward: A pauper's dream of early retirement.

barnstar2077

kempiejon said:

barnstar2077 said:
My prediction spreadsheet is set out in years, with each year taking last years amount, adding on x percent for growth, then add that years contributions.

I am aware of there being periods of zero growth, even losses, I am prepared to take the risk, as I can always just work till 57 if it doesn't work out.  He who dares, and all that! : ) 

I love my spreadsheets but the numbers can get ridiculous at decades out, I am aware of their shortcomings. Have you looked at any of the Monte Carlo simulations? https://www.firecalc.com/ is one or https://www.cfiresim.com/ another, more are out there. I found them more useful than my own work to look at a series of outcomes over several decades.

I took a route of 100% equities, leverage and tax treatments to maximise my path to FI. You've got to hold your nerve to keep investing when the portfolio has lost 40% of its value and rub your hands with glee at the bargains available. The down side to your I can always just work until 57 you have to keep working. It might not be 57 either, how can anyone know? I didn't set a date but a target income. Itemised spending analysis showed me when my investments would just cover my basic needs  - after that work become optional, to acquire more things or experiences or add a larger income to my retirement phase. 

I have used something similar, that runs many scenarios based on historical data and my preliminary plans passed with a 100% success rate.  It is definitely a useful tool for putting ones mind at ease.  I only ran 100% global equity scenarios though, as that was what I was interested in.  I will put a lot more effort into that side of things a bit closer to the time. 

Sarahspangles

barnstar2077 said:

Shimrod said:

barnstar2077 said:

I'm pretty happy with my monthly budget.  I just want to track those one off expensive items or services to help me predict which will continue on into my retirement, and which ones wont.

But ongoing items like house maintenance don't always cost over £100 but will add up over a year. Ignoring the small items will give you an inaccurate estimate. I've done a few small maintenance items recently, none of which exceeded £100 mark but when added up over the year become significant.

I'm happy paying out for smaller house maintenance costs from my spending allowance.  I don't want to start recording all my spending as I don't think it would be healthy for me personally to do so.  I can see how it might work well for others though. 

I like my budgets but I observe a lot of people are fine just keeping an eye on whether they’re ending the month ‘up’. My OH doesn’t even budget for predictable costs like car insurance, and his share of holidays or Xmas, he just has a reserve pot for those. Since he retired we’ve been ‘practicing’ by living on 2 x his pension and it’s comfortable and sustainable, with net flows out to investments, so I’m not worrying about money when I also retire - though there’s plenty of other things I am worried about!

barnstar2077

kempiejon said:

barnstar2077 said:
My prediction spreadsheet is set out in years, with each year taking last years amount, adding on x percent for growth, then add that years contributions.

I am aware of there being periods of zero growth, even losses, I am prepared to take the risk, as I can always just work till 57 if it doesn't work out.  He who dares, and all that! : ) 

I love my spreadsheets but the numbers can get ridiculous at decades out, I am aware of their shortcomings. Have you looked at any of the Monte Carlo simulations? https://www.firecalc.com/ is one or https://www.cfiresim.com/ another, more are out there. I found them more useful than my own work to look at a series of outcomes over several decades.

I took a route of 100% equities, leverage and tax treatments to maximise my path to FI. You've got to hold your nerve to keep investing when the portfolio has lost 40% of its value and rub your hands with glee at the bargains available. The down side to your I can always just work until 57 you have to keep working. It might not be 57 either, how can anyone know? I didn't set a date but a target income. Itemised spending analysis showed me when my investments would just cover my basic needs  - after that work become optional, to acquire more things or experiences or add a larger income to my retirement phase. 

Sorry, answered using my phone earlier and didn't really address the highlighted above.

I could live on my state pension alone if I had to (with a small maintenance fund).  So, although I expect to have more in retirement, even if things went quite wrong and nine years from now I find myself with only £180k at 57, I would still retire.

I have £225k now, and we are talking in nine years time, with my current projection being to have about £400k at 55. 

Going from £225k now to £180k in nine years time (while investing, and adding £80k+ in future contributions) I think you would agree would be a pretty pessimistic outcome.

In that worse case scenario I could still take £15k a year until SP kicks in and keep £30k as the maintenance fund (I would not remain 100% equities at that point though, that is for sure! :  )

I value my time over money, so unless my circumstances are so dire that financial concerns are of no concern to me, 57 is my maximum.

cfw1994

I think your plan is sound.  

Your punt on the US economy is the biggest “risk”, & whilst I feel we  a multi-decade decline of the “US Empire”, I also feel things will pull back up there for a few more years yet 🤷‍♂️

Nobody here can predict 10 years out: health & happiness will always be more important than the minutiae of plotting out spending to the Nth degree.

Good luck!

kempiejon

I value my time over money, so unless my circumstances are so dire that financial concerns are of no concern to me, 57 is my maximum.

And you have a good looking 2nd part of a plan to freedom, catastrophes excepting.

Bostonerimus1

barnstar2077 said:

kempiejon said:

barnstar2077 said:
My prediction spreadsheet is set out in years, with each year taking last years amount, adding on x percent for growth, then add that years contributions.

I am aware of there being periods of zero growth, even losses, I am prepared to take the risk, as I can always just work till 57 if it doesn't work out.  He who dares, and all that! : ) 

I love my spreadsheets but the numbers can get ridiculous at decades out, I am aware of their shortcomings. Have you looked at any of the Monte Carlo simulations? https://www.firecalc.com/ is one or https://www.cfiresim.com/ another, more are out there. I found them more useful than my own work to look at a series of outcomes over several decades.

I took a route of 100% equities, leverage and tax treatments to maximise my path to FI. You've got to hold your nerve to keep investing when the portfolio has lost 40% of its value and rub your hands with glee at the bargains available. The down side to your I can always just work until 57 you have to keep working. It might not be 57 either, how can anyone know? I didn't set a date but a target income. Itemised spending analysis showed me when my investments would just cover my basic needs  - after that work become optional, to acquire more things or experiences or add a larger income to my retirement phase. 

I have used something similar, that runs many scenarios based on historical data and my preliminary plans passed with a 100% success rate.  It is definitely a useful tool for putting ones mind at ease.  I only ran 100% global equity scenarios though, as that was what I was interested in.  I will put a lot more effort into that side of things a bit closer to the time. 

Take a look at what happened with the failure of "Long Term Capital Management". Modeling is a useful tool to understand retirement income parameters, but funding retirement with drawdown is not trivial and subject to market risk. Like saving for retirement I believe that a diversified approach to income generation is good and you should compliment drawdown with annuities as well as SP and maybe some dividend stocks that have good long records of regular payouts. Stress testing is important and if you can survive in the worst situations then you have a good plan that should allow you to sleep at night - it's good to be pessimistic. I've lost a lot in the recent US markets downturn, but I can sleep because I don't rely on drawdown for my income and low stress and being able to sleep are increasingly necessary as you get older.

barnstar2077

Bostonerimus1 said:

barnstar2077 said:

kempiejon said:

barnstar2077 said:
My prediction spreadsheet is set out in years, with each year taking last years amount, adding on x percent for growth, then add that years contributions.

I am aware of there being periods of zero growth, even losses, I am prepared to take the risk, as I can always just work till 57 if it doesn't work out.  He who dares, and all that! : ) 

I love my spreadsheets but the numbers can get ridiculous at decades out, I am aware of their shortcomings. Have you looked at any of the Monte Carlo simulations? https://www.firecalc.com/ is one or https://www.cfiresim.com/ another, more are out there. I found them more useful than my own work to look at a series of outcomes over several decades.

I took a route of 100% equities, leverage and tax treatments to maximise my path to FI. You've got to hold your nerve to keep investing when the portfolio has lost 40% of its value and rub your hands with glee at the bargains available. The down side to your I can always just work until 57 you have to keep working. It might not be 57 either, how can anyone know? I didn't set a date but a target income. Itemised spending analysis showed me when my investments would just cover my basic needs  - after that work become optional, to acquire more things or experiences or add a larger income to my retirement phase. 

I have used something similar, that runs many scenarios based on historical data and my preliminary plans passed with a 100% success rate.  It is definitely a useful tool for putting ones mind at ease.  I only ran 100% global equity scenarios though, as that was what I was interested in.  I will put a lot more effort into that side of things a bit closer to the time. 

Take a look at what happened with the failure of "Long Term Capital Management". Modeling is a useful tool to understand retirement income parameters, but funding retirement with drawdown is not trivial and subject to market risk. Like saving for retirement I believe that a diversified approach to income generation is good and you should compliment drawdown with annuities as well as SP and maybe some dividend stocks that have good long records of regular payouts. Stress testing is important and if you can survive in the worst situations then you have a good plan that should allow you to sleep at night - it's good to be pessimistic. I've lost a lot in the recent US markets downturn, but I can sleep because I don't rely on drawdown for my income and low stress and being able to sleep are increasingly necessary as you get older.

It is good that you managed to find a strategy that has worked for you, and that you feel able to sleep at night.  A quality that is hard to put a price on!

I have taken the approach that I am going to do what should give me the best result in the long run on average, with a few educated guesses thrown in.  I am a perfectly average person, that will probably live to an average age, so am happy to have a plan that will, probably, on average, work out just fine.

So, using tracker funds, making contributions monthly, staying 100% equities etc, should on average give me a good outcome.  Admittedly, I am my own worse enemy by trying to time the market every now and then to get ahead, but I have a pretty high risk tolerance and have a great deal of flexibility about when I start drawdown and how much I take etc, so am not concerned for the long run.

I haven't ruled out an annuity in retirement though, that will depend on what is available and my pot size etc at the time. 

OldScientist

barnstar2077 said:

kempiejon said:

barnstar2077 said:
My prediction spreadsheet is set out in years, with each year taking last years amount, adding on x percent for growth, then add that years contributions.

I am aware of there being periods of zero growth, even losses, I am prepared to take the risk, as I can always just work till 57 if it doesn't work out.  He who dares, and all that! : ) 

I love my spreadsheets but the numbers can get ridiculous at decades out, I am aware of their shortcomings. Have you looked at any of the Monte Carlo simulations? https://www.firecalc.com/ is one or https://www.cfiresim.com/ another, more are out there. I found them more useful than my own work to look at a series of outcomes over several decades.

I took a route of 100% equities, leverage and tax treatments to maximise my path to FI. You've got to hold your nerve to keep investing when the portfolio has lost 40% of its value and rub your hands with glee at the bargains available. The down side to your I can always just work until 57 you have to keep working. It might not be 57 either, how can anyone know? I didn't set a date but a target income. Itemised spending analysis showed me when my investments would just cover my basic needs  - after that work become optional, to acquire more things or experiences or add a larger income to my retirement phase. 

Sorry, answered using my phone earlier and didn't really address the highlighted above.

I could live on my state pension alone if I had to (with a small maintenance fund).  So, although I expect to have more in retirement, even if things went quite wrong and nine years from now I find myself with only £180k at 57, I would still retire.

I have £225k now, and we are talking in nine years time, with my current projection being to have about £400k at 55. 

Going from £225k now to £180k in nine years time (while investing, and adding £80k+ in future contributions) I think you would agree would be a pretty pessimistic outcome.

In that worse case scenario I could still take £15k a year until SP kicks in and keep £30k as the maintenance fund (I would not remain 100% equities at that point though, that is for sure! :  )

I value my time over money, so unless my circumstances are so dire that financial concerns are of no concern to me, 57 is my maximum.

I know I asked earlier, but are you taking inflation into account? While you may (or may not) be right that your portfolio value in nominal terms is unlikely to be lower than £180k, it is quite possible that its real value will be.

Using your values of 9 years, a start value of £225k and adding £9k per year (inflation adjusted), using historical UK inflation and equity returns led to a worst case (in real terms) of £140k and a median of £470k (using US stocks raises the worst case to £170k).

If you can survive on the state pension alone, then in real terms, each year of delay means needing £12k less in your pot. So even at £140k, you'd only need to delay for 3 years or so.

edit: An almost risk free* way of securing your early retirement (based on having £180k in real terms in 9 years time) would be to use about £170k of your current pot to purchase inflation linked gilt TRTQ (which matures in 2034) which will give a pot of about £180k on maturity (given today's price of 96.16). Residual portfolio would remain invested together with coupons and new money giving (based on historical performance) and additional portfolio of somewhere between £70k (worst case) and £210k (median).

Admittedly this would not be quite as exciting as adopting a high risk strategy and, if the next decade turns out to be excellent for stock market returns, not less rewarding.

* UK government default is the sole risk.

barnstar2077

OldScientist said:

barnstar2077 said:

kempiejon said:

barnstar2077 said:
My prediction spreadsheet is set out in years, with each year taking last years amount, adding on x percent for growth, then add that years contributions.

I am aware of there being periods of zero growth, even losses, I am prepared to take the risk, as I can always just work till 57 if it doesn't work out.  He who dares, and all that! : ) 

I love my spreadsheets but the numbers can get ridiculous at decades out, I am aware of their shortcomings. Have you looked at any of the Monte Carlo simulations? https://www.firecalc.com/ is one or https://www.cfiresim.com/ another, more are out there. I found them more useful than my own work to look at a series of outcomes over several decades.

I took a route of 100% equities, leverage and tax treatments to maximise my path to FI. You've got to hold your nerve to keep investing when the portfolio has lost 40% of its value and rub your hands with glee at the bargains available. The down side to your I can always just work until 57 you have to keep working. It might not be 57 either, how can anyone know? I didn't set a date but a target income. Itemised spending analysis showed me when my investments would just cover my basic needs  - after that work become optional, to acquire more things or experiences or add a larger income to my retirement phase. 

Sorry, answered using my phone earlier and didn't really address the highlighted above.

I could live on my state pension alone if I had to (with a small maintenance fund).  So, although I expect to have more in retirement, even if things went quite wrong and nine years from now I find myself with only £180k at 57, I would still retire.

I have £225k now, and we are talking in nine years time, with my current projection being to have about £400k at 55. 

Going from £225k now to £180k in nine years time (while investing, and adding £80k+ in future contributions) I think you would agree would be a pretty pessimistic outcome.

In that worse case scenario I could still take £15k a year until SP kicks in and keep £30k as the maintenance fund (I would not remain 100% equities at that point though, that is for sure! :  )

I value my time over money, so unless my circumstances are so dire that financial concerns are of no concern to me, 57 is my maximum.

I know I asked earlier, but are you taking inflation into account? While you may (or may not) be right that your portfolio value in nominal terms is unlikely to be lower than £180k, it is quite possible that its real value will be.

Using your values of 9 years, a start value of £225k and adding £9k per year (inflation adjusted), using historical UK inflation and equity returns led to a worst case (in real terms) of £140k and a median of £470k (using US stocks raises the worst case to £170k).

If you can survive on the state pension alone, then in real terms, each year of delay means needing £12k less in your pot. So even at £140k, you'd only need to delay for 3 years or so.

My apologies for not fully addressing your question earlier as well.  I'm not overly concerned about inflation now, for a few reasons.

Firstly I panicked a bit and increased my contributions when covid and Ukraine hit.

Secondly, I am invested 100% in equities, which usually outperforms inflation (There have been periods of exception of course.)

Thirdly, because my own personal inflation levels have always been very low.  I'm not much of a consumer and prefer to lead a simple life.

Also, because I am quite aware of my finances and am pretty proactive at changing my habits if I feel value for money has decreased.  For instance, I used to travel into London more before they almost doubled the ticket prices and I no longer consider it to be a bargain.  I have also, since covid, reduced how often I have dessert and a coffee in restaurants at £24 a time for two of us and have started breaking a meal up with a walk and then popping into a café for a coffee and bit of cake at two thirds of the price.  Which is cheaper and keeps that special feeling you get when eating out going for longer.  Although yesterday we used a Taste card for the first time at a local Italian restaurant and had a two course meal with a couple of drinks for £30, so we may do that more often going forward.

My future SP is most likely going to be adjusted to keep up with inflation and should be more than enough to pay my monthly bills (especially as I am currently paying £70 a month on my mortgage, which puts my current bills, excluding the mortgage, at under £6k per annum at the moment.)

The idea of staying 100% equities and taking a few calculated risks to boost my pot is so that even if my pot should halve for a while at any point once I am retired I will not have to worry about it.  With the long term result still being better than if I had played it more cautiously throughout the whole of my life (which many people do, and there is nothing wrong with that if that is what they prefer.)

Some people are quite loss averse, which naturally affects their decision making.  I would rather risk losing a percentage of half a million than I would guarantee having a couple of thousand in a safe place upon retirement (an exaggeration, but you get my point.)

We will see how it all turns out! (The above may or may not age well! :  )

MeteredOut

Interesting thread.

There's a lot of click-bait social media about what will happen to the state pension for those under 50. Whilst I'll never subscribe to the "state pension will be means tested" claims, I do think people should stress test the models with the SP age being increased to, say, 70.

I don't think that would alter your figures/circumstances significantly, but worth considering.