Early retirement plan - does it work?

canaryjim

Hoenir said:

canaryjim said:

Assuming inflation of 3% and stocks at 7%, cash at 3%

If stocks consistantly returned 4% above the rate of inflation. There'd be no need to hold any cash. 

This is understood - I have run my numbers through historic data and Monte Carlo tests and it seems to only need a course correction 10-15% of the time.

kimwp

Have you thought about your child's finances after college and if they will be financially independent? And possible care home fees (can be £60 pa per person). My plan is to use my home for care fees if needed, but I won't have any financial dependents at that point.

canaryjim

kimwp said:

Have you thought about your child's finances after college and if they will be financially independent? And possible care home fees (can be £60 pa per person). My plan is to use my home for care fees if needed, but I won't have any financial dependents at that point.

Hello Kimwp 

I did think about care home fees - its difficult. We could both need it, perhaps in our 70s and perhaps for 5-10 years each based on current mortality rates.  By that time inflation will probably have doubled that 60k and so our fund including home value would need to absorb £100k-200k a year. I would need a huge fund entering our 70s to cater for that. I am thinking along your lines - that the house may deal with that risk in the first instance.

One thing i have noticed is that if some kind of state pension arrives, it does mean that a lot of the time the equities in the fund take on a life of their own because you interfere less with them. They might help a bit - or be swallowed up first i guess.

I think our son will be ok - he cant navigate our largely non neuro diverse orientated education system but he is a determined and able person - i would try to steer any surplus funds to him in life (ive assumed no inheritances here but in truth they are probable and substantial) and then house him for as long as we can / he wants us to.

Thank you 

canaryjim

JamesRobinson48 said:

I wouldn't want my future comfort to depend on equity returns during the next 30-40 years averaging as high as CPI + 4%. My own spreadsheet makes a much more conservative assumption. 

It might not be realistic to project £30k total living costs for the two of you from age 80. Care home fees for my Dad (94) are £9k monthly, and his annual fee increases consistently exceed CPI. Dad's been there for 4 years and might live to 100.

You're assuming your kid will be self-supporting from age 21, despite being in SEND education. Is there a risk of the child never becoming financially self-supporting, and living with you indefinitely?  If so, that might impact your financial projections and also make it hard to downsize. Incidentally, that's the situation I've found myself in. Moreover, in my long experience school fees tend to increase faster than CPI.

Presumably there will be some level of income tax to pay on your SIPP drawdowns. Assuming your ties to the UK would make it hard to relocate to a low tax jurisdiction.

As an additional rate taxpayer in middle age, you still have the precious opportunity to materially improve your later life financial prospects by continuing with the day job for several more years. In similar circumstances, and wanting to go at 51, I kept going until agreeing a voluntary severance package at 56. I'm still unsure if hanging on for another 5 years was for the best overall, on health grounds. But it did at least provide a secure financial cushion. A difficult and highly personal decision.

Thank you James this is really helpful. It is a hard call. Bizarrely i actually worry a great deal about finding something temporary to cover the education costs in circumstances where i was earning so much more. I appreciate that having tapped into that higher income I am very fortunate. Its interesting that you had a similar conundrum. I am driven a bit in this having seen my wifes father go at 58, having been diagnosed with something terrible only a few months into retirement. You never quite know what the deal is - if you only have 5-10 years you would think so differently perhaps.

In terms of the living costs - Ive assumed these rise with inflation so it would be £30k inflated so perhaps £54k at 70, £72k at 80 etc but i appreciate that may not be enough.

Fair comment re school fees and noted re the care home inflation.

I appreciate everyones comments, thank you

kempiejon

My gut reactions was that taking £50k from a 1M pot that's 40-50% cash depending how to value the house is too much cash for a 50yr old with earning potential and perhaps 4 more decades to depend on that pot. When I think about the compounding and inflation that £50k draw might not be safe. If the OP has run a few iterations of different Monte Carlo simulations fair enough my quick run had failures but I didn't scrutinise the input info.
However intending to drop a wage next year perhaps a big pots suit this circumstance.

canaryjim

kempiejon said:

My gut reactions was that taking £50k from a 1M pot that's 40-50% cash depending how to value the house is too much cash for a 50yr old with earning potential and perhaps 4 more decades to depend on that pot. When I think about the compounding and inflation that £50k draw might not be safe. If the OP has run a few iterations of different Monte Carlo simulations fair enough my quick run had failures but I didn't scrutinise the input info.
However intending to drop a wage next year perhaps a big pots suit this circumstance.

Thank you Kempejon - I think the MC worked out because it’s assuming two full triple locked state pensions arrive in time. I have cut those in half and it still works but it’s tight ..!

Hoenir

canaryjim said:

Hoenir said:

canaryjim said:

Assuming inflation of 3% and stocks at 7%, cash at 3%

If stocks consistantly returned 4% above the rate of inflation. There'd be no need to hold any cash. 

This is understood - I have run my numbers through historic data and Monte Carlo tests and it seems to only need a course correction 10-15% of the time.

As with the post GFC QE ultra cheap money era . History constantly rewrites itself. As an investor it's what you don't know is going to happen in the future that presents the greatest danger. Get you investment strategy wrong and the outcome can be financially damaging. 

Cus

canaryjim said:

Age 51, wife 46

Expenses target - 50k net pa, reducing to 40k @ 70, 30k @ 80

House paid for but too big (value 1m)

Two full state pensions likely

Potential fund and current values:

* Cash available now - 400k (ISA / Premium Bonds) - split with spouse 
* SIPP - 550k (from 57) - my name only, global equity 100%
* Downsize @ 60 - taking 1/5 of house cash (today’s money less costs - say 150k)

Other circumstances:

* Current job is high income but high stress and taking toll physically with little option to part time / reduce responsibilities,
* Poorly and ill parents in 70s that need more help

* only child @ private SEND school (25-30k pa) and we are assuming this is paid until 18, with a comparable spend on college from 18-21

The idea - quit current role at 52, and remote work part time - house income with wife could be 20-40k income pa - we fund the 50k expenses from cash pot and fund school / college fees from that remote / temp work till 57. At this point reduce draw on cash and draw on equities as well.

Assuming inflation of 3% and stocks at 7%, cash at 3%

Any comments appreciated

My comment would be to consider if the trade of between being 53, 54, 55 years old etc and still working in your stressful job etc to guarantee the numbers is better than being 53, 54, 55 years old and have gone for it and need make a few financial adjustments if you are a bit short at that time.  It looks like you are already in the ball park financially, so perhaps it's not a financial decision 

canaryjim

Cus said:

canaryjim said:

Age 51, wife 46

Expenses target - 50k net pa, reducing to 40k @ 70, 30k @ 80

House paid for but too big (value 1m)

Two full state pensions likely

Potential fund and current values:

* Cash available now - 400k (ISA / Premium Bonds) - split with spouse 
* SIPP - 550k (from 57) - my name only, global equity 100%
* Downsize @ 60 - taking 1/5 of house cash (today’s money less costs - say 150k)

Other circumstances:

* Current job is high income but high stress and taking toll physically with little option to part time / reduce responsibilities,
* Poorly and ill parents in 70s that need more help

* only child @ private SEND school (25-30k pa) and we are assuming this is paid until 18, with a comparable spend on college from 18-21

The idea - quit current role at 52, and remote work part time - house income with wife could be 20-40k income pa - we fund the 50k expenses from cash pot and fund school / college fees from that remote / temp work till 57. At this point reduce draw on cash and draw on equities as well.

Assuming inflation of 3% and stocks at 7%, cash at 3%

Any comments appreciated

My comment would be to consider if the trade of between being 53, 54, 55 years old etc and still working in your stressful job etc to guarantee the numbers is better than being 53, 54, 55 years old and have gone for it and need make a few financial adjustments if you are a bit short at that time.  It looks like you are already in the ball park financially, so perhaps it's not a financial decision 

Thank you Cus, that’s really helpful 

OldScientist

canaryjim said:

Age 51, wife 46

Expenses target - 50k net pa, reducing to 40k @ 70, 30k @ 80

House paid for but too big (value 1m)

Two full state pensions likely

Potential fund and current values:

* Cash available now - 400k (ISA / Premium Bonds) - split with spouse 
* SIPP - 550k (from 57) - my name only, global equity 100%
* Downsize @ 60 - taking 1/5 of house cash (today’s money less costs - say 150k)

Other circumstances:

* Current job is high income but high stress and taking toll physically with little option to part time / reduce responsibilities,
* Poorly and ill parents in 70s that need more help

* only child @ private SEND school (25-30k pa) and we are assuming this is paid until 18, with a comparable spend on college from 18-21

The idea - quit current role at 52, and remote work part time - house income with wife could be 20-40k income pa - we fund the 50k expenses from cash pot and fund school / college fees from that remote / temp work till 57. At this point reduce draw on cash and draw on equities as well.

Assuming inflation of 3% and stocks at 7%, cash at 3%

Any comments appreciated

You may already have done so, but it is very useful to generate a spreadsheet with annual anticipated expenses, non-portfolio income sources (e.g., part time work and state pensions) to then see what the withdrawals would be.

If I've put your data in correctly, you appear to have the first 6 years where 20k per year is required (I've assumed PT work brings in 30k), the next 9 years where 50k is required, followed by 3 years of 38k, two years of 28k, 8 years of 16k and then 6k per year thereafter. All values are real (i.e., inflation adjusted).

I was then curious as to how much it would cost to build an inflation linked gilt ladder that would provide that income (until you are 100yo) using the advanced tab at https://lategenxer.streamlit.app/Gilt_Ladder

Anyway, FWIW the total amount required to build the ladder comes out at £740k. In other words, you could fund your anticipated expenditure this way and still have £200k in your pot for unexpected expenditure (or legacy) as well as the potential amount to be gained from downsizing. The largest risk would be UK government debt default.