Can I retire now? (age 40)

Cus

QrizB said:

Cus said:

QrizB said:

coyrls said:

ent_moot said:

>Is that 5% real (above inflation) or nominal?

I assume 5% nominal.  I model for inflation by increasing my outgoings by 2% a year.

Neither of those will be a constant, you need to understand the effects of sequence of returns and sequence of inflation.  Modelling constant values for investment returns and inflation will give you a much more optimistic picture than the likely reality.

For the benefit of the OP and the interest of everyone else, I plugged his numbers into cFIREsim. It uses US numbers (which are typically more optimistic than UK ones). Links take you to the models.

If £900k (savings plus pension less house move) were accessible from day 1, we see 100% success to age 100 and no failures.

With £500k (savings, no house move) accessible, we see 80% success in getting to 2053 without running out of money.

With £300k (savings less house move) accessible, we see 18% success.

(If OP were 50, those 80% and 18% become 100% and 96% respectively.)

Which withdrawal method did you use in cfiresim?  £900k at start, needed to cover 60 years, 32k a year, so that's approx a 3.5% SWR?

The default one   If you click throuh to the links you can see exactly what parameters I fed it, and can tweak to suit.

Edit to add: "spending plan - inflation adjusted" and "inflation type - CPI historical".

Thanks, sorry, I replied before clicking your links. Has that app been changed? It used to be a black screen with lots of options for withdrawal, now it seems a bit more basic in the options. You used to be able to select withdrawal strategies, much more options for simulation runs etc.  I couldn't even run a simulation while trying to use a constant withdrawal rate in this newer version.

Isthisforreal99

It's one of these 'why ask the question' when you seemingly have all the answers and are going to crack on regardless.

d6fs1l

Apologies if I am wrong, but I think your online model does not deduct any lump sum taken from the starting private pension, whereas you suggested in an earlier post you would use that to repay the mortgage you intend to draw to bridge the gap until the pension is available?

hugheskevi

I'm in a somewhat similar situation, but a bit older - age 48, recently moved to a similar value house, retiring in the next few months. My thoughts having read through the thread:

(1) Frugality from choice is very different to frugality from need.

(2) After buying our new house, as well as all the standard moving costs, I then paid out around £150,000 in house renovations, furnishings, and decorating costs. Bigger houses come with bigger costs - the gas and electric costs at this time of year run to about £400 per month, whilst council tax is about £4,000 per year.

(3) The older I have got, the less I could ever contemplate returning to work. I used to cycle 5 days a week into the office come rain or shine, making my own lunch each morning to take with me. But since COVID I have worked either mostly or entirely from home. Every year that goes by, my capacity for doing things I don't enjoy reduces - I couldn't envisage going back to how I was working in my 30s. That is partly as the last 6 years have been very pleasant with a new working pattern, admittedly.

(4) You can get around the future mortgage without income problem by taking out a fee-free offset mortgage (eg from Yorkshire Building Society) when you purchase the new house. Immediately fully offset it, and in the future you can draw from the offset savings.

(5) It is a shame to be passing up income tax allowances, after what sounds like years of paying tax at 62% / 47%. Even just using up the Personal Allowance doing something enjoyable part-time would make a significant difference. However, working just a bit longer at a much higher salary would make a bigger difference. Examining the difference in future resources from one more year of work usually has a huge impact once you are close to being self-sufficient, and all of the income can be allocated to future use.

(6) Being retired at a young age gives a lot of hours in the day when you will want to be doing things, and those things may well cost enough money to increase annual expenditure noticeably.

(7) For comparison, when we retire later this year, aged 48, across my wife and I, our assets will be a house worth about £800,000, DC pensions of about £500,000, DB pensions of £63K before tax from age 55, ISAs of £375,000, and no debt. I could have retired before now, but I never want to be concerned about cash, and retiring at 48 is very early anyhow.

(8) Rather than retiring very early, I took several periods off to travel, amounting to about 5 years in total during my career. That had very beneficial tax effects and kept a lot of options open. I also passed up promotions at work, prioritising a pretty easy job I quite enjoy over a more senior role that I would not enjoy as much.

(9) As I approached retirement, the importance of risk management and asset preservation became far more important than it had been even 5-10 years earlier. When income is high relative to assets, risk is of minimal importance. Once that reverses, making good losses from an aggressive asset allocation at the wrong time might be very hard, especially if you are drawing down assets rather than accumulating.

OldScientist

Just for interest I ran your first 17 years (assumed £500k - i.e., no problem with mortgage) with £32k per year income using the UK historical simulator at https://www.2020financial.co.uk/pension-drawdown-calculator/

Of course, the outcomes depended on asset allocation but failure rates ranged from 26% (40% equities, 60% cash) to 15% (80% equities, 20% cash).

Some technical notes on your nicely presented simulator:
1) real asset returns (which negates the requirement to model inflation separately) are usually modelled using a lognormal distribution although this ignores mean reversion (assuming it exists) and 'fat tails'.
2) The 'long-term' mean of returns depends on the period selected. For example, over 100 years UK equities have returned about 5.2% real. Over rolling 30 year periods since 1872 the real return has varied from 1.1% (1st percentile), 5.3% (median) to 10.5% (99th percentile). In other words, forcing the mean of the random returns to conform to the selected target mean is unrealistic.

I also note that a 17 year index linked gilt ladder to provide £32k per year would currently cost about £490k to build (see https://lategenxer.streamlit.app/Gilt_Ladder ).

OldScientist

Aylesbury_Duck said:

QrizB said:

ent_moot said:

Aside from the originally stated assumptions, I also assume that my pension and S&S ISA grow at 5% per year, which seems reasonably conservative.

Is that 5% real (aove inflation) or nominal?

5% annual real investment growth is *not* conservative.

Most people would work with 1% or 2% real growth. The more conservative of us (myself included) work on 0%.

Me too.  All my planning works on today's figures, assuming nil growth and no inflation.  It's probably unnecessarily prudent but if the numbers work on that basis, they're almost certainly safe.

FWIW, I'm another one in the '0% club' since

a) it is easy to calculate
b) Depending on the timescale, while conservative it is not entirely unrealistic. For example, historically a portfolio consisting of 30% UK equities*, 30% US equities, 20% UK long gilts, and 20% UK cash had real returns ranging from -3.9% (1st percentile), 0.5% (10th percentile) over rolling 10 year periods, 0.3% and 2.0% over 20 years, and 1.8% and 2.9% (30 years).

In the worst historical cases, sequence of return risk reduces the 'smoothed' rate of return. For example, the well known 4% 'rule' for US retirees over 30 year retirements implies a real rate of return of 1.3% (e.g., see excel rate function) whereas the worst case real return for a 30 year US 60/40 portfolio was nearly 2 percentage points higher at 3.1%.

* All asset returns, exchange rates, and inflation from macrohistory.net

Pat38493

I might have missed it, but is the £32K that you are looking for per year net or gross?   This will make a big difference to the success rates.

In the end I think Hugh’s point 6 above is a key one - if you are retiring at 40, what is your vision for what you are going to do with all your time for the next (hopefully) 50-60 years?

If you have been earning 6 figure salary up to now, and putting away most of that money with the intention of retiring in your 40s, ask yourself have you been living frugally up to now because you enjoy living frugally and would like to live like that forever, or because you were driven by a goal of getting to financial independence?

How many extra years SP would you need to buy to get the full state pension?  Each year costs about a grand real terms.

How is your money currently invested in the different pots?  You will need to have a pretty high portion of highly diversified equities for your plan to have a good chance of succeeding.

Are you familiar with all the academic work and studies around sequence of return risk?  As pointed out by Old Scientist, you might have made assumptions in your modelling that are different to how real markets have behaved historically.  Typically, a multi year period of negative returns and/or high inflation may damage your plan too much unless you adjust dynamically your drawdown.

Base on what Old Scientist is mentioning, consider an approximately 15% historical chance that you will need to either cut spending in real terms for a period of time, or go back to work for a period of time in the future.  Higher if you end up spending more money due to all the extra free time you have.  However - you wouldn’t need to go back to a high stress high salary job - you probably would only need to do a bit of work here and there to top it up.

Pat38493

OldScientist said:

Aylesbury_Duck said:

QrizB said:

ent_moot said:

Aside from the originally stated assumptions, I also assume that my pension and S&S ISA grow at 5% per year, which seems reasonably conservative.

Is that 5% real (aove inflation) or nominal?

5% annual real investment growth is *not* conservative.

Most people would work with 1% or 2% real growth. The more conservative of us (myself included) work on 0%.

Me too.  All my planning works on today's figures, assuming nil growth and no inflation.  It's probably unnecessarily prudent but if the numbers work on that basis, they're almost certainly safe.

FWIW, I'm another one in the '0% club' since

a) it is easy to calculate
b) Depending on the timescale, while conservative it is not entirely unrealistic. For example, historically a portfolio consisting of 30% UK equities*, 30% US equities, 20% UK long gilts, and 20% UK cash had real returns ranging from -3.9% (1st percentile), 0.5% (10th percentile) over rolling 10 year periods, 0.3% and 2.0% over 20 years, and 1.8% and 2.9% (30 years).

In the worst historical cases, sequence of return risk reduces the 'smoothed' rate of return. For example, the well known 4% 'rule' for US retirees over 30 year retirements implies a real rate of return of 1.3% (e.g., see excel rate function) whereas the worst case real return for a 30 year US 60/40 portfolio was nearly 2 percentage points higher at 3.1%.

* All asset returns, exchange rates, and inflation from macrohistory.net

I have a few different models running and one of them is this flat 0% on a relatively simple spreadsheet.  As said above, if the numbers work on this basis, they are almost certainly safe.  There were a few worst case historical periods where even this approach might fail.

jimi_man

Just some comments/questions that occur to me. (I'm assuming growth = inflation so all figures are in today's numbers).

No matter what anyone says, if you retire at age 40 then at age 50-55 you decide you want to go back to work for a bit, that's going to be difficult. 10-15 years out of work is a huge gap and doesn't look good on a CV - employers don't like gaps for one thing. Also many industries will have changed hugely - often in terms of tech and there might be a significant learning gap. Just worth bearing in mind. I know some people who have tried to get back to work after a long time out of work and it's not easy.

In terms of getting a mortgage, how would this work in practical terms? Let's say they give you the £200k loan based on your savings. You will then have £200k to live on but you'll have to pay the interest back on a monthly basis. You can't get an offset mortgage with pension savings AFAIK and you obviously can't delay payback of the interest. So, I'm guessing that will be another £7500 a year maybe?

Just a general point. You say that you live a relatively frugal lifestyle, (though that's a slightly meaningless term since it's quite subjective), but how does that translate to things like holidays, treats for your child, days out and stuff? If I was having to tighten my belt and reduce family/child spending/opportunities because I couldn't be bothered to work then personally, I'd feel a little guilty. It's a different kettle of fish if your figures were very healthy, or you're twenty years older but that's not the case here and the figures are marginal. My wife and I are just retired at 59, we consider we are relatively low spenders and yet £32k net wouldn't be enough. 

The bit that would concern me the most is, that having made the decision to retire at age 40 with £x amount of savings to last until the first pension became eligible, you are then immediately blowing 40% of that £x on purchasing a new house, which if nothing else is a hugely illiquid asset. That seems foolish to me.

Then once you reach 57 and you can access your £400k pension (£600k minus the £200k which will have paid of the mortgage) that will have to do for the rest of your life along with SPs. Is that enough? It does look slightly more encouraging than the figures from age 40, which look decidedly poor. 

I don't know about others, but from 40 onwards I really started to plough more money into savings as financially we got in a better position, but you're giving that period up in order to live frugally? Why? The one thing you haven't said is why you are giving up work, what's the reason behind it?

barnstar2077

jimi_man said:

Just some comments/questions that occur to me. (I'm assuming growth = inflation so all figures are in today's numbers).

No matter what anyone says, if you retire at age 40 then at age 50-55 you decide you want to go back to work for a bit, that's going to be difficult. 10-15 years out of work is a huge gap and doesn't look good on a CV - employers don't like gaps for one thing. Also many industries will have changed hugely - often in terms of tech and there might be a significant learning gap. Just worth bearing in mind. I know some people who have tried to get back to work after a long time out of work and it's not easy.

In terms of getting a mortgage, how would this work in practical terms? Let's say they give you the £200k loan based on your savings. You will then have £200k to live on but you'll have to pay the interest back on a monthly basis. You can't get an offset mortgage with pension savings AFAIK and you obviously can't delay payback of the interest. So, I'm guessing that will be another £7500 a year maybe?

Just a general point. You say that you live a relatively frugal lifestyle, (though that's a slightly meaningless term since it's quite subjective), but how does that translate to things like holidays, treats for your child, days out and stuff? If I was having to tighten my belt and reduce family/child spending/opportunities because I couldn't be bothered to work then personally, I'd feel a little guilty. It's a different kettle of fish if your figures were very healthy, or you're twenty years older but that's not the case here and the figures are marginal. My wife and I are just retired at 59, we consider we are relatively low spenders and yet £32k net wouldn't be enough. 

The bit that would concern me the most is, that having made the decision to retire at age 40 with £x amount of savings to last until the first pension became eligible, you are then immediately blowing 40% of that £x on purchasing a new house, which if nothing else is a hugely illiquid asset. That seems foolish to me.

Then once you reach 57 and you can access your £400k pension (£600k minus the £200k which will have paid of the mortgage) that will have to do for the rest of your life along with SPs. Is that enough? It does look slightly more encouraging than the figures from age 40, which look decidedly poor. 

I don't know about others, but from 40 onwards I really started to plough more money into savings as financially we got in a better position, but you're giving that period up in order to live frugally? Why? The one thing you haven't said is why you are giving up work, what's the reason behind it?

This last paragraph is so true, I have been able to really maximise my pension contributions and investments since my mid forties.  Even a few more years, with the money ploughed into your ISA, would make a massive difference.

Are you trying to escape your current position, if so, then reduced hours or a different workplace might be what you are really looking for?