Can I retire now? (age 40)

Pat38493

ent_moot said:

d6fs1l said:

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?

Yes, you're right-  the model I posted was just something I created in 10 minutes to demonstrate the theoretical point that constant rates are not inherently more optimistic (at least in average terms) than fluctuating rates. I'm not basing any decisions on this model, just illustrating a point. And also to illustrate that statements such as "you need understand that X "  where X is potentially untrue is going to be met with robust challenge from me.  

My actual model is vastly more sophisticated.

I suppose it depends how you define optimistic or pessimistic, but typically in retirement planning, financial planners will look at someone's spend plan during their retirement and then stress test it against historical data sequences of market returns, and potentially randomised monte carlo simulations.

The reality is that if you get 3 years of negative returns (or 3 years of double digit inflation like the 1970s) just after you stop working, but you still carry on drawing money out at the same real terms rate, you get a worse result than if you just apply the overall average future growth rate from your crystal ball.  To give an example, people who retired in the year 2000 are having a much worse time than those who retired in 2010, who faced about 10 years where almost every year had double digit growth.

Many people retiring want to know what their prospects are against the worst possible historic scenarios.  Based on your most recent posts about your earnings potential and what you want to do, you will do fine.

Thing is though, everything depends on our own definitions.  In your first post you said you are going to retire at age 40.  However now you've explained a bit more, in my view you are not retiring, you are just saying that you have reached financial independence and you have enough money that you feel you can do whatever you want.

Based on all of the uncertainties and the time horizon you are looking at, I think it's a stretch to say that you are 100% sure you will never need to earn a penny again, but if you are comfortable with that then it's fine.

ent_moot

Another thought occurred to me. I'm not dismissing your plan out of hand (because it's an interesting plan even if I wouldn't do it!), just pointing out some of the things I'd consider if it were me. As a software engineer I'm guessing you're on a good salary, and I imagine a lot more than £32k. So, notwithstanding that you lead frugal lives, a drop from £xxxx per year to £32k a year is likely to be a substantial drop, which may take some getting used to. With a good salary, if things go wrong (say in the house) then you can save for a few months and get back to where you were fairly quickly, however with a much more meagre income and limited savings behind you then it all becomes a little more stressful.

Is that something you have considered?

Well, it hasn't quite been like that for me. 

Literally ever since I started working, I've earned a lot more than I've ever spent.  When I first started working as a fresh grad, I was on a 28k (or possibly 32k, can't recall exactly) salary. I was single and renting a room in a shared house for £400 a month.  I was spending nowhere near what I was earning. 

Fast-forward 17 years, and I'm earning 200k+ , I have a family, child, house, pets.. and we still spend comfortably under 30k a year, with very little desire to spend more.

So, my salary has never really been coupled to my quality of life.  It has, indirectly, in the sense that having lots of savings is peace-of-mind, plus it meant I could dream about retiring very early.

So, yes, running out of money may become a concern in the run-up to accessing my private pension, but I don't think earning 32k instead of 200k is going to "feel" any worse for me, if I need to.

ent_moot

Pat38493 said:

I suppose it depends how you define optimistic or pessimistic, but typically in retirement planning, financial planners will look at someone's spend plan during their retirement and then stress test it against historical data sequences of market returns, and potentially randomised monte carlo simulations.

The reality is that if you get 3 years of negative returns (or 3 years of double digit inflation like the 1970s) just after you stop working, but you still carry on drawing money out at the same real terms rate, you get a worse result than if you just apply the overall average future growth rate from your crystal ball.  To give an example, people who retired in the year 2000 are having a much worse time than those who retired in 2010, who faced about 10 years where almost every year had double digit growth.

Many people retiring want to know what their prospects are against the worst possible historic scenarios.  Based on your most recent posts about your earnings potential and what you want to do, you will do fine.

Thing is though, everything depends on our own definitions.  In your first post you said you are going to retire at age 40.  However now you've explained a bit more, in my view you are not retiring, you are just saying that you have reached financial independence and you have enough money that you feel you can do whatever you want.

Based on all of the uncertainties and the time horizon you are looking at, I think it's a stretch to say that you are 100% sure you will never need to earn a penny again, but if you are comfortable with that then it's fine.

Absolutely fair. 

kimwp

ent_moot said:

Another thought occurred to me. I'm not dismissing your plan out of hand (because it's an interesting plan even if I wouldn't do it!), just pointing out some of the things I'd consider if it were me. As a software engineer I'm guessing you're on a good salary, and I imagine a lot more than £32k. So, notwithstanding that you lead frugal lives, a drop from £xxxx per year to £32k a year is likely to be a substantial drop, which may take some getting used to. With a good salary, if things go wrong (say in the house) then you can save for a few months and get back to where you were fairly quickly, however with a much more meagre income and limited savings behind you then it all becomes a little more stressful.

Is that something you have considered?

Well, it hasn't quite been like that for me. 

Literally ever since I started working, I've earned a lot more than I've ever spent.  When I first started working as a fresh grad, I was on a 28k (or possibly 32k, can't recall exactly) salary. I was single and renting a room in a shared house for £400 a month.  I was spending nowhere near what I was earning. 

Fast-forward 17 years, and I'm earning 200k+ , I have a family, child, house, pets.. and we still spend comfortably under 30k a year, with very little desire to spend more.

So, my salary has never really been coupled to my quality of life.  It has, indirectly, in the sense that having lots of savings is peace-of-mind, plus it meant I could dream about retiring very early.

So, yes, running out of money may become a concern in the run-up to accessing my private pension, but I don't think earning 32k instead of 200k is going to "feel" any worse for me, if I need to.

Super interested in your career trajectory. I started as an engineering grad on 26k 17 years ago, I currently work as a systems integration engineer with software engineers - none of the software engineers will be earning over 70k. It's known that the company doesn't match pay in the software industry (because they are lumped in with the rest of us aerospace engineers), but that seems like a huge gap to £200k. 

BikingBud

With c200k per year I would err on the side of caution and make some of those risky areas more certain.

Not because it is just one more year(many that do that are somewhat perhaps even over pessimistic) but because it really does de-risk many things.

If you are earning £200k then 60k into pension should still see you with ~£80k net.

Bring the house move forward and kill those costs before reviewing and considering again? 

AlwaysLearnin

ent_moot said:

I mean what you suggest is presumably possible, but is it really desirable to take out a mortgage of £420k and then go straight into early retirement? Seems an odd way to fund retirement. 

Agreed, and I've modelled this and it's much less favourable. The longer I'm lending money, the more I'm wasting on paying interest. 

This is why I think it makes most sense to "bridge the gap"  from 53 to 57 (until I get private pension) as late as possible. I think the very worst case (for some illogical reason, banks choose not to grant a mortgage) is that I'd have to bridge the gap with 2-3 years of work. I think the most likely scenario is that I would be able to demonstrate the affordability (and guaranteed future affordability) of the mortgage purely based upon my private pension, and failing this, I would find some short-term way to increase income in order to get the mortgage. 

I think what's being suggested is effectively getting your mortgage/funding pot in place up front, whilst you have the earnings to back up the application. 

In your scenario you pay the house off up front, and hope to get a mortgage later to bridge any shortfall to pensions.  If you follow the suggested offset mortgage route, instead of paying for the house outright, use those funds to FULLY offset the mortgage balance with an offset mortgage, then there wont be any interest costs (whilst it's fully offset).  You can even potentially set it up so that mortgage payments come out of the offset savings, so that it all happens in the background, with the offset savings balance reducing in line with the outstanding mortgage amount.  As long as you set the term and amount up so that you still have enough mortgage term and money in the offset account to bridge the gap to pensions when you need it*, it can just sit there and wait for whenever that might be.

* you will also need to factor in a bit more to cover the interest that you will need to pay when you do withdraw from the offset funds...  But you would need to pay interest at that point with your plan anyway.

ent_moot

Super interested in your career trajectory. I started as an engineering grad on 26k 17 years ago, I currently work as a systems integration engineer with software engineers - none of the software engineers will be earning over 70k. It's known that the company doesn't match pay in the software industry (because they are lumped in with the rest of us aerospace engineers), but that seems like a huge gap to £200k. 

Even within my company, my salary is extremely unusual for a SE (top 0.05%).  The average salary for an SE is closer to 70k at the company.  

This is why it's a big decision for me:  I have zero expectation of being able to achieve anything like the same salary (unless I respond to those head-hunters at Meta who have been contacting me every 6 months for the past 5 years - something I have no intention of doing).

>Bring the house move forward and kill those costs before reviewing and considering again? 

Probably a wise move, excusing the pun.

kempiejon

I'm planning to retire in the next few months, and wanted to sanity-check that it sounds reasonable, given my situation: 

Reasonable is the sticking point. If one wanted to give up work more than anything else change the rest of your lifestyle so you can. Extreme frugality is a life, I can feed 2 of us for less than £1 a day but porridge and lentils are boring.

If your modelling is good and you've covered all your expenses and you get average stock market returns come pension access you'll likely make it. Before you get your pension how much you can or have to cut back with low income is personal. Eventually it is to the detriment of a reasonable life.

ent_moot

£1 a day but porridge and lentils are boring.

The thing is that I really like porridge. It's healthy too, if you get the chonky type with >=12% protein. It's just a case of adding enough cinnamon.  I have literally had nothing but porridge for breakfast for the past decade (apart from the very occasional English Breakfast when travelling). 

I think the reason most households might struggle on an average/low income (let's say 32k) is because of housing costs (rent/mortgage) and repayments on things like car loans, expensive phone contracts etc. 

Personally, I think 32k is very comfortable, as I'm lucky enough to have no housing costs, no loans, and can pretty much DIY anything (apart from boiler / gas).   I suspect we spend a lot more than the average family on groceries, as we like to eat healthily. 

jimi_man

Ha ha, another porridge fan here! Scotts Porage Oats, made with water and little salt.  Occasionally a sprinkle of brown sugar.