Retirement in my 40s - Does the plan work

Money_Mad

I'd appreciate some feedback from people with experience of retirement planning on whether I'm in a position to retire now at 45, or whether I should continue working for a few more years.

My current position is:

• Age: 45
• S&S ISA: £450,000
• SIPP: £460,000
• Total invested: £910,000
• Final salary pension: £15,000 a year from age 65
• State Pension: Expecting the full State Pension from 68, although I will need to make some additional NI contributions to qualify for the full amount
• House: Mortgage-free
• Dependants: None
• Target retirement income: £32,000 a year rising with inflation

The ISA and SIPP are currently invested in global index funds.

My thinking is that the £450k ISA could provide the main source of income between 45 and 58, allowing the SIPP to remain invested for longer. From 58, I would start drawing from my SIPP to make use of my tax free allowance as well of shifting funds from SIPP to ISA. Then from 65 the £15k final salary pension would provide a guaranteed income, with the State Pension adding further income from 68.

I'm trying to work out whether £910k invested at age 45 is enough to sustainably provide £32k a year, particularly given that I have no mortgage or dependants and will eventually have £15k/year from the DB pension and the State Pension.

I'm also conscious that the biggest risk is the first 0–5 years of retirement and the possibility of a major prolonged market downturn early on. I have tried to perform some Monte Carlo analysis using historical returns and inflation figures and get at least 90% chance of success assuming I continue with the same inflation adjusted withdrawal rate. Realistically I can live off far less than £32k a year that I’m targeting.

What would you do in my position?

• Is £32k a year realistic from age 45?
• Does the withdrawal strategy between the ISA and SIPP make sense?
• What strategies would you put in place to avoid sequencing risk? I have started looking at gilt ladders or else having a sum sat in cash earning 4-5%
• Am I overlooking any major risks or costs?

QrizB

This sounds like a job for cFIREsim and Guiide.

https://cfiresim.com/

https://www.guiide.co.uk/

What do they forecast for you?

mark_cycling00

That's a lot of years of free time on a low-average salary. Won't you want to have fun, holidays, do new activities that might need money?

I'd imagine that winter can be tough if you're retired, active and healthy but trying not to spend much.

Personally I would want to future proof my life a bit before retiring. Ie. Solar panels, big battery, good quality electric car, good quality Aircon in at least a living room and one bedroom. Perhaps a lot of rainwater storage.

Just 2 years of your current wealth growth would easily pay for this.

Another unprovable personal opinion is that given the way the economy is going, I'd treat your pension as "safe" but anticipate some unexpected taxes on your ISAs. And potentially ISAs being scaled down. I'm talking about over the next 20 years.

Other opinions are valid too if course!

DRS1

Is £32k a year realistic from age 45?

Only you can know that. Is it a big step down from what you currently earn? Have you done some calculations of what you spend in a year (adjusted for those items which will become more or less expensive when you don't work). The latter would usually be recommended. Personally I just stuck a finger in the air and picked a figure and have no idea if I was right but when I read posts on here I do feel I should check.

Does the withdrawal strategy between the ISA and SIPP make sense?

Well you do appreciate that you won't be able to draw from the SIPP before 58 (maybe later?) so your only source for the first 13 years will be the ISA - or going back to work.

What strategies would you put in place to avoid sequencing risk? I have started looking at gilt ladders or else having a sum sat in cash earning 4-5%

I confess that I would be nervous if I was relying on cash savings generating 4-5% as the sole means of giving me £32k pa. Interest rates can change. When I "retired" interest rates were 5% and then a year or two later they were 0.5%. Yes you could say there was a reason for that and maybe that reason won't happen again but it is worth a what if.

Gilt ladders are fine but are you going to get 15 years of £32k (index linked) out of your S&S ISA on its own? There is a gilt ladder tool which may help with that question here

Gilt Ladder Builder · Streamlit

Am I overlooking any major risks or costs?

You say you have no dependants. With all this free time you will have not working is there a chance you might acquire some?

Bostonerimus1

I'd say the chances of your plan working are good because your initial drawdown will be less than 4% of your invested assets. But you will need discipline to control your spending and you should have a detailed budget so you can track spending. As an example I retired at 52 with a plan similar to yours and a final salary pension that started at age 55 and I now have more invested than when I started. Since I retired stock market returns have been great, but that could have been different and it could easily turn around, so you must have a plan to insulate your self from failure as well as one for success. That should include asset allocation between equities and bonds, dividend funds or investment trusts etc. and maybe products like annuities.

Money_Mad

https://forums.moneysavingexpert.com/discussion/comment/82154132#Comment_82154132

Just to be clear the cash savings would just be there in the event of a market crash, in which case I could live off those cash savings for a couple of years and allow time for the market to recover

My income would come through selling my investments except for the case where there is a market crash

Bostonerimus1

https://forums.moneysavingexpert.com/discussion/comment/82154222#Comment_82154222

You should research income generation other than by just selling your investments. So interest and dividends can provide a relatively stable floor that might be added to by capital gains and you might not have to touch principal. You might also dedicate some capital to a bond ladder or even an annuity. For long term income generation I think diversification is important and you have a good start towards that with the final salary and state pensions.

kempiejon

If I really wanted to retire and could live off £32k a year and be fulfilled with my lot without a job then yeah, in your position provided retirement trumps other considerations jump. £32/910k 3.5%, add a gilt ladder for 5 or 6 years, rolling or extending in good times.

Do you have the data to check your average investment return over the past decade, can you successfully pace 3.5% and inflation for decades to come? Can you take the final salary pension earlier if reduced, a guaranteed income floor is useful for the unemployed dependant on market whims.

Triumph13

If (big if as others have noted) you are confident in the robustness of your £32k pa spending figure, then I would say the numbers work.

The biggest risk is the pre-58 period as you have only your ISAs to live off and really can't afford a big market crash. In your shoes I would be turning almost all of them into an ILG to give you your full £32k pa until age 58. Fortunately, you have enough for this, plus a little left over for emergencies - although you would need to think carefully about whether that emergency fund is big enough or not.

Looking at the other end of the retirement period, you probably want around £10k pa of sustainable income from your DC funds to get your desired £32k pa post tax once DB and SP are on line. You also need to bridge the gaps to your DB (7 years @£22k pa) then SP (3 years @ £10k pa). Your pension already has nearly enough for this and you are leaving it to compound for 13 years, so that should be find. You could look at setting up further gilt ladders within the pension for those bridging funds nearer the time.

TLDR it should work, but only if you are sure of the £32k number and don't mind burning through an awful lot of capital.

OldScientist

As per @Triumph13 , building a certain (in the absence of UK debt default) income stream using a collapsing ILG ladder for the first 13 years would cost you £385k, so leaving you with a relatively small emergency pot of £65k. One approach to expenditure is to divide it into core spending (e.g., bills, food, clothing etc.) and discretionary spending (hobbies, etc.) and support the former with income streams that are not market dependent (SP, DB pension, RPI annuities, and ILG ladders) and use a dynamic withdrawal approach from a risk portfolio to supply the discretionary income (which will then vary from year-to-year).

Two questions about your DB pension:

Is it fully index linked?

Is the £15k a projected amount assuming you continue to contribute? In any case, looking at the basis of the calculation of that amount is important (and often not entirely clear from pension documentation!)

Cobbler_tone

You’re in a very good position and retirement sounds so final. Aim to retire but if it isn’t working out how you want get another job. You may feel differently after a year or two.