Retire at 50 on £800k?

[Phaedrus]

I'm trying to reconcile my own financial calculations with the exponentially more Draconian provisions I read about online. Here are the basics;

I'm 48, my partner is 53
I work full time on 72k, she is part time and will quit fully next year.
We have no kids and no mortgage on a 250k house.
Between our 2 pensions and cash in an Income Distribution Bond, we'll have over 800k come the end of 2020, when I'm 50.

As above, if I'm to believe the various experts, this will not allow for a comfortable (40k pa) retirement.

My simple sums say; even at 3% growth (24k), if we were to consume 16k from the capital, there's the 40k.... (OK, I need to take interest into account, but that can be optimised), plus I acknowledge that the reduction in the capital will hit the annual return, but even with those figures, it would appear unlikely we're ever going to get near running out of money.... especially given the fall-back plan of downsizing and liberating 100k or so.

We do not have an expensive lifestyle, and have no plans on leaving an inheritance...

Am I being foolishly optimistic?

[Chrysalis]

Just one point - what 'pensions' do you have? Personal pensions can normally only be accessed at age 55 (thought to be going up to 57 in 2027 or so) so what will you live on until you can get your pensions? What is an 'Income Distribution Bond'? And what is the current value of your pensions and other savings/investments - do you have ISAs for example?

40k is 5% of 800k, which is a bit on the high side of the usual 'rule of thumb' of 4% (itself endlessly critiqued).
Your own calculation is a bit optimistic, as if you are taking all the growth and depleting the capital then it won't grow as much the next year so you won't have your 24k growth for long - but easy enough to do a spreadsheet to model this (and of course investment returns aren't linear, but as a simple check its a start). I don't think you've allowed for inflation either in your model.
Re downsizing, do you really think you'll be able to liberate £100k from a £250k house and end up with something you are prepared to live in?

What are your current living expenses? Can you continue with some paid work?

I'm not saying its not possible, just that you need to have a bit of a clearer understanding of what you currently spend, what you want to spend in retirement, and what the risks are.

[tjh290633]

If you have £800k and are prepared to invest in equities, you should be able to get a yield of between 4% and 5%. Obviously you will need a cash reserve. Let's say the income is £35k p.a., if you do not need all the income, some can go into that reserve or can be reinvested to increase the income. There should be no need to draw on capital, indeed there should be prospects of increasing it. Also the dividends ought to rise at least as fast as inflation, probably faster.

It sounds reasonable to me. Better if you can get it inside his and hers ISAs to minimise tax liabilities.

TJH

[Alaric]

As above, if I'm to believe the various experts, this will not allow for a comfortable (40k pa) retirement.

Am I being foolishly optimistic?

If you can live with the £ 40,000 not always being available because of stock market volatility, 5% could be achieved. Watch out for whether that's an after tax income though.

One approach is to go for higher income equity investments, Investment Trusts being a possible vehicle. If the income isn't enough, then you sell to make up the shortfall. You won't do it with cash and bonds as the returns aren't high enough.

[Chrysalis]

If you invest your £800k in 100% equities and they reduce by 25, 35, 50%....how will you feel then? What will you do? How will you cover your bills?
I think its a high risk strategy and you might want to think about the possible advantages of covering your basic essential expenditure with something safer. There aren't many people on these boards living entirely off equities on a withdrawal rate of 5%....
All needs a bit more thought and planning IMO. You might live another 50 years...

[Chrysalis]

And yes, tax.
You imply that the bulk of your funds are in pensions. This will be taxed as income (no NI though so better than working). So you'd need to work out what your gross withdrawal would need to be to produce the required net income.

[tjh290633]

There are quite a few investment Trusts which have increased their dividends every year for up to 50 years. It's the income that matters, not the capital value, unless you base your plans on drawing down capital.

TJH

[Urbandreamer]

As pointed out, you can't access your pension* at 50.

Someone posted a link to this calculator on TMF back in the day.
https://www.firecalc.com/

If you just enter simple amounts the result is truely depressing. If however you are a bit more nuanced (using the tabs at the top) it produces more acceptable answers. In particular the state pension will make a difference.

*Of course you can give up work and live off XYZ funds from the likes of an ISA, but a pension is usually taken to mean a scheme regarded as a pension by HMRC.

[JohnB]

So total assets of £1.05m, do you both have full state pensions? If your investments are evenly split 40k income should equate to 40k expenditure with minimal tax. By 2020 your partner can start eyeing their pensions, but you can't. Can you cover a funding gap until they both kick in?

If you are flexible on spending, and can tighten belts to get the 40k down to 30k if the market disappoints, you are probably OK, but I expect you'd need to sell/equity release your house before death, and be very glad when state pensions arrive.

[RececaDron]

As others have alluded to, you'd be advised to break down your "retirement" into phases with a timeline:
- pre-private pension(s) access;
- pre-state pension(s) age;
- post-state pension(s) age etc.

...and then consider your cash flows within each stage to see what approx income you require and how you'll fund it.

Breaking the problem down into stages like this, and assessing your spending and its funding within each stage, should help move your thinking on from the single overly-simplistic question of "how big a pot do I need to retire?".

[Lootman]

There are quite a few investment Trusts which have increased their dividends every year for up to 50 years. It's the income that matters, not the capital value, unless you base your plans on drawing down capital.

Except that if the stated need for 40K a year is to be met then that implies a running yield of 5% a year. There are investment trusts that will give you that, but they are on the riskier end of the spectrum. That kind of stretching and reaching for yield can cause problems.

And note what Phaedras stated:

"My simple sums say; even at 3% growth (24k), if we were to consume 16k from the capital, there's the 40k . . it would appear unlikely we're ever going to get near running out of money.... especially given the fall-back plan of downsizing and liberating 100k or so.

We do not have an expensive lifestyle, and have no plans on leaving an inheritance..."

He desires to adopt a capital drawdown strategy and I believe this makes sense for two reasons. Firstly income alone cannot get him to 40K a year without risk, as noted above. And secondly because of the stated desire not to not leave behind an inheritance. At some point that capital will be wasted if it is not withdrawn and spent.

On any scenarioo I can conceive of, adding capital drawdown to dividend income either enables an earlier retirement OR gives a higher annual cashflow OR enables the money to support you for longer.

[mc2fool]

My simple sums say; even at 3% growth (24k), if we were to consume 16k from the capital, there's the 40k.... (OK, I need to take interest into account, but that can be optimised), plus I acknowledge that the reduction in the capital will hit the annual return, but even with those figures, it would appear unlikely we're ever going to get near running out of money....

By those figures I have you running out at the end of the 31st year, i.e. when you're 79. Open up a spreadsheet and put into cells...

.    A               B
1  800000        =A1*1.03 
2  =B1-40000     =A2*1.03

and now copy row 2 downwards to row 32.

[Chrysalis]

Yes mc2fool, that was exactly the spreadsheet I had in mind. Of course real life is much more complex, there’s inflation, investment volatility, tax, etc etc.

[Lootman]

My simple sums say; even at 3% growth (24k), if we were to consume 16k from the capital, there's the 40k.... (OK, I need to take interest into account, but that can be optimised), plus I acknowledge that the reduction in the capital will hit the annual return, but even with those figures, it would appear unlikely we're ever going to get near running out of money....

By those figures I have you running out at the end of the 31st year, i.e. when you're 79. Open up a spreadsheet and put into cells...

.    A               B
1  800000        =A1*1.03 
2  =B1-40000     =A2*1.03

and now copy row 2 downwards to row 32.

That doesn't seem right. His capital is growing by 3% a year, so that's 24K in the first year. He is withdrawing 16K of that. So he ends the year with 808K, an increase of 1%.

Every subsequent year increases his capital by 1%, assuming the numbers stay constant.

The other 24K a year he needs in income is presumably drawn from dividends. 24K a year in dividends implies a 3% yield - fairly modest.

Assuming constant numbers he is taking in 48K a year (6%) and spending 40K a year (5%).

His only problem is if growth plus dividends falls below 5% a year, and even then he might be fine unless that continues for an unusual number of years.

[genou]

[By those figures I have you running out at the end of the 31st year, i.e. when you're 79. Open up a spreadsheet and put into cells...

. A B
1 800000 =A1*1.03
2 =B1-40000 =A2*1.03

and now copy row 2 downwards to row 32.

You have ignored the two state pensions. Those numbers need factored in. I'd also endorse the idea that the OP needs to analyse what he expects to spend into the three phases suggested above, but at the same time consider what level of expense he expects at the various stages. A level ( or inflation adjusted ) 40k from 50 til death strikes me as too simplistic.

[mc2fool]

My simple sums say; even at 3% growth (24k), if we were to consume 16k from the capital, there's the 40k.... (OK, I need to take interest into account, but that can be optimised), plus I acknowledge that the reduction in the capital will hit the annual return, but even with those figures, it would appear unlikely we're ever going to get near running out of money....

By those figures I have you running out at the end of the 31st year, i.e. when you're 79. Open up a spreadsheet and put into cells...

.    A               B
1  800000        =A1*1.03 
2  =B1-40000     =A2*1.03

and now copy row 2 downwards to row 32.

How can that be right? His capital is growing by 3% a year, so that's 24K in the first year. He is withdrawing 16K of that.

That's not what he said. He said "even at 3% growth (24k), if we were to consume 16k from the capital, there's the 40k" indicating that he intended to take out the £24K growth and an additional £16K to get the £40Kpa he wants.

I'd assumed his 3% was a real total return, but I'm not particularly commenting on his overall statement, just, as I say, by those figures...

[mc2fool]

[You have ignored the two state pensions.

Yes, and quite a few other factors too. I was just demonstrating the error in that single statement I quoted.

A level ( or inflation adjusted ) 40k from 50 til death strikes me as too simplistic.

I agree, however forecasting is problematic. For instance, my costs have dropped significantly since I turned 60 (free public transport, concession/free rates on some things, etc), and will drop further when I turn 65 (concession/free rates on more things) but will those all still be there when the OP turns 60/65? One can only forecasting on the basis of current information....

[Chrysalis]

I thought free bus travel was already pegged to female state pension age? I’m not really expecting much in concessions before then...

[Alaric]

I’m not really expecting much in concessions before then...

You can get a third off leisure rail travel from age 60 for the cost of a Senior Railcard. That's a commercial offer so age 60 stayed put.

I think Prescription charges stayed at 60, although given that you can buy an annual prepayment of unlimited prescriptions, that's not as big a potential saving as you might think.

If some of the wealth is tied up in pensions, it's the non pension wealth that has to be used between the ages of 50 and 55/56/57. One option there is to pre fund each year's expenditure by buying a Gilt or with more risk a Corporate Bond to mature in each future year. Don't expect much of a return from Gilts though.

[mc2fool]

I thought free bus travel was already pegged to female state pension age? I’m not really expecting much in concessions before then...

https://tfl.gov.uk/fares-and-payments/adult-discounts-and-concessions/60-london-oyster