FIRE Puzzle

[TwentyTurtles]

Hi all, long time lurker, I'm at an undecided point of my FI-bound life and hoping you could provide some advice.
Not entirely clear if this is the right part of the forum as it touches on multiple areas - apologies if not!

I'm 30 years old, with a net worth of ~£500k, consisting of:
- 90k Cash
- 65k Pension
- 190k ISA
- 5k LISA
- 150k Taxable investments

I contribute 5% to my pension, my employer double matches at 10%, so 15% total, on a ~90k salary. I generally top this up with a chunk of my bonus to keep me under the £100k tax tapering. I contribute an additional £3k per month to my taxable investments and fill my ISA annually.

I have very abnormal living arrangements paying only around £600/month rent, with all bills included, hence I'm able to save so much. However this agreement is coming to an end, and I need to seek alternate living arrangements, most likely a 1 or 2 bed flat within central-ish London likely setting me back £1200-1600/month bills excluded.

I'm cautious of the amount I am putting into taxable investments which will be subject to capital gains on drawdown, and am also conscious that I do not own property and will need to do so before I FIRE. As a first time buyer the tax incentives are heavily in my favour, with no/low stamp duty, LISA bonuses, and no CGT on sale. However I'd need to lump up a large deposit, thus removing money from the market and eat up my cash reserves, which I'm not hugely keen on given the impending recession i.e. stock sale. I'm likely looking at a 1-2 bed at £450k max (the LISA limit).

Alternatively I could increase my pension contributions for that tasty tax break, but this potentially delays my FI plans.

If you were me, what would you do? I realise theres no universal answer, but I don't really have anyone else to bump ideas of money wise in such an open forum.

Thanks!

[JuanDB]

Hi Twenty,

I think there are a few key questions that might help steer your approach.

What is your target retirement age?
Where do you plan to live post retirement?
Do you have a target net worth or post retirement income?
How do you plan to find your retirement Target SWR, natural yield etc?

A common strategy is to use tax sheltered, taxable accounts and cash to bridge from early retirement until your pension access age (currently 57?). From your target retirement age and income you can work out what you need to bridge that time period. The obvious observation in your case is your pension wealth is very low relative to your non pension wealth. As a higher rate tax payer I would seriously consider upping your contributions, especially if you have access to salary sacrifice.

The decision to buy property ties into your target retirement age and post retirement plans. If you plan to retire in 5 years and move out of London then probably not. If you want to retire in 20 years and live in central London then maybe yes.

Thanks,

Juan.

[TwentyTurtles]

What is your target retirement age?

I'm not clear at this point, currently I am happy with work, and don't see that rapidly reclining. I suspect full time retirement would bore me, I think in reality if current portfolio holds its worth and growth I'd be looking at part retirement in about 10 years at 40.

Where do you plan to live post retirement?

I've no idea sadly, my life is still very undirected and undecided. I am happy with London, and my career is likely to remain in London - but who knows, I'm still young (and single).

Do you have a target net worth or post retirement income?

My target is ~1.4mil, I believe this will sufficient for approx 40k annual withdrawal.

How do you plan to find your retirement Target SWR, natural yield etc?

I haven't looked into this really, given retirement isn't on the table currently. Approx 3% SWR seems to be common, on the super safe side from what I understand.

A common strategy is to use tax sheltered, taxable accounts and cash to bridge from early retirement until your pension access age (currently 57?). From your target retirement age and income you can work out what you need to bridge that time period. The obvious observation in your case is your pension wealth is very low relative to your non pension wealth. As a higher rate tax payer I would seriously consider upping your contributions, especially if you have access to salary sacrifice.

I understand the purpose behind the bridge, but am conflicted internally as if I have a perpetual sum and SWR that never runs out, I don't really have need for a pension. It would annoy me to no end if I had enough money in my pension to retire, yet could not do so as I'd not yet hit the age limit (who knows what it'll be by the time I actually get to that age). Although It is true that I'm losing a bunch to tax, and could potentially have saved 40% more had I put more in my pension, leading to a much larger sum - but it would have been locked up for 30 years.

The decision to buy property ties into your target retirement age and post retirement plans. If you plan to retire in 5 years and move out of London then probably not. If you want to retire in 20 years and live in central London then maybe yes.

There is no way I can afford to retire in 5 years, I'm too hooked on city life. I've no idea if I'll retire in central London, but I'll certainly be here for 5 years+. Especially given the fact my living arrangements are changing, and will significant increase in cost - mortgage or no mortgage, so my savings rate will drop massively.

Thanks for taking the time to comment.

[Laughton]

Given

(a) the amount of cash you are holding,
(b) the amount of rent you think you will shortly have to be paying,
(c) that you say you will stay in London for at least the next 5 years and
(d) currently available long term fixed mortgage rates

then, to me, a first step onto the property ladder would be my first choice.

[Alaric]

a first step onto the property ladder would be my first choice.

Perhaps just take a five year view.

Compare the monthly income and outgo between flat purchase and rental where
(a) he rents and doesn't dip into his assets other than using interest and dividends to help pay the rent.
or
(b) use the cash and some of the taxable assets for a deposit and then buy.

On (b) he would forgo the interest on cash, such as it is, and the dividends on shares, but the higher the deposit, the lower the mortgage and thus the monthly outgo on housing.

The downright horror for buying would be if the London property market collapsed.

[TwentyTurtles]

I don't really consider a property collapse to be a problem, as a house is a place to live rather than investment - so I tell myself, whether my stomach will respond the same if it happens who knows

You've effectively summarised my dilemma yes. Spend cash on deposit, lose out on market returns. Spend cash on rent, saves me burning my assets so they can continue to grow. However not really sustainable long term without a bigger FIRE pot, which I'm not likely to achieve (I don't think)? I'm not really sure I want to draw down at this stage of FI to spend on rent, that doesn't seem a good use of assets? Or am I mistaken.

[thebarns]

Think about the considerable pension tax reliefs for some of that money.

For each pound you invest, you will get a 66.6% return.

Using current personal allowances and a rate of return/withdrawals of around 4% you will need to amass a pension of greater than £400k, all of which could be withdrawn tax free via the 25% lump sum then a 4% withdrawal within the personal allowance.

The total amount would go up if a safer 3% withdrawal rate is used and an increasing personal allowance comes into play.

You get far more bang, via the 66.6% return, for your buck than putting the same money in taxable investments.

I appreciate this is a long term tie up for the money, but when you do hit that age you will need that money anyway.

I had a similar type of issue, retiring at 52, and am effectively drawing down capital from taxed investments to fund living expenses and also to facilitate my wife still contributing to her pension which had been underfunded and was not going to make use of her personal allowance when she early retires at 55.

So you could draw down some of the unsheltered investments/cash in your forties if that is needed to supplement income needs for early partial retirement.

The existing higher rate pension tax relief will be targeted in the future.

[JohnB]

I expect you see tying up money very differently at 30 to 50. With state pension ages rising, and political risk that pension pots will be raided, or access age changed to spa-5, I'd be wary of standing out from the crowd. And one obvious common asset they're missing is a house. Houses also give stability that rentals cannot, irs not just a financial decision.

If the OP is expecting a 1.4m pot and 40k income, then 30k will be taxed whatever, and the pension advantage is just the difference between tax bands. Wirh employer double matching, you'll get plenty without extra contributions now.

[TUK020]

I think there is a much bigger perspective that the OP needs to take into account.
At age 30, your future uncertainty is much much greater - for all you know, in 5 years time you could have met someone and be wanting to start a family, or have had a life changing medical experience that leaves you wanting to travel the world and enjoy things a little.
Locking extra funds into pension at this stage may be very near sighted. Putting it into housing might be much more flexible.

[paulnumbers]

I’ll give you my take, as until recently I was in a very similar position.

Several hundred £k of investments, held outside pensions, roughly £90k income, no property, London based with little desire to leave.

I finally bought a place last year, and now feel suitably poor again, it has done wonders for my work ethic.

And unexpected bonus was that without needing to aquire cash for property, I am infinitely more comfortable shovelling cash into a sipp, and havent paid higher rate tax since, nor do I expect to for several years. Since December I’ve paid in about £55k, saving about half that amount of tax.

My rent was £1150, and now the interest on my mortgage is ~£170 ish.

Although I feel poorer, my SIPP should be larger than the mortgage within 18 months, at which point I’ll no longer be paying off debt, and will just be en route to FIRE with negligible costs.

I wish I’d got it over with earlier frankly, although perhaps I’m influenced by the poor call I made on property prices.

Not sure if that’s any use.

[dspp]

A lot depends on
- how stable your employment situation is;
- what your relationship position might reasonably become.

Re the first: buying a property now and seeing its value halve whilst still paying the mortgage is one thing. Losing your job at the same time and not being able to find a new one is quite another thing. So employment stability is a real consideration.

Re the second: if you are single and expecting to be a monk/nun for the rest of your life then you only need to consider yourself. If on the other hand you are hoping to meet the perfect TurtleMatch and have lots of Turtlets then that is a consideration. Plus of course the statistically significant chance of a Turtle split, and divorces typically wreck the finances of the richer party.

Personally I would consider what you could get in the way of smallish one vs two bed flats in London. Then weigh up the delta of the one bed vs two, as you can rent-a-room the second bed as a norm, and in the jobless extremis position rent out both rooms to keep the mortgage afloat (whilst you do your best to be invisible on the sofa, or vacation for 6m in cheap locations).

best wishes, dspp

[Kantwebefriends]

If you want a lot of flat for your money, especially if you want a good location, you could take the gamble on buying one with a fairly short lease. You'd need to find out (from a specialist mortgage broker?) how easy it would be to get a mortgage on such a thing.

Maybe you wouldn't need a mortgage at all.

[TwentyTurtles]

Thanks for the commentary all, sorry for the delayed response. You've given me a lot of stuff to think over.

My rent was £1150, and now the interest on my mortgage is ~£170 ish.

I infer from this low mortgage that you're interest only? What is your plan to pay off? How big a deposit did you put down to get a rate that low, as that seems very low. Or did you buy a few decades ago

A lot depends on
- how stable your employment situation is;
- what your relationship position might reasonably become.

Re the first: buying a property now and seeing its value halve whilst still paying the mortgage is one thing. Losing your job at the same time and not being able to find a new one is quite another thing. So employment stability is a real consideration.

My employment is very stable, I'm unlikely to be laid off. However, I'm more likely to lose my sanity and resign on fairly short notice, and have to spend a fair bit of time (6mo+) finding a position of equivalent salary (if I can at all, I think I've managed to work myself into some special high-value position in this company I can't reproduce elsewhere in any short time).

Personally I would consider what you could get in the way of smallish one vs two bed flats in London. Then weigh up the delta of the one bed vs two, as you can rent-a-room the second bed as a norm, and in the jobless extremis position rent out both rooms to keep the mortgage afloat (whilst you do your best to be invisible on the sofa, or vacation for 6m in cheap locations).

This is something I'd consider in dire need yes, but I can't imagine it being something I'd be comfortable with day to day.

If you want a lot of flat for your money, especially if you want a good location, you could take the gamble on buying one with a fairly short lease. You'd need to find out (from a specialist mortgage broker?) how easy it would be to get a mortgage on such a thing.

I think there's a big gap in my knowledge here, I've no clue how this works. It's something I understood you should never do, but I don't know why - as I thought there was laws requiring for freeholders to allow you to renew the lease.

[JohnB]

People grew rich on property as interest rates fell, so the same repayment could get you more in the end as prices rose. With interest rates near 0, and people spending half their pay on repayments in London, I don't see how you can get strong growth now. You can still make money on Buy to Let, but its on the letting side, not the capital appreciation side.

Having said that, I think everyone should aim to have a house to live in. It gives stability and tax advantages, and is part of the mantra "have a little of what everyone else has" that protects you from political risk.

[jonesa1]

What about winter sun, another popular investment choice for those with retirement in mind, meantime a free holiday and 30 weeks of overseas rental income in exchange for buying a modest lock-up-and-leave apartment somewhere civilised on the Med for example. You could probably do that now and get a positive return from your existing resources as an adjunct or alongside buying your own place in and around London.

The Med might not be the best location for a holiday home as a long-term investment. The warming climate is already making some places far too warm in summer to do much other than shelter in air-conditioned buildings. If the trend continues (and nothing in the political world suggests otherwise), it seems likely that the Med will see a decline in tourism during the hottest periods.

Andrew

[jonesa1]

Where else would you suggest? We might be straying off topic, but the idea of having somewhere warmer or brighter to bolt to or to retire to is central to many plans, and so is the idea of having a rental income ... which is why the Med is full of retired Brits in places we outnumber the locals and other tourists in Winter, not all of it a tacky all-day-breakfast scene.

Good question. No idea! The economic impact of global warming is hard to predict in detail, but is likely to be very significant to a lot of existing business models. One of the easier prediction to make is that hot places will get hotter. How long it will take for The Algarve or Mallorca to get too hot even for the most extreme sun-worshippers is anyone's guess. My point was simply to question whether a Med based holiday home will be a good long term investment, starting now. I don't know the answer, but wouldn't invest any of my money that way. Similarly, there are plenty of low-lying locations (quite a few in the UK) where rising sea levels, coastal erosion and more extreme storm surges would make property investment questionable.

Andrew