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Retire at 45 Plan of attack

Including Financial Independence and Retiring Early (FIRE)
Will2pass
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Retire at 45 Plan of attack

#443597

Postby Will2pass » September 19th, 2021, 3:19 pm

First post so go gentle please.

This is long and convoluted so please hang in there. It was simple in my head....

Just musing and have a vague early retirement plan in my head.
Thought I would put something down on paper so people more experienced with all this can point out the glaring mistakes.

For this I want to keep things simple so best to avoid the '45 is too young, what will you do' conversations and for extra simplicity let's imagine this is a full retirement, no future part time work (although this could very well happen).

For ISA please read S&S ISA invested in a cheap passive world tracker.


Current position

Age - 39 not far off 40
SIPP - £178K (currently salary sacrificing but this will change to solely company contributions
MORTGAGE - £188K
HOUSE VALUE - £650K-£700k

Company Director of own Ltd company (employ 15 staff members). Soon to be sole director so income will be tailored to me whilst remaining as a BR tax payer. Extra pension contributions will be made to avoid corporation tax instead of increased salary or dividends to remain tax efficient. These extra pension payments will NOT be added to this planning as it's not guaranteed and will be the cherry on top so to speak. Basic contributions only listed here.



First 5 YEAR PLAN

Mortgage

I was overpaying the mortgage by £650 a month (2.44% rate) I am fully aware that investing in S&S ISA is statistically better however my plan is short on time (5years) so a guaranteed 2.44% saving seemed better than risking collateral for the possibility of a little more reward.
However I am starting to have second thoughts as hopefully I will have a largish pot of unwrapped cash in the near future so I might take the opportunity to wrap some up in a s&s ISA rather than overpaying the mortgage.

Q1 - ISA or Mortgage overpayments (£650 a month for 5 years.


Business Sale in 5 years time. Age 45= Large unwrapped cash pot

Having given 20 odd years (so far) to a business I never envisioned myself doing I am finding myself crunching the numbers daily looking for an escape.

Realistically the business has a value of £800k - £1m. I will use £800k in my planning.

£800k minus legal and EA fees should leave £750k (there is and will be cash reserves for tidying up lose ends (£80k contingency pot but not counting that).

£750k minus tax at 10% using BADR (Formally entrepreneurs relief) would leave £675k.

So that's £675k of unwrapped cash.


Position after 5 years at 45 years old

Cash - £675k

SIPP value £178k + 5 years worth of £500 per month contributions @ 4% growth equals £250k

Partner SIPP - My wife has been employed by the company for a few years and I will make her a director. I plan to open a SIPP for her and pay in £1500 per month for 5 years.

Partner SIPP after 5 years based on 4% returns £100k

My wife also works part time as a teaching assistant but I will not include her wage or LGPS pension in this scenario.

Q2 - For me it seems more tax efficient to have 2 SIPPS to draw from rather than one in the future. This is to take advantage of the personal allowance. Hopefully it's still there in the future
Correct to go with 2 pots?

Now what to do with this pot of cash?
Originally as stated earlier, I would have overpaid the mortgage by £650 per month which would leave £117k on the mortgage.

Option 1
£675k cash pot minus £117k mortgage = £558k cash left. To be honest I still think this is the best / safest way to do things but I'm happy to be swayed towards the ISA route.

Option 2 ISA route

£650 invested each month for 5 years at @ 4% return would be £43k.

Mortgage remaining in 5 years time with no overpaying= £159k

£159k minus £43K (the ISA ) = £116k

Cash pot of £675k minus £116k = £559k

The risk involved in investing for only 5 years for an extra £1,000 (cash pot left £559k Vs £558k) doesn't seem worth while.


However Option 3 / Hybrid

Possibly my biggest question Q 3

Invest in ISA for the 5 years = £43k (hopefully)

Mortgage left in 5 years ( no overpaying) = £159k

Cash pot £675k minus £159k mortgage = £516k remaining in cash AND £43k wrapped in the ISA.

Written out, this way seems favourable?



Now time to simplify things again. Those 3 scenarios leave either £558k, £559k or £516k with no mortgage and possibly an ISA pot.

Let's forget the ISA and budget on having £500k cash. I like to be cautious.

Plan for years 5-15 which will take me us to 60 years old[b]

We live quite a frugal life and without a mortgage I believe and have tracked that £26,000 will give us the quality of life we are used to.

In 5 years time when 'the pot' needs to be used to bridge us to our SIPPS, based on 3% inflation per year. £26,000 will become £29,225


I plan to make this cash pot last us until we are 60 before touching the SIPPS.
We will contribute £20k each (£40k combined) into an ISA each, each year.


£29,225 increasing with 3% inflation for 6 years will cost £189,000 out of the £500k pot.

£20k X 2 people for 6 years plus an extra year at the start (7 contributions total )would cost £280k

So after 6 years the £500k pot would be reduced to £30k and there would be 2 ISAs worth £158k in each, based on 4% returns.

Let's discount that £30k or leave it for later helping in 'bad investment years'


[b]6 years after retiring. At age 51


2 X £158k ISAs.

Now that £26k needed to live on has now been adjusted for inflation and will now cost £35,000 per year.

As we now have 2 ISAs that £35,000 can be halved to £17,500 each.

£158k ISA responsible for £17,500 per year adjusting for inflation at 3%.

That will give us another 9 years taking us up to 60 years old based on 4% ISA returns offset by 3% inflation (cost of living).

£18k in each ISA left to add to some early contingency money for those "bad years' to come.


Now 60 years old and taking us to 70

Cash Pot and ISAs exhausted (£30k from earlier plus £36k in in 2 ISAs sat quietly in the background).

Onto our SIPPS then

When we stopped investing in them back when we were 45 (keep up) they were worth £250k and £100k.

15 years with no investment sees them now at £455k and £182,000 (oh please let there be 4%AV return)

Back to our £26k living figure in today's money. That has now turned into £45,600 adjusting for inflation at 3%.

Now we come to the reason for opening my wife a SIPP rather than just paying into mine. Assuming the personal allowance remains similar as today (£12500 and change) then by sharing the responsibility plus 25% tax free for each drawdown, we should avoid paying any tax on drawdown.

In today's money that would look like
SIPP 1 - £16K Per year needed
sIPP 2 - £10K
= £26000

OR very roughly speaking three 5ths and two 5ths..

Total needed £45,600 (£26k adjusted for inflation).

SIPP 1 £455k - three 5ths responsibility = starting cost of £27,360 for 10 years at the usual 4% gain and 3% inflation.

Leaves £304,000

SIPP 2 £182K - Two 5ths responsibility = £18,240 taken for 10 years

Leaves £21,000



At 70

Now this is where things get a bit harder to predict. I have deliberately been cautious, written off £30k here and there to have as backup and potentially that earlier ISA saving if I go with that option (not paying off the mortgage from ISA).

These can be added to the following safety net at 70

All things being well we will have at 70,

£320k in SIPPS

Realistically the first 5 years of this plan will see greater pension contributions.

some kind of state pension provision (NI contributions will be met by working or voluntary contributions). I have 7 years curri left to contribute so just the odd 2 to find/pay for).

I imagine our cost of living will also decrease

The ability to downsize releasing £100k + in today's money

My wife will continue to work part time for 5 -10
years when I stop at 45 (she was a late starter)

Her LGPS pension at 67 (roughly £3k per year)

Deliberately not counted any potential inheritance which I'm told there will be £100k - £200k but it's not mine and I don't want to be so morbid as to count that.

There is a real possibility I will do something part time at 45.

The next 5 years will see us save for kids uni etc.


All in all , there's a fair bit of safety built in which will hopefully see us with the ability to hold 3 years cash at points in time to avoid drawing down ISA or SIPP in bad years. They are hard to factor in hence the cautious approach to early figures which will hopefully create its own safety pot.




If you have made if this far then thank you, you might as well comment now ;-)


If anyone wants to chime in and tell me I have things very wrong then please do.

Feedback on those earlier Q's very much sought after as well.

Is retiring early at 45 really doable?

dealtn
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Re: Retire at 45 Plan of attack

#443608

Postby dealtn » September 19th, 2021, 4:14 pm

Will2pass wrote:
Is retiring early at 45 really doable?


Yes.

Firstly congratulations on getting the wealth to where it is now, and having the courage to assess where you are in life and what is important to you.

Turning to the question you ask I would note the greatest asset you have is the business. I would focus much less on the minutae of how you are going to invest that wealth beyond the 5 year horizon, but more on how you increase the worth of the company in the next 5 years. Selling that business for £2-5 million instead of the current projected £700-800k solves a lot more problems than you pose elsewhere.

Sorry if that comes across as flippant in response to a real world problem but I would be looking at guidance there from trusted advisors and conversing with potential buyers to assess how, when, and for how much you can exit.

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Re: Retire at 45 Plan of attack

#443614

Postby Will2pass » September 19th, 2021, 4:38 pm

dealtn wrote:
Will2pass wrote:
Is retiring early at 45 really doable?


Yes.

Firstly congratulations on getting the wealth to where it is now, and having the courage to assess where you are in life and what is important to you.

Turning to the question you ask I would note the greatest asset you have is the business. I would focus much less on the minutae of how you are going to invest that wealth beyond the 5 year horizon, but more on how you increase the worth of the company in the next 5 years. Selling that business for £2-5 million instead of the current projected £700-800k solves a lot more problems than you pose elsewhere.

Sorry if that comes across as flippant in response to a real world problem but I would be looking at guidance there from trusted advisors and conversing with potential buyers to assess how, when, and for how much you can exit.



Many thanks for the reply.

Unfortunately there isn't a lot of room to grow. In fact we are downsizing to be able to raise some capital to effectively buy out my other directors.

I spent 6 months going back and fourth wrestling with the idea of raising finance to buy them out whilst keeping the business at its size. Unfortunately the numbers didn't stack up.

Now with no finance hanging over the 'smaller' business it's a good little company but it would take a large dollop of cash to enlarge.

Thankfully, in my sector it's predominantly cash buyers. Just accepted an offer on our second site within two weeks of being in the market. 7 viewings, 6 cash bidders, accepted over asking price.
As such, the remaining business is an attractive proposition.

Regional and national size companies have the clout to do this in my sector. A private individual doesn't really have that option.

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Re: Retire at 45 Plan of attack

#443630

Postby tacpot12 » September 19th, 2021, 5:23 pm

Q1 Contribute to your ISA while the limits are £20K per annum. Use the lump sum from the sale of the business to clear the mortgage, i.e. Option 3.

Q2 There is no tax efficiency in having two SIPP pots if they are both yours, but if one is your wife's, then that does make sense.

I've checked your numbers and assumptions and agree that providing your business sells for what you think it is worth, you can retire at 45. However, I think your assumption that a starting income requirement of £26,000 is too low. My partner and I retired aged 53, and we are currently spending c£32K pa to maintain our previous lifestyle which was not lavish by any stretch of the imagination, and we are only running one car now to save money.

However my retirement plan is working out. I lived on savings until I was 55 then started to drawdown from my SIPP. I've received £50K in dividends in 4 years (and drawn £40K out), and the investments are now worth 15% more than they were when I bought them four years ago. So my total return is about 6.5% pa. I think you could afford to increase your assumption about the income you need from the plan slightly, or keep this in reserve until you know that things are working out. Your wife's income while she is still working will make a difference.

All the elements of your plan are sound, but there is a bit that is missing, which is the taxation of the cash pot. The majority of the proceeds from the sale of your business will go into a General Investment Account (GIA), and dividends and gains on the assets will be taxable, and you will be reliant on these gains. The solution will be to give your wife half the proceeds for her to invest in separate GIA so that you can use her capital gains tax allowance as well as your own. So two SIPPs and two GIAs. I think if you do this, you should be able to avoid paying CGT.

You will have the GIAs and ISA to draw on so that you can avoid paying Income Tax on the withdrawals from the SIPPs for the most part.

I would encourage you to create a spreadsheet to model the plan that you have, and also to write down your plan, including making NI contributions for you and your wife.

I would agree wholeheartedly that you should be spending the next five years ensuring that the business is worth at least £1M and finding the right buyer and finalising the sale.

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Re: Retire at 45 Plan of attack

#443641

Postby Will2pass » September 19th, 2021, 5:43 pm

tacpot12 wrote:Q1 Contribute to your ISA while the limits are £20K per annum. Use the lump sum from the sale of the business to clear the mortgage, i.e. Option 3.

Q2 There is no tax efficiency in having two SIPP pots if they are both yours, but if one is your wife's, then that does make sense.

I've checked your numbers and assumptions and agree that providing your business sells for what you think it is worth, you can retire at 45. However, I think your assumption that a starting income requirement of £26,000 is too low. My partner and I retired aged 53, and we are currently spending c£32K pa to maintain our previous lifestyle which was not lavish by any stretch of the imagination, and we are only running one car now to save money.

However my retirement plan is working out. I lived on savings until I was 55 then started to drawdown from my SIPP. I've received £50K in dividends in 4 years (and drawn £40K out), and the investments are now worth 15% more than they were when I bought them four years ago. So my total return is about 6.5% pa. I think you could afford to increase your assumption about the income you need from the plan slightly, or keep this in reserve until you know that things are working out. Your wife's income while she is still working will make a difference.

All the elements of your plan are sound, but there is a bit that is missing, which is the taxation of the cash pot. The majority of the proceeds from the sale of your business will go into a General Investment Account (GIA), and dividends and gains on the assets will be taxable, and you will be reliant on these gains. The solution will be to give your wife half the proceeds for her to invest in separate GIA so that you can use her capital gains tax allowance as well as your own. So two SIPPs and two GIAs. I think if you do this, you should be able to avoid paying CGT.

You will have the GIAs and ISA to draw on so that you can avoid paying Income Tax on the withdrawals from the SIPPs for the most part.

I would encourage you to create a spreadsheet to model the plan that you have, and also to write down your plan, including making NI contributions for you and your wife.

I would agree wholeheartedly that you should be spending the next five years ensuring that the business is worth at least £1M and finding the right buyer and finalising the sale.





Many thanks..


Yes the 'second' SIPP would be the wife's so one each to take advantage of future personal tax free allowance.



You have lost me a bit with the GIAs. After paying BADR (formally entrepreneurs relief) I thought the money would be cash. Is my assumption wrong? You seem to suggest the proceeds automatically go into a GIA.

My business is trading not investment.


As far as GIAs, I ran the numbers between

Cash depletion over 6 years + ISA investing for that time as in my writeup

Vs

Lumping all the proceeds in a GIA


The first option came out on top. I didn't however model splitting the proceeds 50/50 with my wife because she will still be working so will pay greater tax (I believe) on anything taken from the GIA. CGT and income tax?

So unless corrected, I think the GIA is a bit of a red herring.

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Re: Retire at 45 Plan of attack

#443646

Postby Will2pass » September 19th, 2021, 6:26 pm

Just looked again at GIAs and this could make sense if shared between my wife and I.

For ease of calculating, £500k to invest. No other CGT to bear in mind each year.

Me £250k

Wife £250k

We could both take our annual CGT allowance which would total £24,600 without paying any tax on these withdraws.

Depending on the investments could we also take advantage of the £2000 X 2 tax free dividend allowance?

Any extra taken would currently be charged at 10% given we would remain within the BR bracket.




Hmmm, this does seem to beat holding cash for 6 years whilst simultaneously maxing ISAs each year.


Just to add. Like drawdown from a SIPP, I would keep 3 years in cash as a buffer to corrections/crash.

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Re: Retire at 45 Plan of attack

#443662

Postby Alaric » September 19th, 2021, 7:20 pm

Will2pass wrote:Hmmm, this does seem to beat holding cash for 6 years whilst simultaneously maxing ISAs each year.


Provided you don't want to protect capital at all costs and can live out periodic market storms, almost anything beats cash if invested in mainstream assets for so long as the interest paid on cash is next to nil.

As well as the CGT allowances, there's the £ 1000 savings limit and £ 2000 dividend limit, so a couple can take £ 6000 free of tax from investments even outside ISAs and SIPPs.

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Re: Retire at 45 Plan of attack

#443668

Postby tjh290633 » September 19th, 2021, 7:53 pm

My immediate thought is that paying off the mortgage, as opposed to investing in a share ISA (or his and hers ISAs) is the wrong priority. What you put into the mortgage is lost money, whereas what you put into the ISAs can generate more than the mortgage interest and also increase the capital. I would be inclined to make the mortgage interest only, if it isn't already, and pay the mortgage off at a later stage from sale proceeds.

If you need £35k a year, you are better off having built up a capital sum which will generate that amount of income, assuming an appropriate rate of dividend yield after tax. In ISAs where no tax is currently liable, £1million will generate that quite easily. To my mind that is a better approach than digging into capital until pensions become available, not that pensions are a bad thing. At 45 you can be looking at another 50 years or more and inflation can do a lot in 50 years. Avoid fixed interest like the plague.

TJH

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Re: Retire at 45 Plan of attack

#443688

Postby Will2pass » September 19th, 2021, 9:21 pm

tjh290633 wrote:My immediate thought is that paying off the mortgage, as opposed to investing in a share ISA (or his and hers ISAs) is the wrong priority. What you put into the mortgage is lost money, whereas what you put into the ISAs can generate more than the mortgage interest and also increase the capital. I would be inclined to make the mortgage interest only, if it isn't already, and pay the mortgage off at a later stage from sale proceeds.

If you need £35k a year, you are better off having built up a capital sum which will generate that amount of income, assuming an appropriate rate of dividend yield after tax. In ISAs where no tax is currently liable, £1million will generate that quite easily. To my mind that is a better approach than digging into capital until pensions become available, not that pensions are a bad thing. At 45 you can be looking at another 50 years or more and inflation can do a lot in 50 years. Avoid fixed interest like the plague.

TJH




Thanks for the input but a little pie in the sky.

In 5 years I have zero chance of having £1m in an ISA. £650 a month certainly wouldn't touch the sides. 5% there with a fair wind behind me maybe of couy that would be the choice if possible but it's bit a choice.

The choice is £500k unwrapped in 5 years time. . What is the most efficient way to deal with that.


Living until 95. Again, not something I am going to factor in. If by some chance I do then I can't see spending being much more than food and water and heat and light. Not going to go down the care fees debate route here. It's my day job so I have a good understanding of what's involved and what I want.

Not saying it WILL happen but grandparents on both sides and 6 out if 7 aunts and uncles have died between 71/72 with the 7th now 72 and very unwell (second bout of cancer). My wife has almost identical mortality patterns in her side.
I'm fairly happy factoring in upto 80. House sale etc could then fund longer but ideally that would be for my kids.

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Re: Retire at 45 Plan of attack

#443717

Postby Kantwebefriends » September 19th, 2021, 11:50 pm

Consider the opposite of overpaying the mortgage; consider borrowing more on the mortgage and plunging the money into ISAs and SIPPs. Then pay it off when you sell the business. That way you maximise use of tax shelters.

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Re: Retire at 45 Plan of attack

#444339

Postby Snakey » September 22nd, 2021, 9:33 am

Transfer at least 5% of the shares in your company to your wife, since you're making her a director. That way if they reduce the BADR limits further in the next five years you can transfer a further 45% to her just before sale and double up on whatever the lower limit is. It's also useful if you don't end up doing the deal for cash - you get two annual exemptions etc etc.

You say the company has massive potential if it had more cash - what would the timescale be for that? Might the next five years be more fun and profitable if the company could get bank finance and you could make a start on that expansion now?

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Re: Retire at 45 Plan of attack

#444403

Postby Mike88 » September 22nd, 2021, 12:31 pm

You also have a house which you may be able to downsize in the years beyond 45. You may also be in a position to move to a similar size house in a cheaper area down the line especially when the children go to University and eventually leave your home. Your calculations do not seem to have taken this fact into account although I might have missed it in your original post.

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Re: Retire at 45 Plan of attack

#444410

Postby Will2pass » September 22nd, 2021, 12:41 pm

Snakey wrote:Transfer at least 5% of the shares in your company to your wife, since you're making her a director. That way if they reduce the BADR limits further in the next five years you can transfer a further 45% to her just before sale and double up on whatever the lower limit is. It's also useful if you don't end up doing the deal for cash - you get two annual exemptions etc etc.

You say the company has massive potential if it had more cash - what would the timescale be for that? Might the next five years be more fun and profitable if the company could get bank finance and you could make a start on that expansion now?




Many thanks for your contribution.

Yes, I have adding the Mrs on as shareholder on my to do list with my accountant. It opens up plenty of different avenues.


The company in my hands doesn't have a lot of room to grow in the next 5 years. It would however easily be acquired by a regional/national company.

We were a small care home business, now very small having downsized to one home. I had the opportunity of keeping two homes but that would have meant financing to buy out the other directors rather than selling one and using those proceeds. A little complicated but those directors owned one of the buildings which the company paid rent to. The company (with me as sole shareholder) will buy out the former directors meaning the company will own its own property now.

Months of back and forth with banks/brokers etc and the figures didn't stack up. To take credit to buy the property from said directors.

If the company had the cash reserves to outright buy another home then it would be a good move but financing in a "high risk sector' creates too much risk for a one man band due to Local Authorities lack of commitment to residential care (specifically my area, non elderly)

We would be a good buy for the companies with cash to buy outright and our other home was sale agreed in days with multiple cash buyers bidding over asking.

Realistically I would need £1m cash to expand. Not going to happen in the next 5 years.

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Re: Retire at 45 Plan of attack

#444415

Postby Will2pass » September 22nd, 2021, 12:54 pm

Mike88 wrote:You also have a house which you may be able to downsize in the years beyond 45. You may also be in a position to move to a similar size house in a cheaper area down the line especially when the children go to University and eventually leave your home. Your calculations do not seem to have taken this fact into account although I might have missed it in your original post.




Sorry if it didn't come across in the OP but I am a cautious individual and deliberately didn't include certain things in the calculations but I believe I did gently touch on them.

These would be 'extras' but not baked in to my calculations

Downsizing

Partner small LGPS pension (£3000 per year if she stays at least another 10 years) not able to access until she's 67 (to avoid penalties) so 25 years from now for her.

2 state pensions in 26 and 28 years time.

Any inheritance




In summary in 5 years time my back of a fag packet plan is


Age 45 - 60 live off the proceeds of the business sale. The main question is how best to invest that. Maximising 2 s&s pensions each year and possibly continuing to add the allowed amount into the SIPPS is an easy decision. Still undecided on the GIA route for the remainder.

Age 60-68 - SIPP that will hopefully continue to grow well, after contributions potentially stop in 5 years time.

Age 68- death - Remainder of Sipp to top up 2 (maybe 1 god forbid) state pensions and LGPS pension.

Die leaving everything that's left to 2 kids. If no cash then realistically that would be a £650k -£700k house in today's market.

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Re: Retire at 45 Plan of attack

#444528

Postby LooseCannon101 » September 22nd, 2021, 6:11 pm

I am 58 with both a general investment account (GIA) and an ISA - both invested in a global equity investment trust (FCIT). Each year I transfer the full £20k allowance from the larger GIA to the ISA, so maximising my tax-free returns.

As has been mentioned, putting all the £500k into a bank account and then drawing from that is a poor choice in my opinion due to inflation. A better option would be in year 1 to put the maximum ISA allowance - £20k each, and say £200k each in a GIA - both in one or more global equity investment trusts. In years 2-10+ the GIA can gradually be moved over to the ISA.

I hope you find this helpful.


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