Is it safe to risk retiring?

[scrumpyjack]

I too would be very averse to putting my money into gilts. There is a huge risk of it being eaten away by inflation. It is a fallacy to say that a wide spread of equities is 'riskier' than fixed interest. They are both risky but the risks are different. Gilts yield less than inflation and that is before income tax, and their capital value is likely to reduce in real terms. There is therefore a big risk of loss of purchasing power if you invest in gilts but it will be relatively slow compared to the risk of a sudden loss (or profit) in holding equities.

Also consider that In your early 40's withdrawing from work may make it unfeasible for you to re-enter the labour market in 10 years time if that became necessary and you would still be years away from drawing the state pension.

A few million sounds like a lot of money, but you could live for another 50 years. Over that timescale it could easily vanish!

If you do go ahead i would suggest you make sure you are well diversified geographically and by currency as well whether fixed interest or equities. I would not like to rely too much on the UK economy or currency!

[TUK020]

I think the last comment about maybe 50 years to go really brought home to me the fact that you have to be ready for all sorts of scenarios.
In the last 50 years we have had 1970s style inflation, and there has to be a real chance that this will occur again in the next 50.

Diversification does seem to be the order of the day, and it is not just gilts/equities, but also gold, commercial property, etc, international diversification as mentioned by previous posters etc.

In that light the OP's portfolio does seem overly skewed to cash & f.i.

[dspp]

I can understand (but not entirely agree) with the spending on the kids bit, so set that aside.

So ...... here's a few suggestions for something to do whilst working another year:

- Cut down on the other spending a bit. This will likely involve being open with your spouse which is deliberate. You are at £60k self-spend + £30k school-spend now if I read right. So try targetting (say) £40k self-spend. That will force you to think, experiment, discuss, and experience whilst still being at work.

- Your biggest risk is an expensive divorce.

- During the year also try to think through and write down 2-3 years of no-working that could be accomodated given your childrens' schooling. I can think of plenty, but the point is tat if in a year's time you do decide to FIRE then you will have had a long time to map out at least a few years worth of things to do.

- Once out you may find it harder to get back in than you think. So you are quite right to think of it as a one-way trip imho.

regards, dspp

[hiriskpaul]

WorkShy, great name, just a few thoughts.

Firstly, your asset allocation is similar to mine and may well be fine if you are comfortable with it. Excluding property I target about 25% in global equities, mostly passively managed now, about 50% fixed income and 25% cash. Much of the 25% cash is temporarily invested in a Provident Financial bond, maturing on 4 October, but is usually deployed as margin for option trading. That means it is available on instant access and so earns negligible interest. My fixed income investments have swung all over the risk spectrum, but weighted average yield is currently around 5%, so mostly below investment grade and with a weighted average duration of about 12 years. I see no great reason to alter my asset allocation at present and agree with your view that most investment assets are expensive. In Buffett language we are closer to the "Be fearful when others are greedy" side of the road.

The second point I would make is that you may find downsizing more difficult than you think. Moving is really expensive so you don't really want to make mistakes. Also, your circumstances may not be clear even after your children turn 18. Our youngest has just moved back in with us for a while to start a phd and she is 23. The others still regard our London house as their home and regularly seem to need it.

Taken altogether, I am not sure you are at the point where you can retire unless you are prepared to completely change your lifestyle and/or rein in your spending. I am 55, probably retired, but due to inflated asset prices I would not be comfortable at present spending more than 2% of our investments per year, excluding our property. That would change if we had a definite plan to downsize.

[Mapfumo]

Your biggest risk is an expensive divorce.

Absolutely. Divorce and/or cancer/heart attack statistically way, way more likely risks than running out of money on a 2% withdrawal rate.

Sounds to me like the real issue is that you don't know what you want to do with the rest of your life. I'm the opposite - my list of things I want to do when I stop working in a few months is pretty long, and I can't imagine getting bored, but I appreciate that's not the case for many people.

[Chrysalis]

Hi
I'm just into my 50s, 2 children who should be away to university in 5 years or so, and have (mainly through an inherited windfall) invested assets of about £2m, plus a DB pension payable at 60 of £30k per annum, and state pensions. Children have additional inheritances which means they won't need funding from our assets post 18. I don't count the house in my net worth, but it might realise something eventually if we downsize.

Our annual spend is in excess of £60k (I don't think that's difficult to achieve with four nearly adults, two of whom are growing fast! And a large house to maintain) but I think it will reduce once we have more flexibility over holiday times.
I actually feel pretty relaxed (now) about the 'do I have enough' issue, and suspect we will likely end up with excess to give away. It has taken a while to reach that point though, it requires acceptance of the inherent uncertainties of life. I've concluded that endless modelling is not going to provide any more certainty - its more a state of mind that develops rather than a number you achieve from a calculation. I am as sure as I can be that we could both stop work tomorrow and be fine.

And yet, and yet....we are both still working, and more or less earning enough not to need to draw on the assets for day to day living expenses. I've cut back to two days - like you, I don't really enjoy my work, but I find 2 days gives enough time outside of work to explore other avenues. I'm volunteering, learning a couple of new skills, and gardening. I also find it comforting to have an earned income stream as a diversified, whilst I still have the human capital, and whilst still tied to the rhythm of the kids school timetable. Overall, I'm enjoying the mix and feel rejuvenated.

I agree with others who say that your main issue seems to be having a plan for what to do instead of work. I personally think you have enough financially to not work again, but I also think that might not be the most sensible or most likely outcome. You definitely have enough to pause and rethink your life and direction, assuming that you'll find some gainful employment at some point.

As to asset allocation, that's a very personal issue and I would say, if it ain't broke don't fix it. I'm rather cautious, and have had to make a conscious effort to get to 50% equities. Others would be higher equities due to my decent DB pension. I have a lot of cash, maybe about 10 years of expenses mostly in a 'ladder' of fixed term deposit accounts, and the rest in bond index funds. I'm pretty comfortable with that - at least I think I am, I have yet to experience a serious crash!

Good luck with what you decide. You've got loads of options, enjoy!

[hiriskpaul]

@WorkShy, on reading your second post, it is clear that your biggest looming unknown is the cost of the school fees. If it were not for those you could easily retire, so I would wait a while until you have clarified the position and cost. My children went to a nearby state school and did better, socially and academically than their peers who went private. It was a very good state school, but even so it was not an easy decision not to go private. It is very easy to get swept along the path of private education if most other people around you are doing that, but there is absolutely no guarantee that private schools are automatically better (whatever better means) than good state schools. They tend to do better academically because they are often more selective and don't allow kids to take exams if they are likely to pull down the results (some state schools do that as well though). Some parents I know even had to pay for additional private tuition above the school fees or risk having their kids kicked out or refused exam entry. One child was forced to retake an entire year, which was very demeaning and turned out to be a total waste of time as she still left school with barely any qualifications. Take a critical and opened minded view of the schools available to you, then choose the best for your children. If that ends up being state, you will save yourself a packet. If it ends up private, so be it, you can afford it, but you may have to work a little longer.

[Chrysalis]

Agree with hiriskpaul.
We have gone down the state route, even though kids have been left enough to cover fees.

[DiamondEcho]

2) Perhaps this seems odd, but in the circles I move most people have a mortgage and work hard to pay it off. I might feel uncomfortable saying "haha - I've retired".
3) What will I do with my time? It's important to have something to occupy yourself that provide both some social interaction, mental exercise and self-worth, and though I have vague ideas, I've nothing concrete. I could just become a full time fund manager of my own money (I nearly am anyway) - but- is this retirement? Not really.. I'd be sat at my desk fretting about shareprices all day. So I'm considering reversing a lifetime of self-investment and finding someone else to manage my money. This might be a bigger change than retirement in getting me away from the computer screen all week.

Taking two of your points, IME:

2) It a new and potentially uncomfortable position to have split from 'the tribe' and appear different from them. A lot of social bonding is via 'connecting' at various levels, similarity and status, so setting yourself apart won't help. It is far harder to try and connect, or even chat or relate, to a person who you perceive has just socially blown you out the water in the popularly perceived ranks of lifetime success.
So, simple, never tell people you have retired. It's a social kiss of death, certainly pre-50YO, unless your social circle is people just like you.
Make up some pursuit as 'mundane, ill-rewarding and thankless' as a reflection vs the person quizzing you. It is quizzing, it's simply social triangulation (instinctual establishment of relative hierarchy).
3) Yes, it's good you recognise this, you WILL have to find a new focus in life, around which to build a routine, a reason to get up, a self-worth, and an identity. Mine currently is as you suggest 'being the manager of my own money'. That's done well for me time and purpose-wise for many years. If I went hands-off into passive investments I'd consider following useful personal interests. I've had stints of this doing both formal accounting and cooking qualifications, both of which were I found rewarding.
Re: social interaction, it'll shift. Employment brings it to you on a plate, along with relative status. In retirement you have to back-fill it, or 'spend all day alone in the garden shed'. This is one of the challenges of retirement that aren't often discussed, and perhaps worthy of it's own topic. But keeping yourself busy/engaged with the world via being a self-investor is in part a useful stopping off point to answering that.

- I too am facing the question of 'What will I do?' after I phase to passive investing. My wife asks why I spend so long working on my investments 'when you don't need to', without seeing that from her careerist life there is more to it (as above). When I do go passive, I'll have to evolve again, and find new reasons to get up, and engage in the world and each day... lest the shed beckons

[tjh290633]

3) What will I do with my time? It's important to have something to occupy yourself that provide both some social interaction, mental exercise and self-worth, and though I have vague ideas, I've nothing concrete.

Apart from any paid work, there are lots of volunteering opportunities. I got myself involved with our community bus operation, for example. Local government is another area where they are often short of experienced people. If you have any accounting experience, many local organisations are always on the lookout for treasurers or auditors. Your local Patient Participation Group might welcome a recruit.

There is certainly no need to sit around twiddling your thumbs.

TJH

[Lootman]

3) What will I do with my time? It's important to have something to occupy yourself that provide both some social interaction, mental exercise and self-worth, and though I have vague ideas, I've nothing concrete.

Apart from any paid work, there are lots of volunteering opportunities . . . There is certainly no need to sit around twiddling your thumbs.

I understand some people have to keep busy. But others, like me, are never happier than when there is a day with no commitments or obligations. Enjoying doing nothing is an important skill. My aim is to pass time pleasurably,and not to necessarily "achieve" anything. I am perfectly content to fritter time away

[WorkShy]

In reply to a few of the comments:

I didn't clarify this but my fixed income portfolio now has very few gilts. I was in quite a chunk of long-duration gilts and ILGs between 2011-16 (I rotated out of most UK equities) but I sold nearly all of that post Brexit. I am very aware that long-duration gilts have a serious amount of risk (given the mod duration on those funds is 20+). I also do understand that fixed income is vulnerable to inflation but I have some conviction that the risk skew is still not toward high inflation. Most of my current portfolio had been in "risky" fixed income i.e HY and EM bond funds, secured lending on property or renewables etc with a willingness to take FX risk. Yields vary from say 4% through to 12%. My background gives me some insight into these products (in comparison to equities where I feel clueless). The issue is that I'm exhausting good value plays in fixed income. Hence the increasing pile of cash doing nothing. I'm quite risk averse generally but I can take risk when I do enough analysis to generate some conviction (justfied or not!). I know the advice is that it's better to be totally passive but I just find it hard to sit on large lumps of equity trackers.

With regard to cutting spending. I get that we may spend a lot compared to the average family but on the other hand compared to my colleagues,friends and the parents of my children's playmates we are exceedingly frugal! No Range Rover and Porsche in the drive (1 second hand Honda CRV), no business classs flights etc. The running costs of a large house and holidays for 4 (my other half is Australian so 3 weeks in Oz over Xmas and 2 weeks in the summer costs about £12k) mean that £40k is just not palatable. I also like to assum £60k/annum spend because it gives me a margin of error i.e if something goes wrong we can cut down to £40-50k. I take the same view on state pensions, assuming they will be zero. As a few people have said 50+ years is a very longtime. One of my biggest concerns is that CPI adjusting my expediture will underestimate my real requirements i.e it may adjust for cost of living but not for improvements in the standard of living, so that you may need say CPI+2% just to standstill.

I can understand some posters preference for state over private schools.There is a grammar option in my area, so I can consider that option in the next few years but for now I'm assume private fees to give myself more error margin. It's the same with the uni fees, where I assume that they might do undergrad at a US uni rather than UK one.

I appreciate all the comments. Thanks

[Chrysalis]

Hi.
Ok, so you are an experienced and accomplished investor. I reiterate my point above, ie I don't think you need to change your approach there.

What strikes me is that you ask 'is it SAFE to RISK retiring?' From a position in which you have clearly made a LOT of money from your own efforts in a short space of time. You mention you are risk averse (although your strategy shows you are able to take calculated and informed risks with considerable success). I wonder, have your historical returns been so dramatically good that you (probably rightly) suspect (or fear) that returns going forward might not be so good?

You mention that you don't enjoy work, but are motivated by earning a high income. You are also worried about how others might view it if you 'retired', and you've had some useful reflections on that.

I just wonder, if the main question for you is really this, what are you going to do that will motivate you, apart from amassing more and more wealth? There really does come a point, as I'm sure you appreciate, when the desire for more and more security and certainty (in the form of ever more wealth) becomes a block to actually living your life. Money should support and enable what you want from life, and financial planning should start with that question.

Btw, unlike others, I don't think your income requirements are crazy. As I said, my family of four spends more than £60k per year (sometimes a lot more) and we live in a cheap part of the country miles from London. I plan for £60k per year long term, but, I know my cautious nature, and I think that will turn out to be plenty (i.e. more than needed). I agree with you that over many decades we can't know whether the cost of living will rise (or fall, as it has done for home owners over the last 30-40 years). I therefore try to triangulate with average earnings and with survey assessments of 'comfortable' retirement incomes, to keep some perspective. That is also my reason for equity investing, as I'm reasonably convinced by th argument that equities are the most likely asset class to keep pace with the true cost of living. (I'm a passive investor with no claim for edge or expertise in investment selection, so my strategy needs to reflect the limitations of my expertise).

I think really, you need to start with the question, what do you want? And then work out how your resources (financial and other) can support that.

[Lootman]

There really does come a point, as I'm sure you appreciate, when the desire for more and more security and certainty (in the form of ever more wealth) becomes a block to actually living your life.

I cannot speak for the OP but I haven't reached that point yet! Building more wealth isn't just about addressing the last percentile risk of running out of money if you live to be 120. It's also about the satisfaction of getting the markets right, or at least more right than average. Investing isn't just about financial gain but also about the satisfaction of doing a job well.

For me, the biggest risks ahead are political. Having a few million is fine in most scenarios but people like us will be in the cross-hairs of a future government that is either ideologically opposed to success and prosperity (like Corbyn, perhaps?). Or in the event of a crisis, like the inability to fund the NHS, the state pension or public sector pensions when, again, the government will seize wealth where they can.

Ensuring a desirable lifestyle in the face of such an environment is about more than having money and assets. It's about how you can immunise yourself against political risk. 38 years of Thatcherite free-market nirvana may have made us complacent.

[thebarns]

Do you have a solution Loot ? To the political question ?

Presumably somehow moving assets abroad or perhaps spreading them round the wider family so no one individual is perceived as having too much ?

I agree with you though.

Corbyn/Sturgeon/Public sector trade unions are all after the middle class majority who have a bit of comfortable wealth, however that may have been derived.

Corbyn/Sturgeon/Public sector bleat and bleat and bleat forever being ignorant of the incredibly expensive pensions they are given.

But who speaks up for 83% of the population, being the private sector ?

And who speaks up for the middle class wealth ?

Most of those sort of people would have gravitated to the Conservatives, but they are an utter shambles of a party.

So like you, I fear the biggest factors in my retirement will not be so much the financial performance of a reasonably well spread basket of investments, but the risk of a catastrophic political wealth upheaval in this country and or some horrific war - both of which are outwith of my control.

[DiamondEcho]

There really does come a point, as I'm sure you appreciate, when the desire for more and more security and certainty (in the form of ever more wealth) becomes a block to actually living your life.

... Ensuring a desirable lifestyle in the face of such an environment is about more than having money and assets. It's about how you can immunise yourself against political risk. 38 years of Thatcherite free-market nirvana may have made us complacent.

Both valid points, and thoughts that I share.

Jabd - Yes I agree. So there might be a need for being able to in some form recognise 'how much is enough', re: wealth and hence income. There is a point IMHO when there is a major mental shift to be made from being an accumulator to crossing a line, a point in time of your choosing to 'retirement' and going passive and being a spender.
I am still accumulating, for maybe just a year more now, and looking ahead I imagine going passive is not going to come easily, because I will be noticing what seem to me the opportunities to invest that I've had to act on this past decade+. I wonder to what extent the personality type that facilitates a person to create such a self-constructed retirement portfolio, is the same as one who can cross the line and accept that they'll now simply ignore financial markets since they've achieved what they set out to. For context this isn't just a pre-retirement interest, it was my former career, and that mentality and drive to 'make more' has been with me my whole adult life.

With that in mind I currently imagine switching perhaps 90% of my investments to passive/low-risk, so the household income should be locked in from thereon after. Then having perhaps 10% left in my account. It would be invested along similar lines as previously, but on a much smaller scale of course. It wouldn't be a 'play account', my personality wouldn't allow it to be run any less rigorously than my original portfolio . But it would keep me mentally as engaged as when I ran the full portfolio whilst have negligible stress, and perhaps I could divide off gains from it for pure recreation/special dinners out or slap-up weekends away to make such gains tangible and immediately rewarding. Thus I'd maintain my innate need to succeed in succeeding, whilst tightly corralling off the potential longer-term fallout of 'events'.

Loot - This is another prescient and relevant observation to where I am on the pre-retirement stage. I might have got as much as we need, but I'm not yet sure of that. I need to consider what the income derived would reduce to once I make some appropriate further de-risking/up-diversification adjustments. So then the question you ask comes into play, it might be appropriate for it to stand alone in it's own topic. What do you do? In previous times you might have put it in a 'Swiss bank account', but that no longer exists for that purpose. Do you put it in a form of offshore trust so capital and income generated isn't taxed at source, it can accumulate gross, but might be liable to tax on repatriated funds?
This is a question I'm considering instructing an 'expert' to guide me on. A Chartered Financial Planner, a tax expert? Don't know, I'm not even sure how to start to figure out an answer.

[Lootman]

Do you have a solution Loot ? To the political question ?

Presumably somehow moving assets abroad or perhaps spreading them round the wider family so no one individual is perceived as having too much ?
Most of those sort of people would have gravitated to the Conservatives, but they are an utter shambles of a party.

So like you, I fear the biggest factors in my retirement will not be so much the financial performance of a reasonably well spread basket of investments, but the risk of a catastrophic political wealth upheaval in this country and or some horrific war - both of which are outwith of my control.

Loot - This is another prescient and relevant observation to where I am on the pre-retirement stage. I might have got as much as we need, but I'm not yet sure of that. I need to consider what the income derived would reduce to once I make some appropriate further de-risking/up-diversification adjustments. So then the question you ask comes into play, it might be appropriate for it to stand alone in it's own topic. What do you do? In previous times you might have put it in a 'Swiss bank account', but that no longer exists for that purpose. Do you put it in a form of offshore trust so capital and income generated isn't taxed at source, it can accumulate gross, but might be liable to tax on repatriated funds?

This is a question I'm considering instructing an 'expert' to guide me on. A Chartered Financial Planner, a tax expert? Don't know, I'm not even sure how to start to figure out an answer.

As you say, DE, probably a separate topic. I do not have a bulletproof solution to the problem, but I think it's important to ask the question. The risk of a confiscatory government in the future is a bigger concern to me than whether or not I need another million. I still do not trust the UK electorate to keep delivering governments that are benign to people like us, and the tendency of people in the UK to resent success and project envy seems undiminished.

Having assets overseas won't necessarily help if you remain within UK jurisdiction. But it's better than hoping that you will be able to export assets overseas in a crisis, as the government could impose exchange controls overnight - I'm fairly sure Corbyn would have voted against Thatcher's abolition of them but I think he wasn't a MP at the time.

Likely targets of an envy-driven government would be high-value ISAs, on the grounds that it would be easy to sell a policy that "stopped millionaires paying no tax on their income". And houses since they are the one asset that cannot be moved from the jurisdiction. And of course no government can resist messing with the pension rules, showing the risk of holding any asset that is captive and a hostage to fortune.

In fact it is probably fair to say that the worst assets to hold when there is political risk are the assets that typically come with the best tax benefits i.e. homes, ISAs and pensions. Politicians love sticky assets.

[DiamondEcho]

As you say, DE, probably a separate topic.

Done:
viewtopic.php?f=30&t=7546
'Protecting against political risk to retirement income'

[WorkShy]

Perhaps I am missing the obvious here? But a pot of >GBP 5 million can be drawn down at a rate of GBP 50,000 per year and it will STILL last for a 100 years. What is there to worry about?

My pot isn't £5mm. I have £5.35m but you need to deduct £1.5m for house (and assume that if we downsize any excess goes to children) and then deduct another £0.7m for school/uni fees. The residual is £3.15m. If I could earn CPI flat, tax free, then drawing £60k/annum gives me around 52/53 years to take me to 95/95 or so. The problem is that I cannot earn CPI flat, after tax, with zero return volatility.

Take the following initial conditions. £3mm initial pot, split £500k ISAs, £1.25mm SIPPs, £1.25mm offshore life bond (so all principal is tax wrapped but some flows are not). Blended tax rate 15%. Draw £60k/annum. Calculate success rates at age 100 using Monte Carlo, assuming Gaussian dist.

CPI 3%, CPI vol 3%, asset returns 6%, asset return vol 10%: success rate 80%
CPI 3%, CPI vol 3%, asset returns 5%, asset return vol 10%: success rate 58%
CPI 3%, CPI vol 3%, asset returns 6%, asset return vol 6%: success rate 94%
CPI 3%, CPI vol 3%, asset returns 5%, asset return vol 5%: success rate 80%

Sequence of return risk is a killer. Only on a 3% real return with vol level of just 6%, do I pass (94%). So this pretty much excludes equity heavy portfolios given their return vol. For example a 2% real return with a more reasonable vol assumption (say 10%) for an equity heavy portfolio, my success rate is only 54%. So effectively I need 3%+ real returns on my assets, with a portfolio Sharpe ratio probably close to 1. Most early retirement blogs seem to assume portfolios can generate historical real return levels of 4%+ but I admit I'm not convinced. Moreover, tax rates need not to rise. Wealth taxes could stuff me completely.

[WorkShy]

Hi.
Ok, so you are an experienced and accomplished investor. I reiterate my point above, ie I don't think you need to change your approach there.
What strikes me is that you ask 'is it SAFE to RISK retiring?' From a position in which you have clearly made a LOT of money from your own efforts in a short space of time. You mention you are risk averse (although your strategy shows you are able to take calculated and informed risks with considerable success). I wonder, have your historical returns been so dramatically good that you (probably rightly) suspect (or fear) that returns going forward might not be so good?

I would not say I am an experienced/accomplished investor. As I said in an earlier post, investing since 2009 has been like shooting fish in a barrel: you simply couldn't miss. The key thing was to be invested in something/anything except cash. I suppose my view here is that a large chunk of many asset returns since 2009 is just an effective PVing upfront of cashflows/income streams. As bond yields have collapsed, discount factors have moved ever closer to 1 etc. So my fear is that there are two scenarios from here. One a form of limbo (secular stagnation etc) where assets just get more and more overpriced as the hunt for yield gets more extreme. I worry that generating even a 2% real yield might be tough in that scenario. The other that global yields rise (whether from inflation, fiscal policy etc) and every asset class takes a haircut but at least this might get us back to a more "normal" environment. In that scenario I worry that my actual wealth might be overstated by a factor of 2.

On reflection I think perhaps I am not risk averse. Perhaps the problem is I am a pessimist!