Retire at 45 Plan of attack
Posted: 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?
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?