Is it safe to risk retiring?

[Chrysalis]

Ok, so you're very good at seeing the worst case scenario. The advantage of that is you'll probably always have enough of a safety net and you won't take big steps without thinking it through carefully. The possible downside is that you'll find it difficult to take the leap of faith that is necessary if you are going to do something different with your life. Paralysis by analysis if you like.

It's just not possible to be completely certain about the future. You might even die before it arrives! All I can say is, you're in good shape to step off the pedal a bit. But if you're not convinced, work a bit longer until you either are convinced, or events intervene to force the issue.

I have to say I've been going round this loop (or my own variant of it) for a while as well. I am encouraged that most people report some anxieties about their finances as they let go of earning, but in general, these ease off pretty quickly. So I try to see it a necessary discomfort that must be faced at some point, as I certainly don't intend to die still in the harness!

[Longtermyieldman]

Some thoughts for the OP to ponder, from one who's done it:

- The only truly safe withdrawal rate is zero. Relying on asset sales is a risky game because you have to sell more 'units' in a downturn than in a boom, which is counterintuitive. Much safer to live on the natural yield of a portfolio that is likely to increase its payouts at least in line with inflation (ideally more)

- Fixed income is a very bad fit with FIRE, since the effects of inflation will likely have more impact on an early retiree's earnings than on someone who retires later in life. So equities and perhaps BTL may be better asset choices

- If you're worried about dividend cuts this can be mitigated in three ways: investment trusts (because they carry revenue reserves, often as much as a year's worth), diversification (in particular, having some international exposure helps because the Sterling worth of foreign currency dividends will rise if the Pound falls) and of course holding some cash (I keep a year's base spending, i.e. excluding luxuries, on deposit)

- Modesty precludes me plugging it here but I recently wrote a report on FIRE for a well-known personal finance website that contained two income portfolios aimed at early and mainstream retirees (and a capital growth one for those in accumulation mode), all based on investment trusts. The FIRE one generated a yield of around 2.9 percent a year, and raised its payouts at (from memory) about 10 percent a year over the past decade, maintaining its income throughout the GFC. The mainstream one yielded more (about 3.6 percent I think), which grew at about half the other's rate. With the OP's net worth, the first of these would deliver more income than needed now, with a significant surplus in later years in the base case, which would provide a lot of wriggle room in the unlikely event of another GFC-scale shock

- Notwithstanding the above, he has the luxury of a number of other options. FIRE often presents the opportunity of geographical arbitrage. I assume he's in London; retiring might enable a move somewhere nice but less costly, not just in property terms but cost of living too. And there are parts of the country where the state schools are good enough that the £700k provision for fees could be avoided

- I think some people have mentioned tax-related matters, including concerns about estate planning; these may be bigger considerations than income. A family investment company may be worth considering

- Unless you believe in reincarnation, you have only one life. There are so many interesting things to do if you don't have to be at a desk doing someone else's bidding in return for a salary. The OP has ample net worth to retire now; I see no reason for him to continue working unless he actually enjoys it.

[Itsallaguess]

- Modesty precludes me plugging it here but I recently wrote a report on FIRE for a well-known personal finance website that contained two income portfolios aimed at early and mainstream retirees (and a capital growth one for those in accumulation mode), all based on investment trusts.

The FIRE one generated a yield of around 2.9 percent a year, and raised its payouts at (from memory) about 10 percent a year over the past decade, maintaining its income throughout the GFC.

The mainstream one yielded more (about 3.6 percent I think), which grew at about half the other's rate.

I fully understand why you might not have wanted to include a link to your on-line article in the above post, but I hope you don't mind me asking you if you'd please do just that?

I'm sure there are many people here who would be very interested to read it.

Cheers,

Itsallaguess

[Vince56]

Longtermyieldman - I second Itsallaguess. I'm sure there are many others who would like to see your article.
Vince

[TUK020]

Likewise
Tuk020

[WorkShy]

Some thoughts for the OP to ponder, from one who's done it:
.....

Thanks for the post. I do feel underweight equities at this point, but really need to think through where 'neutral' is and what sort of glide path I should use to get there. I would also be interested in any reports on using equity ITs for retirement.

I understand the negative view on fixed income with regard to FIRE. It's not as though I'm sitting in gilts or corporate bonds but I do accept the fixed income weighting needs to come down. It's just historically it's always where I've been able to generate the best risk-adjusted returns. I just find it easier to tale a view on 5-year 16% coupon IBRD bonds, denominated in BRL, than GSK or whoever. I prefer macro to micro. I just have no interest in analysing companies but I'm happy to look at yield curves and fx forwards etc.

With regard to tax planning, most of the assets are tax wrapped. My SIPP in under fixed protection 2012 (£1.5m LTA). Rather than go the FIC or trust route, I decided on an offshore life bond. There are pros and cons to all. The cost of the life bond was fairly reasonable at 40bps running (so comparable to a broker platform). I like the fact some of my money is offshore, the top-slicing relief will likely come in handy and I can move units between myself, wife and children at will. I was influenced mainly by the fact that those I know who are 10x richer than me seem all to have offshore bonds. The advice was that FICs were more vulnerable short-term.

[Wmnr]

Out of interest, which offshore life bond did you go for?

[WorkShy]

Out of interest, which offshore life bond did you go for?

Lombard to write life bond, with JPMorgan as bond custodian/manager.

[Mark]

@Workshy, when you say 'FICs are more vulnerable short term', what do you mean by that? Vulnerable to changes in taxation policy?

[Chrysalis]

I’ve never really understood the pros and cons of offshore life bonds. I’ve had attempts to sell me them in the past but because I don’t fully understand them, I’ve never taken the bait. I also read that commission is high which tends to put me off anyway.

[WorkShy]

@Workshy, when you say 'FICs are more vulnerable short term', what do you mean by that? Vulnerable to changes in taxation policy?

I was overstating this risk a bit. The advice I got this year (both from big 4 accounting group and also separately from JPM private bank) was that the HMRC might look to taking action to tighten up the rules on the use of UK resident companies as investment vehicles. The proliferation of these in recent years (for all the obvious reasons) is starting to make them uneasy. Therefore the advice was just to make sure any FIC is correctly structured.

[WorkShy]

I’ve never really understood the pros and cons of offshore life bonds. I’ve had attempts to sell me them in the past but because I don’t fully understand them, I’ve never taken the bait. I also read that commission is high which tends to put me off anyway.

I wouldn't say I'm a huge fan of any of these types of products (trusts, life bonds, FICs, QROPS etc). However, once I had take fixed protection on my pension to protect my LTA then I started to consider these really as an alternative way to achieve a gross roll-up on investment returns. The life bond suited my requirements in 2012 somewhat better than a trust or FIC. I suppose my view is that you probably want to diversify over tax wrapper products to reduce your concentration risk to any specific change in legislation.

In terms of costs, they are expensive simply because there is no capping on the charges. However, it could be argued that 40bp (20bp to Lombard, 20bp to JPM) is not that much different to what I would pay as a platform charge on some retail broker platforms. There are no upfront fees or other commissions. Inside the wrapper I can buy and sell funds like it was HL or Youinvest etc. What offsets the pain a bit is that I get access to the transactional capabilities and deal flow from a private bank without having to give my portfolio to (mis)manage (and pay them 1% for that). Plus my portfolio would be way too small for a PB like JPM to care about.

[Longtermyieldman]

- Modesty precludes me plugging it here but I recently wrote a report on FIRE for a well-known personal finance website that contained two income portfolios aimed at early and mainstream retirees (and a capital growth one for those in accumulation mode), all based on investment trusts.

The FIRE one generated a yield of around 2.9 percent a year, and raised its payouts at (from memory) about 10 percent a year over the past decade, maintaining its income throughout the GFC.

The mainstream one yielded more (about 3.6 percent I think), which grew at about half the other's rate.

I fully understand why you might not have wanted to include a link to your on-line article in the above post, but I hope you don't mind me asking you if you'd please do just that?

I'm sure there are many people here who would be very interested to read it.

Cheers,

Itsallaguess

I'd love to help, but it was a paid-for report, so I think anyone wanting a copy would have to order one from the Fool.

[TedSwippet]

The only truly safe withdrawal rate is zero. Relying on asset sales is a risky game because you have to sell more 'units' in a downturn than in a boom, which is counterintuitive. Much safer to live on the natural yield of a portfolio that is likely to increase its payouts at least in line with inflation ...

This line of thinking always bothers me somewhat. Its logical and inevitable end-point is that you die leaving behind a huge amount of unspent cash.

Perhaps defining 'natural yield' to include both dividends and some element of capital gain ameliorates things a little. A stock's dividend declaration will be somewhat arbitrary. More the management's view of what they would like to pay out to shareholders than a direct measure of the corporation's real return. But even allowing for this, it still seems unavoidable that your heirs and not you will be the ones spending the bulk of your retirement savings. Safe then, but at huge cost.

Of course, for some people leaving a legacy might well be the aim. Not for everyone, though. Personally I neither need nor want to leave a great deal behind.

[Longtermyieldman]

@TedSwippet, I agree with you - ideally we'd all both enter and leave this life with nothing. The problem is that, without certainty about when we'll die, it seems prudent to take only as much from one's investments as they throw off in natural yield, in order to have a reasonable prospect of maintaining that income indefinitely. Eating capital reduces future income and hence increases the likelihood that further capital must be eroded, a vicious circle.

It would be great if we lived in an era in which inflation-proof annuities were available cheaply, but we don’t. Absent that, a Dutch-style means of pooling individuals' savings and withdrawing an income reflecting pooled longevity prospects would help. But I'm unaware of such a scheme in the UK.

[DiamondEcho]

it seems prudent to take only as much from one's investments as they throw off in natural yield, in order to have a reasonable prospect of maintaining that income indefinitely. Eating capital reduces future income and hence increases the likelihood that further capital must be eroded, a vicious circle.

For me, I'm not going to want a straight-line income throughout retirement. I expect to figure out some way to 'front end' the draw-down, as a) I have no call to leave anything to anyone and b) I know our call on my funds will be higher and more likely to be enjoyed in the earlier years.
Am I going to 'buy a Jag' at 90? Nope, but it's still the kind of thing I'd like to entertain when I retire at say 60.

[Hariseldon58]

Work shy

Well done on acquiring a good pot but you are way too pessimistic. Your Income needs in relation to your pot size will work out fine.

Avoid the “clever” investment vehicles , trusts life bonds etc concentrate on a diverse portfolio.

Your mathematical modelling can be ignored , it may be interesting but in the long run ...useless.

The assumptions that are made in such models are pretty hopeless for the long term ( small changes in the underlying model create huge variation in output. ) this comes from an Oxford maths scholar. Clever quants abound , using sophisticated techniques and make a hash of it, a need for £60k a year off £3000k+ will work out. The saving grace is we don’t live for ever and the provision of a reasonable “safe pot” will see you through bad times.

As this too will pass ....the future is not a repeat of the past, there may be similarities but that’s as far as it gets.

The bad things that catch you out will be unexpected, health , relationships, accidents , things that you cannot control and come out of the blue, money will not be one of them, enjoy the ride, the glass is half full.

[davidm84]

With a total of £3,850,000 excluding your home residence one approach would be to keep three year's expenses and school fees (£270,000) in cash and invest the remainder for income. Investing this £3,580,000 so as to match the FTSE all share index yield of 3.64% would produce £130,000 per year. This is comfortably over the required £90,000 per year. Your requirement of £90,000 only requires a 2.51% yield on £3,850,000.

The investment portfolio would need to emphasise equities over bonds (high yield) and property (REIT's). Investment trusts with revenue reserves to sustain dividends in down years should enable any temporary capital falls to be ignored.

You might like to consider some portfolio ideas by looking at these websites: AIC (dividend heroes list), Investors Chronicle (Investment trust portfolios), John Baron portfolios.