Is it safe to risk retiring?

[WorkShy]

Hi
Saw this forum and thought I might tap the collective wisdom. I'm 43, married with two children (both under 10). I work but my wife doesn't anymore. I'm tired of work. Never enjoyed it and not sure I'm good at it etc. Last thing I enjoyed was doing my PhD and that was 20 years ago. I've earned good money but I'm pretty risk averse when investing. I missed most of the London property rally because I didn't want to leverage excessively, I prefer fixed income to equities etc.

At this point my portfolio looks like the following (total c £5.35m)
Prime Residence: £1.5m
Other houses: £350k
Equities: £800k
Fixed income: £1.8m
Cash: £900k

I won't get any inheritance and we have no DB pensions etc. Assuming when we downsize we give the excess to the children for a deposit and ringfencing about £700k for school and uni costs, then I'm left with a pot of about £3.15m. Excluding school costs, we spend around £60k/annum, so it looks like a withdrawal rate of circa 2%.

I've read the literature on SWRs etc and, based on their numbers, I should be able to retire now. The problem is that I'm not really convinced the idea of a 4% SWR really stands (even with variable withdrawals, GK rules etc). I found a piece by Wade Pfau who seemed to argue the SWR was more like 1.6-2.3% for a 40 year retirement (and I'm looking at say 50-60 years). He seems to assume high fees so perhaps this might be 2.0-2.5%. To me this doesn't actually seem that conservative with Gilt yields at 1-2% in the long-end and the S&P CAPE at close to 30. I simply can't get any decent real yield even from corporate bonds.

What I'm wondering here is am I being too conservative? Moving to a full equity portfolio would probably generate dividends greater than my required income but it just seems hugely risky which doesn't suit me at all. Is is better to wait to retire after a stockmarket crash when valuations aren't so extreme or hopefully for a backup in bond yields.

[BarrenWuffett]

I've read the literature on SWRs etc and, based on their numbers, I should be able to retire now. The problem is that I'm not really convinced the idea of a 4% SWR really stands (even with variable withdrawals, GK rules etc). I found a piece by Wade Pfau who seemed to argue the SWR was more like 1.6-2.3% for a 40 year retirement (and I'm looking at say 50-60 years). He seems to assume high fees so perhaps this might be 2.0-2.5%. To me this doesn't actually seem that conservative with Gilt yields at 1-2% in the long-end and the S&P CAPE at close to 30. I simply can't get any decent real yield even from corporate bonds.

What I'm wondering here is am I being too conservative? Moving to a full equity portfolio would probably generate dividends greater than my required income but it just seems hugely risky which doesn't suit me at all. Is is better to wait to retire after a stockmarket crash when valuations aren't so extreme or hopefully for a backup in bond yields.

I think you could easily generate 2% or 3% p.a. from a reasonably conservative portfolio.

I would not get too hung up on dividends and yield...what matters is total return. If you portfolio generates 5% (on average) every year then you can withdraw 4% indefinitely.

I am in drawdown and use Vanguard Lifestrategy 60 which may be too high equity for you but maybe VLS 40? I have a cash reserve of 10% and merely sell 4% of my units at a set time each year and transfer the proceeds to my BS from which I take a monthly amount.

Here's an article on SWR by DIY Investor which may help.

http://diyinvestoruk.blogspot.co.uk/201 ... wdown.html

[SalvorHardin]

I would say yes, but first think what you are going to do. Finding something to do is important. For many people their job defines them and they find retirement to be a tremendous shock. It sounds as if that won't be a problem for you because of your attitude towards your work.

2% p.a. dividends are attainable with solid companies with strong moats (e.g. Unilever, Procter & Gamble), international growth & Income funds/investment trusts, so you are not taking the sort of risks that the HYP investors are with their weak moat high yielders which are prone to dividend cuts. Given your situation there would be no need to pile everything into investments on day one, so you could gradually move into income producing investments over several years.

I quit the ratrace 14 years ago at age 39. With quite a bit less overall than you have, but with much lower costs (and no dependents). A 1% yield was enough for me and being someone who has always favoured equities ever since buying my first share at 18 (and has never bought fixed interest) that was no problem. Today excluding my house I'm about 97% in equities of which about one-third doesn't pay any income.

I always keep a couple of year's living costs in quickly accessible deposit accounts. This provides a safety net, both financially and psychologically, for when markets fall (the pressure to panic sell drops drastically when you've got a lot of cash on deposit). I also diversify by country much more than the typical private investor (seven of my ten largest shareholdings are North American operating companies).

Every month I do a very simple stress test on my portfolio (it's a variation on what insurers do) to see what would a 50% fall in both capital and income from equities have upon my lifestyle (if I held fixed interest I'd test by revaluing using a 400 basis point interest rate move against me). So far if this happened there would not be a major effect (I did experience a 47% fall in capital and a 7% fall in income in 2008, which was painful but I stayed retired!).

People's costs fall when retired because they no longer have the work-related costs such as commuting and food (convenience shopping, pricy coffees, etc.). It can be a surprise how much it costs to work, especially in Central London.

The CAPE ratio will drop significantly next year when 2007-08 falls out of the calculation.

Best quote I've ever heard about taking early retirement: "no-one ever said on their deathbed that they wished they had spent more time in the office."

[Midsmartin]

I'm in a similar boat, but I'm 49. We spend less than you do. I reckon that we need to take out about 1.5-2% pa which should be doable. I'm self employed, and actually spend much of my time on my investments. What's stopping me from formally retiring? Probably just that I'm a bit of a chicken, but to expand:

1) What if there's a major economic problem leading to a collapse in markets and/or returns - natural disasters, wars, climate change, over population, inflation etc.. plenty of scope for any of those to pop up in the next 40-50 years and cause a loss of more then 50%. Though if there is such a disaster I probably wouldn't have much of a job anyway. Perhaps I should just live for today and not worry about that.
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.

There is an interesting calculator here which probably you have come across:
https://www.firecalc.com/
It uses US data, but you put in your numbers and it tells you how often you'd have run out of money (or not) had you started retirement in any of the last 100+ years.

[Lootman]

Five million is close to the level of net worth where you almost don't need to invest. If you spent at a rate of 100K a year then it would be over 50 years before you ran out. You could certainly put it all into gilts yielding 2% a year, and spend that same 100K a year without touching the capital. So I'd say you can retire whenever you want unless either you want an extravagant lifestyle or you wish to leave an estate to others.

I would almost worry more about not spending it all and leaving millions behind for the taxman to take 40% of. Or working too long. But either way if you invest in an index fund and just spend the dividends, you'll be fine. And I see little risk with a 4% drawdown in any event.

[SalvorHardin]

1) What if there's a major economic problem leading to a collapse in markets and/or returns - natural disasters, wars, climate change, over population, inflation etc.. plenty of scope for any of those to pop up in the next 40-50 years and cause a loss of more then 50%. Though if there is such a disaster I probably wouldn't have much of a job anyway. Perhaps I should just live for today and not worry about that.
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.

A few thoughts from someone who has been through it.

1) To some extent economic problems in Britain can be reduced through geographic diversification. This is a major reason why my portfolio is so internationalised. And as you've said if there is a major disaster it's quite possible that you would have lost your job anyway. Keep a fair bit in cash (assuming that inflation isn't a major problem) to help you ride out the economic storms for a year or two; what really clobbers most people when they become unemployed due to an economic shock is that they don't have enough savings to keep them going for a few months.

My insurance against a truly massive disaster (Nuclear Terrorism, Korean War, India-Pakistan War, country destroying asteroid strike) is to keep a few % of the portfolio in the shares of Canadian gold explorers wih decent reserves whose business is almost exclusively in Canada. And a larder filled with a couple of months worth of tinned food with cooking supplies (lots of Tinned Haggis, Spam, Beans and Bourbon).

2) Regarding "what to tell your friends" I came up with a fake job that I could do from home and which I knew that most of my friends would be unlikely to question. There's a lot about not telling people about your early retirement in this thread:

/viewtopic.php?t=3214

3) I took another Open University degree as soon as I retired (that takes up quite a bit of time). And started reading a lot more than I already did. And got a lot of travelling in. And got Sky TV installed so I could watch a lot of live sport.

I don't worry (much) about share price movements, the vast majority of which are "noise" - then again I'm the sort of person who views a 10% fall in my portfolio with a shrug, followed by wondering if there's anything interesting on fire sale!

[b0f77]

You have a good size pot for a comfortable retirement and have planned provision for your children. If you prefer a conservative approach there is an interesting article titled 'The Wasting Asset Retirement Model' up on the J Collins Simple Path to Wealth site. I can't post a link but you can google it. The article and comments are good food for thought anyway.

[langley59]

I would almost worry more about not spending it all and leaving millions behind for the taxman to take 40% of. Or working too long.

I have recently been through this dilemma. I liken it to a cricket team deciding when to declare, you can bat on and on until you have enough runs and have eaten up enough time such that there is no way you can lose or you can be more aggressive and give yourself a good chance of winning with a relatively small chance of losing. Similarly you can work for longer and accumulate more money such that you will never run out but you miss the big prize of retiring and having a life whilst you are still relatively young.

The choice was made for me a few months ago by the company I worked for. My portfolio of income generating investments is pretty diverse covering traditional HYP shares, investment trusts and ETFS as well as corporate bonds and National Savings products (ILSC & PBs). It does not quite generate my targeted requirement income to feel completely safe but it is close enough such that I am planning to declare/retire. Similar situation to the OP with dependents but 15 years older. I fill my time with exercise for body and mind, helping the kids and catching up with all those simple things other people do which I deprived myself of for years when working in a long hours high stress job like watching movies and going to the pub.

[UncleIan]

In short, no, nothing's 100% safe, but your position seems safer than most. If you dislike the work you do...why do it? Life is short.

[JohnB]

I think you should map out your spending in phases 1) dependent children, 2) fancy free, 3) dotage. I doubt £60k applies for all of them. Then consider what spending levels you could drop down to with a little sacrifice. In your circumstances there is no point considering subsistence spending levels.

With that much cash I'd take a year out now and see how you like it, and how your spending goes. Reassess at the end of the year, as I doubt your skills will have degraded much, and employers shouldn't mind a sabbatical. I think you'll find you won't be able to spend your cash on yourselves whatever the SWR, so returning to work would purely be to give more to your children. Even the little sacrifice lifestyle will be more appealing than a job you dislike.

[thebarns]

I think you have already amassed more than 99.5% of the UK population will ever manage.

I think it pointless to worry about nuclear wars/asteroids etc, this has been around since the 1960s and is part of life - you may as well worry about dying of an as yet undiagnosed brain tumour.

As Loot pointed out, you have accumulated so much that you could almost draw down on the capital. I think it is very easy for you or someone to arrange your affairs to generate a very safe £60K, even safer if an element of capital drawdown is included, such that you actually need never think about investments again.

So I think you can do as you wish and I would encourage you to do whatever makes you happy.

You are here once and most of us are forced into working because of financial necessity.

If the financial necessity is not there, do as you wish.

[moorfield]

Have to say, some of the best advice I have ever seen in this forum.

Seconded FB.

Thanks to all who've taken the time to write those posts - particularly interesting for me as I think am currently about 4-5 years away from being able to "retire" - or more accurately replace most of my wage with income from investments - perhaps a little earlier if my put options project stays on track!

I never will "retire" though. I am interested in an MSc course + may then seek to continue working in academia. The dilemma I have there with my future age is I fear 50ish may be too late to be taken seriously. Perhaps that is a symptom of the industry I currently work in, but health permitting I expect to continue working for another 20-25 years but would like to do that increasingly on my own terms.

[BreakoutBoy]

60k is a serious amount of spending. Should your investments prove duds, and dividends fall, there is still likely to be sufficient income to avoid having to join Ivor the Tramp in a dossbag under the local railway arches. Plenty of fat to trim to get past short term equity hiccups.

Plus once kids grown out of the private school situation, 60k pa personal spending seems quite unlikely to be maintained. There is only so much one can consume...

My projections have me retiring in 4 years in my early 40s with around £2m in assets, just from a series of middle management drone jobs any fool could do, together with a BTL sideline portfolio that is gently ticking over. I have zero worries about my familys ability to thrive indefinitely with total assets on that scale: That said I am from a benighted part of the nation where house prices and cost of living are very low, and employment is not always the norm, so I am going to feel much better off than most of my social network. It is a near certainty I will run out of life before running out of money. My main fear is dying before I get to enjoy my ill gotten loot!

[WorkShy]

Thanks to everybody for the replies. I appreciate the time people have put into their comments.

I think the issue of what to do when I retire is pretty pertinent. I don't really have any ideas and it's not as though I can travel the world given the constraints imposed by school terms etc. I always get bored of any course/job etc after around 2-3 years but compensation tends to be a function of experience/specialization; these are not compatible. I suppose the attraction of retirement is that I could simply flit from one interest to the next. I've already tried to "downshift". I changed jobs with the idea was that I would earn less but I could work from home 1-2 days per week and have total flexibility over how/when I worked etc. Frankly, it's been a failure. The flexibility is great but it doesn't translate to working less. Motivation still collapsed. I think the only thing that kept me motivated was an ever bigger pot of gold at the end of the year, the small pot doesn't seem to do it. Plus working at home when the children are off from school can be worse than being in the office.

With regard to drawing down my capital, I do find that concept hard. I've never spent more than I earned and I've never seen my net worth go down on a year-on-year basis. Even in 2008, I was up since I was almost 100% in govt bonds and US$ cash. My concern is also that spending will continue to rise for another 15y until the children leave uni. It's at £90k now (£30k is school fees) but will rise probably toward £120k (in today's terms), assuming fees continue to rise at CPI+4%. Without the school/uni fees, I'd feel my position was robust since I'd be looking at £60k/annum from a pool of £3.85m or just over a 1.5% withdrawal rate. Part of me wants to put the kids in state school but it seems selfish. I see every day in London the impact going to the "right" school/uni can have. My old employer only really hires from about 5 unis in the UK.

Investment-wise I know that I really should move more into equities. There was a period of a few years (2009-11) when I piled in to equities but they went up so fast I found it hard not to take profit! I held onto the S&P funds but sold most UK stuff. I was just lucky that this money went straight into long-duration gilts which ended up making me almost 100% total return between 2011-16. That's the issue. Investing has been like shooting fish in a barrel since 2009; just everything went up. I now have this feeling that one day govt bond yields will reprice higher and everything I own, whether bonds, equities, property etc will reprice lower as the discount factors change.

I think the core problem is that intellectually I know the balance of probabilities is in my favour over most scenarios, but emotionally I'm not sure I can cope with taking losses and seeing the capital drawdown!

[BreakoutBoy]

In all honesty, I think your main problem is your huge spending. You have a large pot of money but the hole in the bottom of the bucket is massive and money is evidently rushing out too fast for comfort. Plug the drain up a bit and your retirement plans will be bulletproof and you can feel more confident in retiring and chasing those dreams.

[flyer61]

There is only so much one can consume...

You haven't met my wife

[tjh290633]

The only comment I have is that I would be very unhappy with money in fixed interest securities. You need a growing income, which you will not get from fixed interest. And ignore the so-called "life-styling" approach, which assumes that you need to move from equities towards fixed interest when you near retiring age. If anything you need to move the other way. Lots of widoes on fixed incomes found that out to their cost.

TJH

[Mark]

@Workshy, looks as if you are in a great position, this blog explores some interesting aspects of high(/er) net worth FIRE, it's worth a read: https://firevlondon.com

Regards


Mark

[BarrenWuffett]

The only comment I have is that I would be very unhappy with money in fixed interest securities. You need a growing income, which you will not get from fixed interest. And ignore the so-called "life-styling" approach, which assumes that you need to move from equities towards fixed interest when you near retiring age. If anything you need to move the other way. Lots of widoes on fixed incomes found that out to their cost.

TJH

The OP has said moving to a higher level of equities would not suit at all. Whilst you would be unhappy with fixed interest, many others cannot cope with too much volatility and prefer a balance which allows them to sleep easy at night.

[tjh290633]

The OP has said moving to a higher level of equities would not suit at all. Whilst you would be unhappy with fixed interest, many others cannot cope with too much volatility and prefer a balance which allows them to sleep easy at night.

I know that he did. He asked for comments and I gave one. Having an income which is falling in real terms is something which does not appeal to me and which would worry me, were I in that state.

TJH