How much is enough?

[Itsallaguess]

One thing that really shocked me, after years of a 'waged' working life, if how my mindset had become fixed on my current salary when I tried to think about how big a potential 'pot' might have to be with regards to retirement income.

When a salary has so much taken out of it in terms of the various taxes and usual work-related deductions, then by the time you get to see your actual banked income, then over the years our salary/income ratio might tend to get embedded in our minds in an almost fixed ratio, when in fact quite often a good proportion of any potential retirement income might well be immune from the high level of deductions seen on a working pay-packet.

What I'm trying to say is that for me to get £11K in my hand via my working wages, my salary needs to be much higher than £11K a year, but if we start early enough and get enough of our pot into tax-free ISA's, then there's the potential for an £11K yearly income from dividends to come from an £11K a year dividend-stream.

I think this might explain the tendency for people to overestimate their requirements if they don't do some real-world calculations, and just rely on their 'wage-born' instincts. It certainly did with me, for many years.

Cheers,

Itsallaguess

[ursaminortaur]

I see he is going for a 2.5% withdrawal rate i.e the pot would last for 40 years even with no real growth. The FTSE 100 - a portfolio of large, global companies on a modest PE ratio- is currently yielding 3.5%.

I believe 2.5% is unnecessarily conservative especially if retiring relatively young.

I agree with you but would express it differently. If you have a sum saved that is equal to 40 years of estimated spending, then effectively you could get away with not investing it at all and just spending it down. At least, if you were at the retirement age of 65, because that 40 years would take you to age 105 and not many people worry too much about living longer than that.

The 2.5% SWR is supposed to be withdrawing 2.5% in the first year and then increasing that withdrawal to match inflation in subsequent years. Hence even in a relatively benign inflationary setting - which probably won't be the case for the full retirement period of 40 years - the total amount you will need to spend is going to be a lot more than 40 times your current spending level.
Hence it wouldn't be true to say you could get away without investing it at all - you would need to invest it well enough to at least cover increases in inflation or have a much bigger pot to start with.

[LeMoss]

I see he is going for a 2.5% withdrawal rate i.e the pot would last for 40 years even with no real growth. The FTSE 100 - a portfolio of large, global companies on a modest PE ratio- is currently yielding 3.5%.

I believe 2.5% is unnecessarily conservative especially if retiring relatively young.

I agree with you but would express it differently. If you have a sum saved that is equal to 40 years of estimated spending, then effectively you could get away with not investing it at all and just spending it down. At least, if you were at the retirement age of 65, because that 40 years would take you to age 105 and not many people worry too much about living longer than that.

The 2.5% SWR is supposed to be withdrawing 2.5% in the first year and then increasing that withdrawal to match inflation in subsequent years. Hence even in a relatively benign inflationary setting - which probably won't be the case for the full retirement period of 40 years - the total amount you will need to spend is going to be a lot more than 40 times your current spending level.
Hence it wouldn't be true to say you could get away without investing it at all - you would need to invest it well enough to at least cover increases in inflation or have a much bigger pot to start with.

if you assume average inflation of 2% and a portfolio earning an average 1% per annum risk free in the bank, it will still last 37 years so the argument is still valid.

[Lootman]

When a salary has so much taken out of it in terms of the various taxes and usual work-related deductions, then by the time you get to see your actual banked income, then over the years our salary/income ratio might tend to get embedded in our minds in an almost fixed ratio, when in fact quite often a good proportion of any potential retirement income might well be immune from the high level of deductions seen on a working pay-packet.

What I'm trying to say is that for me to get £11K in my hand via my working wages, my salary needs to be much higher than £11K a year, but if we start early enough and get enough of our pot into tax-free ISA's, then there's the potential for an £11K yearly income from dividends to come from an £11K a year dividend-stream.

I think this might explain the tendency for people to overestimate their requirements if they don't do some real-world calculations, and just rely on their 'wage-born' instincts. It certainly did with me, for many years.

Yeah, that's my experience. Not only do your outgoings go down when you stop working. So does your effective and marginal tax rate since investment income is more lightly taxed, and of course there is no NI. The tax rules could dramatically change, of course, but we cannot plan on what cannot be known.

I retired 17 years ago and my net worth is considerably higher now than then. Of course, markets have been kind in the time period since my start date was around the end of the dot.com fall. But even so, I have found retirement to be much more profitable than working, in many ways.

[RececaDron]

The other thing to consider - particularly so for those retiring very early - is that you may well wish your sustainable spending - your income - to keep up with wages rather than with inflation.

Absent this link to rising wages, you risk your lifestyle becoming partly frozen in time, unable to afford goods or services that may not yet exist but which in the future* become commonplace everyday things.


*For example, a 50 year old today may face a retirement of 40 years. That's a helluva long time for new things to appear that you may wish to purchase or participate in, else experience a progressive declining (relative) lifestyle.

[ursaminortaur]

I agree with you but would express it differently. If you have a sum saved that is equal to 40 years of estimated spending, then effectively you could get away with not investing it at all and just spending it down. At least, if you were at the retirement age of 65, because that 40 years would take you to age 105 and not many people worry too much about living longer than that.

The 2.5% SWR is supposed to be withdrawing 2.5% in the first year and then increasing that withdrawal to match inflation in subsequent years. Hence even in a relatively benign inflationary setting - which probably won't be the case for the full retirement period of 40 years - the total amount you will need to spend is going to be a lot more than 40 times your current spending level.
Hence it wouldn't be true to say you could get away without investing it at all - you would need to invest it well enough to at least cover increases in inflation or have a much bigger pot to start with.

if you assume average inflation of 2% and a portfolio earning an average 1% per annum risk free in the bank, it will still last 37 years so the argument is still valid.

40 years ago takes you to the late 70s when you had double digit inflation

1977 - 12.14% cpi
1978 - 8.39% cpi
1979 - 17.24% cpi

The eighties were somewhat better averaging about 5%
The nineties then started somewhat higher
1990 - 7.61% cpi
1991 - 7.21% cpi

http://www.inflation.eu/inflation-rates/great-britain/historic-inflation/cpi-inflation-great-britain.aspx

The only really sustained run with inflation below 2% was between 1997 and 2005 inclusive.

Of course for the next 40 years it may be different this time and inflation may stay around the 2% level but I'd doubt it.

And by the way I note from your comment

If you assume average inflation of 2% and a portfolio earning an average 1% per annum risk free in the bank, it will still last 37 years so the argument is still valid.

that despite saying "the argument is still valid" you still actually agree with me that investing is needed if only, rather optimistically given current bank account returns, in a bank account rather than Lootman's argument that "you could get away with not investing it at all".

[LeMoss]

The 2.5% SWR is supposed to be withdrawing 2.5% in the first year and then increasing that withdrawal to match inflation in subsequent years. Hence even in a relatively benign inflationary setting - which probably won't be the case for the full retirement period of 40 years - the total amount you will need to spend is going to be a lot more than 40 times your current spending level.
Hence it wouldn't be true to say you could get away without investing it at all - you would need to invest it well enough to at least cover increases in inflation or have a much bigger pot to start with.

if you assume average inflation of 2% and a portfolio earning an average 1% per annum risk free in the bank, it will still last 37 years so the argument is still valid.

40 years ago takes you to the late 70s when you had double digit inflation

1977 - 12.14% cpi
1978 - 8.39% cpi
1979 - 17.24% cpi

The eighties were somewhat better averaging about 5%
The nineties then started somewhat higher
1990 - 7.61% cpi
1991 - 7.21% cpi


The only really sustained run with inflation below 2% was between 1997 and 2005 inclusive.

Of course for the next 40 years it may be different this time and inflation may stay around the 2% level but I'd doubt it.

True but also bear in mind high inflation environments are also associated with high "risk free" interest rates ( cf 70s and 80s) . In addition, someone who really wanted to implement this zero risk for forty years strategy now has index linked gilts available. The point is rather theoretical as you would obviously want to invest with some attention to protecting the capital against inflation but the point remains - you could stick the lot in index linked gilts and manage an extended period with no risk. Google WARM ( wasting asset retirement model) for this. I'm not a fan since I would like the capital to grow but it does have some logic to it.

[scrumpyjack]

if you assume average inflation of 2% and a portfolio earning an average 1% per annum risk free in the bank, it will still last 37 years so the argument is still valid.

True but also bear in mind high inflation environments are also associated with high "risk free" interest rates ( cf 70s and 80s) . In addition, someone who really wanted to implement this zero risk for forty years strategy now has index linked gilts available. The point is rather theoretical as you would obviously want to invest with some attention to protecting the capital against inflation but the point remains - you could stick the lot in index linked gilts and manage an extended period with no risk. Google WARM ( wasting asset retirement model) for this. I'm not a fan since I would like the capital to grow but it does have some logic to it.

But the 'high risk free' interest you received was then all taxed as income even though most of it was compensation for inflation.

Also Index Linked gilt prices are very high now and give a negative real return because the price has been bid up by pension funds in effect forced to buy them. They will not give a return that matches inflation.

Personally I think we are headed back to much much higher inflation, particularly if a Corbyn government gets in.

I don't even think that ISAs will protect you because he is likely to scrap them or tax them above a minimal level. There is no guarantee that they will continue to be a tax shelter forever. Similarly the AIM share IHT loophole will go as will the farm land one (sorry Mr Dyson!)

[Lootman]

Personally I think we are headed back to much much higher inflation, particularly if a Corbyn government gets in.

I don't even think that ISAs will protect you because he is likely to scrap them or tax them above a minimal level. There is no guarantee that they will continue to be a tax shelter forever. Similarly the AIM share IHT loophole will go as will the farm land one (sorry Mr Dyson!)

Maybe, but then we leave the UK, solving both problems at a stroke!

[ursaminortaur]

Personally I think we are headed back to much much higher inflation, particularly if a Corbyn government gets in.

I don't even think that ISAs will protect you because he is likely to scrap them or tax them above a minimal level. There is no guarantee that they will continue to be a tax shelter forever. Similarly the AIM share IHT loophole will go as will the farm land one (sorry Mr Dyson!)

Maybe, but then we leave the UK, solving both problems at a stroke!

Not really. You might by becoming an economic migrant hope to escape tax rises in the UK by choosing to move to a low tax country. However although it is possible that the country you move to for tax purposes may have something similar to ISAs or have tax rules which similarly benefit certain holdings such as AIM shares that wouldn't protect money you already have in ISAs or necessarily protect AIM shares you had already bought. Unless the country you were moving to had a special agreement with the UK recognising UK ISAs as tax free they would just be treated as any other investment and if it did have such an agreement you would then be subject to any alterations made to the ISA rules in the same way as a UK resident.

[TheRIT]

Personally I think we are headed back to much much higher inflation, particularly if a Corbyn government gets in.

I don't even think that ISAs will protect you because he is likely to scrap them or tax them above a minimal level. There is no guarantee that they will continue to be a tax shelter forever. Similarly the AIM share IHT loophole will go as will the farm land one (sorry Mr Dyson!)

Maybe, but then we leave the UK, solving both problems at a stroke!

Not really. You might by becoming an economic migrant hope to escape tax rises in the UK by choosing to move to a low tax country. However although it is possible that the country you move to for tax purposes may have something similar to ISAs or have tax rules which similarly benefit certain holdings such as AIM shares that wouldn't protect money you already have in ISAs or necessarily protect AIM shares you had already bought. Unless the country you were moving to had a special agreement with the UK recognising UK ISAs as tax free they would just be treated as any other investment and if it did have such an agreement you would then be subject to any alterations made to the ISA rules in the same way as a UK resident.

Of course you could then take it to the next step and move to a country that won't tax you on share price gains or dividends whether in a UK ISA or Trading Account.

[TheRIT]

TheRIT of these parts has thought a lot about this and has concluded that 4% SWR is too optimistic, even using global index investments.

I see he is going for a 2.5% withdrawal rate ..i.e the pot would last for 40 years even with no real growth. The FTSE 100 - a portfolio of large, global companies on a modest PE ratio- is currently yielding 3.5%.

I believe 2.5% is unnecessarily conservative especially if retiring relatively young. The biggest risk is the a sequence of negative returns in the first 10 years. The SWR analysis assumes you do nothing to adapt to adverse circumstances and keep withdrawing the same inflation adjusted amount regardless of market conditions and make no effort to increase income even modestly if required in adverse circumstances ( part-time job, consulting etc). Michael Kitces in the US has done an analysis based on SWRs and valuations and even with a CAPE ration of US stocks of 32, concludes 3.5% is the floor for SWRs even in worst case scenarios.

Obviously all this analysis is based on historical data and financial markets have a habit of throwing up completely new environments and conditions so there is no definitive answer. If you are willing and able to adapt a bit to adverse initial retirement years, I think 3.5% and even 4% is perfectly fine.

Just for clarity my research and risk tolerance led me to 2.5% plus investment expenses which post home purchase are 0.28% per annum. So my WR will really be 2.78%. A subtle but important difference. Regarding risk I do not want to have the risk of having to work for money again (even part time) and I don't want the risk of having to sleep under a railway arch (if the black swan is bad enough then either excessive wealth or most jobs are unlikely to help anyway of course)

The pot may or may not last 40 years because of the future sequence of returns (which you highlight) plus inflationary effects affecting spending. The SWR principle includes uplifting 'salary' each year by inflation. Your point about adaption is very valid. 46% of our spending will be 'fun money' giving plenty of opportunity to cut back if the sequence of returns starts to become worse than we've seen historically. Although we really don't want that hassle and just want to live our FIRE lives how we want to vs how Mr Market tells us to.

Important to highlight also that I'll FIRE when I'm 45 (MrsRIT will be a little younger still) and so even if I just live to average that's 36 years more on this great planet. An important consideration while at the same time agreeing with you that's historically the early sequences are the ones that so far have hurt portfolio longevity.

[TheRIT]

I see he is going for a 2.5% withdrawal rate i.e the pot would last for 40 years even with no real growth. The FTSE 100 - a portfolio of large, global companies on a modest PE ratio- is currently yielding 3.5%.

I believe 2.5% is unnecessarily conservative especially if retiring relatively young.

I agree with you but would express it differently. If you have a sum saved that is equal to 40 years of estimated spending, then effectively you could get away with not investing it at all and just spending it down. At least, if you were at the retirement age of 65, because that 40 years would take you to age 105 and not many people worry too much about living longer than that.

In other words, if you have the cash equivalent of 40 years spending then there is no question to ask. It's more than enough, especially since you will always get some kind of return on that - just take the lowest risk approach and buy laddered gilts and hold them to maturity.

In other words, 2.5% is obviously too low and conservative. And that is just as bad as a withdrawal rate that is too high since it means you may end up working and saving and making sacrifices for years longer than you need to. Maybe even decades longer.

The point is to maximise the quality of your life - not to reduce the last 0.1% of risk.

Can't agree with your first point for a couple of reasons:
1. inflation eroding the value of the wealth and even gilts likely won't cover that; and
2. in my case I'm backing myself to live more than 40 more years.

Do very much agree with your point around maximising ones quality of life though.

[TheRIT]

Of course you could then take it to the next step and move to a country that won't tax you on share price gains or dividends whether in a UK ISA or Trading Account.

Go on, do tell, where?

Gib's has capital gains exemption, but income tax is payable (High Net Wealth individuals can opt for alternatives). i/c tax isn't a issue however if your investments don't pay any interest/dividends

Disclaimer: Not claiming to be a tax expert so could be about to make a fool (vs Fool) of myself.

We're looking at 2 locations with the final decision needing to be made within a couple of months:
- Spain. Dividends and capital gains would be taxed on both ISA and Trading Account. Depending on level of wealth could also see a wealth tax.
- Cyprus. No CGT on investments listed on regular stock exchanges. Also if you're a non-domicile of Cyprus (we are) then no 'tax' (called a Special Contribution for Defence) on dividends/interest for the first 17 years of residency. No wealth tax either. Interestingly they do have CGT on immovable property situated in Cyprus (with a tax free limit) so if you want to live in a big house then this could be a consideration if Cyprus gets some house prices gains/inflation.

[Lootman]

We're looking at 2 locations with the final decision needing to be made within a couple of months:
- Spain. Dividends and capital gains would be taxed on both ISA and Trading Account. Depending on level of wealth could also see a wealth tax.
- Cyprus. No CGT on investments listed on regular stock exchanges. Also if you're a non-domicile of Cyprus (we are) then no 'tax' (called a Special Contribution for Defence) on dividends/interest for the first 17 years of residency. No wealth tax either. Interestingly they do have CGT on immovable property situated in Cyprus (with a tax free limit) so if you want to live in a big house then this could be a consideration if Cyprus gets some house prices gains/inflation.

Two obvious low tax destinations are Dubai and Hong Kong. Neither has CGT or IHT. Other nations that don't have IHT include Australia, Austria, Canada and even tax-loving Sweden, although other taxes can be high in those places. Various central American nations offer low taxes and easy citizenship to economic migrants e.g. Costa Rica, Belize, Panama.

Or the good ole' USA. After Trump's tax reform, it has relatively low taxes especially if you choose a State with no State income tax (AL, FL, NH, SD, TN, TX, WA, WY). Capital gains and dividends are taxed at 15%, and there is no Estate Tax unless you leave more than $11 million.

In such a situation I would close any ISA or other UK account and move the money from the UK. That way a future punitive and confiscatory UK government could not touch your assets.

[scrumpyjack]

Might be worth looking at Portugal. They have introduced a 10 year tax holiday on foreign income.

https://www.blevinsfranks.com/news/arti ... e-pensions

Apparently it has mightily annoyed the French as loads of the French are retiring to Portugal and getting their pensions tax free!

[Lootman]

Might be worth looking at Portugal. They have introduced a 10 year tax holiday on foreign income.

https://www.blevinsfranks.com/news/arti ... e-pensions

Apparently it has mightily annoyed the French as loads of the French are retiring to Portugal and getting their pensions tax free!

Knowing how tax-happy the French government is, I would have thought they would tax those pension payouts at source, withholding whatever rate of tax they deemed should apply.

Pensions are difficult to move in the same way you can move cash and securities.

I like your Portugal idea. Hadn't thought of any EU nation as being low-tax, but that deal is attractive. I like Portugal as a nation so will look into it.

[TahiPanasDua]

Might be worth looking at Portugal. They have introduced a 10 year tax holiday on foreign income.

https://www.blevinsfranks.com/news/arti ... e-pensions

Apparently it has mightily annoyed the French as loads of the French are retiring to Portugal and getting their pensions tax free!

Knowing how tax-happy the French government is, I would have thought they would tax those pension payouts at source, withholding whatever rate of tax they deemed should apply.

Pensions are difficult to move in the same way you can move cash and securities.

I like your Portugal idea. Hadn't thought of any EU nation as being low-tax, but that deal is attractive. I like Portugal as a nation so will look into it.

You earlier discussed Hong Kong. It has no inheritance, capital gains or dividend taxes and income tax is a paltry 15%. If anything sounds too good to be true it usually is. It's actually a grand illusion. The Hong Kong government does not live on air. They need taxes like any other government and are able to maintain the façade of low/no taxes by manipulating property to ensure high prices. The government owns all land and, for example, sells land at enormous prices by creating and maintaining false scarcity. Ask anyone in Hong Kong how much they paid for their tiny flat or how much rent they pay. It is eye-watering. That's the real tax. Ideally then, you have investments there but live elsewhere. I know someone very very very well who does that!

My thoughts on another issue. This whole thread, "How Much Is Enough?" could be poorly titled. Even after you have saved a massive sum, have achieved a 2.5% withdrawal rate, have several years cash in the bank, are inflation proof and have a healthy amount set aside to cover care homes, for the vast majority of people even that will never be enough. I think it is human nature. If we are honest, for the vast majority of us no amount is ever enough. I think a more suitable title is "How Much Is The Minimum?" Even that title is inadequate as "enough" and "minimum" are not dissimilar in this context. Anyone got a better suggestion?

TP2.

[RececaDron]

This whole thread, "How Much Is Enough?" could be poorly titled. Even after you have saved a massive sum, have achieved a 2.5% withdrawal rate, have several years cash in the bank, are inflation proof and have a healthy amount set aside to cover care homes, for the vast majority of people even that will never be enough.

Perfect.

The "vast majority" are welcome to carry on grafting. If by doing so they generate lots of tax revenues, swell corporate revenues and profits, and generally make the world go round, then all the better.

Crack on!

[DiamondEcho]

'How much is enough?'
I used the budgeting spreadsheet in MoneySavingExpert. And 1) input all my current outgoings. That gave me a good view of where I currently stand. Then I created a 2nd version, building up an expense line-by-line budget for what I aspire/need to have in retirement.

Might sound a horrible process, but I found it verging on 'liberating'.