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How much is enough?

Including Financial Independence and Retiring Early (FIRE)
DrFfybes
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How much is enough?

#111083

Postby DrFfybes » January 16th, 2018, 7:31 pm

I can see a few similar "can I afford it" type threads on here, but wondered what the general opinion was on multiples, rather than actual figures.

A while back MrsF and I went through 12 months of bank statements, and worked out what we spent over the year. This is Total spend in a 12 month period.

We have savings in a mixture of cash and equities, about 50:50 as MrsF is more risk averse than me. My mum has a portfolio of equities that I set up which yields a 4% income and has done for 7 years, plus some capital growth which has meant her income has risen. However I'm well aware of the markets being at record highs and expect that to change.

There will be State Pension and some other pensions coming along in a decade or so which will provide just over 50% of current spend, but MrsF doesn't want to eat into the capital too much so we need to get our current spend from savings income.

Assuming our spend is £30k (for ease of calculation) then I reckon £1m would do it - half in equities at 4% is 20k, and the cash half yielding 10k.

This "man maths" means we need about 30x annual spend and can nibble the capital slightly if required, and as coincidence has it we're pretty much there. With ISAs and a proper division of assets, there should be virtually no tax to pay under current rules.

However now we're getting there, the goalposts are moving towards 35x or 40x (I did mention someone was more risk averse than me :) )

Am I missing something, or is my theory feasible, assuming we can always sell shelves in Ikea or similar if things do take a turn for the worse.


Thanks

Paul

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Re: How much is enough?

#111089

Postby swill453 » January 16th, 2018, 7:51 pm

DrFfybes wrote:There will be State Pension and some other pensions coming along in a decade or so which will provide just over 50% of current spend, but MrsF doesn't want to eat into the capital too much so we need to get our current spend from savings income.

Assuming our spend is £30k (for ease of calculation) then I reckon £1m would do it - half in equities at 4% is 20k, and the cash half yielding 10k.

I retired on far less than that. If you avoid eating into capital then you're going to leave an estate of £1m+ (presumably plus a house) when you go, is that really what you want?

I absolutely planned (plan) on spending down capital until the state pension kicks in, only then is it going to stabilise or start going up again.

(In fact the stock markets have been kind, despite having no income for 4 years and spending more than £100K, our net worth has increased significantly).

There's a risk of course, but as you say there are ways to boost income if things go a bit awry.

Scott.

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Re: How much is enough?

#111091

Postby SalvorHardin » January 16th, 2018, 7:54 pm

Based on what you've said you almost certainly have enough. A few thoughts, as someone who has already done this:

1) You only need to fund your spending of £30K for 10 years. Then it drops to £15K when your pensions kick in and then generating 1.5% should be straight forward (I'm ignoring inflation). Don't get too focused upon not spending capital. Keep a year or so of costs as easily accessible cash (I keep three years but then I have a big margin of safety).

2) You can't realistically earn 2% on cash the moment as your 50/50 equities at 4% cash implied 2% income requires.

3) 30 x income provides a reasonable margin of safety. When I retired (at 39) I had a bit more than that, I could probably have managed with 20x, and I've never looked back. It helps that I am quite ruthless in controlling some costs - my weekly food shop is generally split between four supermarkets (difficult to do when working full-time).

4) You may be pleasantly surprised by how much your costs fall in retirement. Some people don't fully appreciate how much they spend simply in order to work (e.g. doing all your shopping in one supermarket to save time generally raises your overall cost).

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Re: How much is enough?

#111092

Postby vrdiver » January 16th, 2018, 8:03 pm

We did the same sort of calculations. The first problem is similar to "how long is a piece of string"? You may have your current spending recorded and analysed, but what about lifestyle after retiring? I put together a "current" budget, then looked for things that would change in retirement; eating out, travel and holidays, home heating, work clothes costs, commuting, new hobbies / retirement toy fund etc.

Once I'd got a theoretical retirement budget, I went with a 4% safe withdrawal rate (SWR), but being risk averse, I also put 3xannual spends in cash savings and a 25% excess in dividends received vs withdrawn (i.e. I want to withdraw £10k, so I need £12.5k in dividends) with the 25% being used to either replenish cash reserves, or purchase more shares if cash is healthy).

The above means that for every £10k I want to draw, I need £350k of assets (cash or shares). I have it arranged so that all withdrawals are from dividends, as I don't like the idea of selling capital (but if that works for you, then fine).

At the end of the calendar year I review the figures and work out whether we get a pay rise or not, based on the total assets having grown over the period. So far it's been a pay rise each year :) awarded at less than the possible maximum, further increasing the safety margins in the capital.

We also have a list of discretionary expenditure that could be cut back in the event of a financial meltdown. It's good to have something agreed at least in principle, hopefully never to be acted upon!

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Re: How much is enough?

#111100

Postby JohnB » January 16th, 2018, 9:05 pm

I think 3% is safe, but you should calculate your floor spending level, to reassure your more cautious wife, and discuss how your spending levels might change with age, as the travel bug dissipates, but the need to employ others to clean, garden and DIY rises. Generally spending follows a U in retirement, with the final climb very steep as you hit care home fees

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Re: How much is enough?

#111103

Postby vrdiver » January 16th, 2018, 9:28 pm

Forgot to mention: as state pension is more than 10 years away it's ignored for planning purposes. If the rules don't change and we actually get it, it will be a bonus. If the government introduces some sort of means testing then it has no impact on the plan.

Having a surplus will also help if a future government rejigs the tax take on dividends, savings, ISAs etc.

(I can't see a weak government introducing SP means testing, but a landslide by either major party could look at means testing at a very high level, followed by a ratcheting down to the point where it starts to (just) impact votes.)

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Re: How much is enough?

#111115

Postby Lootman » January 16th, 2018, 10:37 pm

vrdiver wrote:I can't see a weak government introducing SP means testing, but a landslide by either major party could look at means testing at a very high level, followed by a ratcheting down to the point where it starts to (just) impact votes.

Means testing the SP would be a massive retrospective slap in the face to millions of people who have spent the last few decades making decisions based on the promise and premise that it's an insurance contract and not welfare, and so not subject to means testing. At the very minimum, it should only affect new contributions, and vested benefits should be grandfathered.

I would regard any such decision as permission to regard the government as having no moral authority, with all that that implies. I do not rely on the SP but I damn well expect to get it, having spent a lifetime contributing to it for that exact purpose. And remember, it is taxed so a good part of it recycles back to the government anyway.

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Re: How much is enough?

#111183

Postby vrdiver » January 17th, 2018, 9:16 am

Lootman wrote:Means testing the SP would be a massive retrospective slap in the face to millions of people who have spent the last few decades making decisions based on the promise and premise that it's an insurance contract and not welfare, and so not subject to means testing. At the very minimum, it should only affect new contributions, and vested benefits should be grandfathered.
I would regard any such decision as permission to regard the government as having no moral authority, with all that that implies. I do not rely on the SP but I damn well expect to get it, having spent a lifetime contributing to it for that exact purpose. And remember, it is taxed so a good part of it recycles back to the government anyway.

I'd have thought the same about increases to NI years required, as well as changes to State Retirement Age, but governments have managed to change these with almost no reaction as far as voting is concerned.

There was an outcry at the precipitous change in female retirement age, but that seemed to fall away relatively quickly. Simply by making the changes occur out in the future, or so complicated and sparse of real information (how long did it take to get the facts about the post 2016 pension deductions for contracted out years?) the news outlets seem to get bored of the story long before any real examples of the impact become available.

I'm actually ambivalent towards receiving the SP. I'd like it (who wouldn't) but for somebody who's made their own provisions, the SP is effectively taxed at full marginal rate, so already worth less than for those who actually need it. Also, like e.g child care, perhaps we simply can't afford to give out money to everyone any more. I agree with you that it is a "contract" but in my view that is weakened by the fact that those of us who paid "massive" amounts of NI are getting the same deal as those who've had their NI records boosted by welfare: how long before the other side of the equation starts to fall under scrutiny (and not just further SP age reviews)?

I'm intrigued as to what "no moral authority" implies in the context you use it? I've not considered any government since perhaps Thatcher or Blair to have conviction embedded in their policies. These days it's all about grasping power, not about campaigning for what they believe in.

VRD

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Re: How much is enough?

#111214

Postby Urbandreamer » January 17th, 2018, 10:28 am

vrdiver wrote:I'm intrigued as to what "no moral authority" implies in the context you use it? I've not considered any government since perhaps Thatcher or Blair to have conviction embedded in their policies. These days it's all about grasping power, not about campaigning for what they believe in.

VRD


Moral authority to me means authority granted because we accept that we will be treated fairly.

It's all tied up with the "social contract" that you never signed up to but were presumed to agree to by being born and living here.

Our state has said that in return for 30 years of NI contributions we will recieve a basic state pension. If after paying them for 40 or so years they turn around and decide to renege upon that contract then it won't be a particular political party that suffers from the reaction of those defrauded but the government itself.

https://en.wikipedia.org/wiki/Social_contract
"According to other social contract theorists, when the government fails to secure their natural rights (Locke) or satisfy the best interests of society (called the "general will" in Rousseau), citizens can withdraw their obligation to obey, or change the leadership through elections or other means including, when necessary, violence."

But we have drifted a bit far from the subject. From blaiming the EU to political philosophy, I personally think that 30 times expenses should easily be enough and that it is other issues that discourage retirment.

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Re: How much is enough?

#111294

Postby Lootman » January 17th, 2018, 2:09 pm

Urbandreamer wrote:
vrdiver wrote:
Lootman wrote: I would regard any such decision as permission to regard the government as having no moral authority, with all that that implies. I do not rely on the SP but I damn well expect to get it, having spent a lifetime contributing to it for that exact purpose. And remember, it is taxed so a good part of it recycles back to the government anyway.

I'm intrigued as to what "no moral authority" implies in the context you use it? I've not considered any government since perhaps Thatcher or Blair to have conviction embedded in their policies. These days it's all about grasping power, not about campaigning for what they believe in.

Moral authority to me means authority granted because we accept that we will be treated fairly. It's all tied up with the "social contract" that you never signed up to but were presumed to agree to by being born and living here.

Pretty much that.

There are a few reasons why people follow rules and obey laws. They might be fearful of punishment. They might think that all laws should be obeyed. They might agree with a law. But for a good number of people, it's a matter of ultimate respect for the rule-making institution, in this case the government. Take that away, and I lose of a big part of my motivation to play nice and by the rules.

If a government took away a pension entitlement that I had spent a lifetime investing for and planning on then, regardless of whether I actually need those funds, I would regard it as a gross betrayal if it was taken away from me without compensation. On the other hand, if the government makes offers to buy out my pension entitlement, that might be acceptable. Otherwise it is a government taking and an abuse of power. I don't think it would happen except under Corbyn as PM.

To the other point, I think your 30 times annual expenses is quite conservative. I'd reckon that 25 times is adequate, especially if there are pensions as well. That's equivalent to the "4% rule" often cited as prudent.
Last edited by Lootman on January 17th, 2018, 2:17 pm, edited 3 times in total.

ursaminortaur
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Re: How much is enough?

#111295

Postby ursaminortaur » January 17th, 2018, 2:09 pm

DrFfybes wrote:I can see a few similar "can I afford it" type threads on here, but wondered what the general opinion was on multiples, rather than actual figures.


The standard advice is that your savings should last at least 30 years with a safe withdrawal rate of 4% (that is an initial withdrawal rate of 4% of your savings with the amount increasing by inflation in each subsequent year).
This was based upon US research. Subsequent studies have suggested that this is probably over-optimistic for UK savers and figures of 3% or even as low as 2.5% have been suggested as being more realistic for the UK.

http://www.morningstar.co.uk/uk/news/149651/how-much-can-you-safely-withdraw-annually-from-your-pension-pot.aspx

There are a number of tools available which you can use to analyze this, some based upon historic returns and others based upon monte-carlo simulations of possible futures. These tools provide you with good estimates of the probability of running out of money over your desired retirement period according to how much you take out.

https://www.firecalc.com/

http://www.cfiresim.com/

http://www.flexibleretirementplanner.com/wp/

Just substituting pounds for dollars and playing around with different scenarios should give you a reasonable idea as to whether you have enough. The tools are fairly sophisticated allowing you to deal with state and other pensions starting at some later time after you have retired, one off payments, different allocations of savings between cash, bonds and equities etc

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Re: How much is enough?

#111299

Postby Lootman » January 17th, 2018, 2:24 pm

ursaminortaur wrote:The standard advice is that your savings should last at least 30 years with a safe withdrawal rate of 4% (that is an initial withdrawal rate of 4% of your savings with the amount increasing by inflation in each subsequent year).

This was based upon US research. Subsequent studies have suggested that this is probably over-optimistic for UK savers and figures of 3% or even as low as 2.5% have been suggested as being more realistic for the UK.

Why would the number be different in the UK?

You could argue that the US market historically gives better returns because of its higher growth profile. But then UK shares typically yield higher dividends and so drawdown can take more from dividends and therefore less from capital.

Also bear in mind that the UK has more comprehensive healthcare and welfare provision than the US. Even with MediCare, US seniors can end up spending a lot of healthcare as they age. Moreover there is no concept of residential and nursing care home fees being paid by the government, such as there is in the UK. Nor is there any pension credit, housing benefit, winter fuel allowance and the whole spectrum of our welfare state.

On that basis one might even argue that the UK safe drawdown rate should be higher than the US.

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Re: How much is enough?

#111309

Postby Alaric » January 17th, 2018, 2:39 pm

ursaminortaur wrote: Subsequent studies have suggested that this is probably over-optimistic for UK savers and figures of 3% or even as low as 2.5% have been suggested as being more realistic for the UK.


The paper quoted notes that you might be paying 1% in charges. If so then 4% becomes 3% by the time you see it.

There's a simple benchmark which runs as follows. If you can get a dividend yield of 4% and it increases with inflation at 2%, then in a year's time your income is 2% higher. But your market value should be 2% higher as well if economic conditions are unchanged and the relationships between price and dividends remain stable. In other words you are expecting or hoping for a total return of 6%. You aren't touching the capital value if you solely spend dividends, so there's a large residual left over for your estate and it's going to be higher in money terms than when you started.

If living off a running return of 4% isn't enough or your stocks become dividend cutters or worse, you are going to need an asset disposal plan. Holding dated bonds and cash will do this automatically up to a point.

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Re: How much is enough?

#111311

Postby Chrysalis » January 17th, 2018, 2:47 pm

Lootman, the research giving rise to the 4% rule was based on backtesting of historic market returns in the US, using a 50/50 equity bond portfolio (iirc). The same exercise when done on UK based markets produces a slightly lower figure because UK markets have had historically lower returns.

The issue of healthcare costs etc doesn’t change the multiplier (25, 30 x spending needs), since that just tells you how much you might ‘safely’ draw down as a proportion of your pot. What it might change is your estimate of how much you might need, since you’d have to include more costs in your budget. Similarly for welfare benefits, if some of your income is coming from other sources, that just reduces the amount you need from your investments and hence a smaller total pot. It doesn’t mean you can take a higher percentage from your pot - it will still run out more quickly!

Btw in the US as I understand it, social security can provide an income far greater than our state pension. And there are other welfare schemes. I don’t think the comparison is as clear cut as all that.

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Re: How much is enough?

#111331

Postby Lootman » January 17th, 2018, 3:26 pm

Jabd2001 wrote:Btw in the US as I understand it, social security can provide an income far greater than our state pension. And there are other welfare schemes. I don’t think the comparison is as clear cut as all that.

Yes, the US social security system (the equivalent of our National Insurance system) is considerably more generous. For a start, you only need 10 years of work to be entitled to a full pension (and MediCare at age 65) versus 30/35 years here. And the maximum it pays out is about $2,600 a month. That's about £2,000 a month, or a little under £500 a week. That is about three times the maximum pension under the new UK system of about £155 week. And double the maximum under the old UK system of £220 or so.

The extra US provision is sometimes attributed to the fact that their system is fairly "pure". NI revenues get used for a lot of other things in the UK, thereby diluting the pot.

US welfare provision is sketchy and can vary by State. The main Federal programs are food stamps and Section 8 housing vouchers. Veterans are quite well looked after, but there are a lot of cracks that poor people fall through.

In terms of the amount you need to safely retire, the US does better for state pension provision but worse for welfare, healthcare and care home fees if you are poor. How you balance those two contrary factors is down to the individual and their circumstances.

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Re: How much is enough?

#111622

Postby DrFfybes » January 18th, 2018, 2:08 pm

Many thanks for all the replies, it does seem there is a variation in opinions but I think the consensus is that we should be fine, especially with DB pensions coming in 10 years which will pay half our annual outgoings.

I'm also making some attempt to reduce necessary spend, however having taken ages persuading MrsF an old Maserati was a good idea, I now find she's become attached to it after 5 years (even if it consumed over 5% of out outgoings last year!).

There was also a shuffle at work last year, so MrsF needs to finish this year off the get full benefit of her payrise in her pension, but I hit my 12 months at top of scale in March.

Including annual leave and flexi left to take, this is about 38 days, 2 hours, and 16 minutes left.

Paul

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Re: How much is enough?

#111849

Postby LeMoss » January 19th, 2018, 11:49 am

Jabd2001 wrote:Lootman, the research giving rise to the 4% rule was based on backtesting of historic market returns in the US, using a 50/50 equity bond portfolio (iirc). The same exercise when done on UK based markets produces a slightly lower figure because UK markets have had historically lower returns.



Just to go back to this point, I believe this analysis is based on the assumption that UK retirees are constrained to only invest in UK markets.
I can understand this being an issue in the past where overseas dealing was expensive and cumbersome.
This is no longer the case as these days it is very cheap and efficient for a UK investor to invest in markets around the world, especially the US. It can all be done via ETFS or even direct stock purchases via cheap online brokers. For this reason the argument that the returns profile ( and therefore the SWR) for a UK investor should be fundamentally different from one on the US doesn't really make much sense to me. A UK investor has many more options to get close to global returns rather being limited to returns from purely UK listed stocks.

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Re: How much is enough?

#111882

Postby LeMoss » January 19th, 2018, 1:23 pm

ap8889 wrote: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.

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Re: How much is enough?

#111944

Postby RececaDron » January 19th, 2018, 5:47 pm

If you want to get into some reading detail about safe withdrawal rates (SWR), I'd suggest these two sources:

1. jamesd's thread of SWR posts over on MSE:
http://forums.moneysavingexpert.com/sho ... ?t=5466114

...illustrating amongst other things how flexibility in spending patterns (eg. Guyton and Klinger) may permit significantly higher SWR's than generally deemed safe (when the assumption is generally to assume constant inflation adjusted spending).

2. Mike McClung's new book (and spreadsheets), "Living Off Your Money", discussed a bit over on MSE and in this Monevator post:
http://monevator.com/review-living-off- ... l-mcclung/

...covering - in massive detail - dynamic asset allocation and withdrawal rates in order to adapt to whatever the future holds and be robust to very many outcomes.

It's likely that many people will not have the lifestyle flexibility / necessary discipline / implementation skills to put materially variable spending stuff into practice, hence the appeal of targeting the biggest lump they can (with the likelihood of eventually croaking while the richest they've ever been!).

For sensible people who've put a lot of time and effort into planning and saving for their retirement it seems to be quite common to overestimate the amount they'll end up spending, by failing to appreciate how much cheaper it can be to live when not working and/or misjudging the level of 'spendy' activities they'll undertake.

Some findings from the US suggests that retirees' real spending commonly declines by 1% per annum (pa) each year during their 60s, declines by 2% pa during their 70s, and declines by 1% pa during their 80s, reflecting people "winding down" their activities as they age.

Set against this likely declining spending pattern must then be placed the desire to have a great big pile of money - safety first! - to pay for a decent care home, should that ever be required.

The main goal must be to find something that, after doing a reasonable amount of research, feels right and comfortable (sleep at night). Monitor things and make modest and sensible adjustments if required to nip potential issues in the bud so that dramatic action is unlikely to ever be required.

(And encourage your partner to stay a dab hand at something that retains earning power should the S ever HTF in some extreme future scenario :D )

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Re: How much is enough?

#111953

Postby Lootman » January 19th, 2018, 6:54 pm

LeMoss wrote: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.


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