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Introducing the LemonFools Personal Finance Calculators

FIRE starts in two weeks

Including Financial Independence and Retiring Early (FIRE)
Shelford
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FIRE starts in two weeks

#236414

Postby Shelford » July 13th, 2019, 12:28 pm

Dear All

Like Pheidippides, I’m now approaching the time to light the blue touchpaper. I expect to hand my notice in to my boss in 10 days’ time.

Facts:
Age: 54; Wife 51
Working years: will be 35 years, of which 34 will count towards state pension
SIPP: £1.055m
ISA: £162K
Share account: £78K
Cash savings: £100K (primarily intended as safety buffer)
DB pension: roughly £212K in value (calculated on basis of 20x the deferred annual benefit), realisable at age 60, or earlier if I’m prepared to take a discount
Current annualised income from the above £64K, excluding the DB
Anticipated annual withdrawal for 2020 is £50-55K, exact amount depending on whether I do any paid work from next year on
No mortgage on main property
BTL mortgage of £144K; £8K net income which goes to my wife
3 kids whose education is taken care of though boomerang option is highly likely!

In terms of my investment philosophy and detailed holdings, I refer readers to links in an earlier post here. These are possibly informative for those in the ‘growth’ phase of their financial life-cycle.

viewtopic.php?f=56&t=13689&p=166292#p166292

In terms of asset allocation, I break it down here; I include DB pension value for completeness – I treat the income from this as an index-linked gilt for asset allocation purposes. UK shares are selected and long-term held on a HYP basis. I am a regular reader of John Barron’s Portfolio service to which I subscribe and it is useful particularly for non-equity asset classes I’m not familiar with.
There will be some minor variances from the numbers below to the snapshot above, simply due to timing
Summary portfolio breakdown: capital value Value %
Asia Equities 75,368 5%
Property 99,170 6%
Infrastructure/leasing 114,651 7%
DB Pension 212,500 13%
Fixed Income 353,310 22%
Commodities/Mining 47,669 3%
Europe Equities 50,189 3%
US Equities 19,822 1%
UK Equities 267,558 17%
International Equities 106,110 7%
Private equity 66,068 4%
Renewables 56,858 4%
Cash 125,131 8%

Portfolio value 1,594,406

In terms of goals, my principal aims are as follows:

a) short term – next 12 months

-maximise cash savings in the remaining months of employment. This is to provide additional cash cushion/safety margin for the next five years
-analyse most tax-effective way to take pension benefits post 55, given I’ve now exceeded the LTA and will be the beneficiary of a DC as well as a DB pension. Note: I’ve investigated protecting this excess via HMRC rules but unfortunately it doesn’t work out for me for reasons to tedious to explain here.
-have a Pensionwise appointment before deciding whether I need professional advice. Having been burned in the past by so-called IFAs, I’m reluctant to pony up vast sums telling me what I already know.
-identify non-exec work or interesting unpaid opportunities. Whilst I’m not one of those sad males for whom work = their identity, I don’t hate my working life, enjoy the company of young bright people, and want to replicate these benefits - albeit on my own terms.
-confirm what, if any, voluntary NI payments need to be made in future to secure a full state pension

b) longer term – next 60 months

-transfer any shares & cash outside a tax wrapper into my/my wife’s ISA over next 2-4 years. Her pension at 55 will be worth an annual income of £18K or so, and she should qualify for a full state pension at 67.
-help pay towards my childrens’ higher education (a separate sum has already been set aside for fees)
-tackle the garden

The future: I’m not a believer in the R word i.e. ‘retirement’ – I will be using my spare time next year across a range of activities including charity and university trusteeships as well as paid and unpaid work, albeit on my terms, and more time for music and wine and when my wife steps back from work, some travel etc.

As Pheidippides said, huge kudos to TMF and LMF for all the advice without which I wouldn’t have had the courage to go solo and manage my own SIPP: the single best financial decision I have taken in my life.

Portfolio Performance

Organic growth on my portfolio has averaged at 11% over the past 9 years for my SIPP, and 13% on my ISA. I’m not claiming to be an investment genius: I’ve simply been lucky to ride the equity boom since 2008 and, not paying egregious advisor fees nor chase equity unicorns, to pocket all the growth in the process.

Last year performance to end May saw organic growth of 14% on the ISA, and 5% on the SIPP. Income on an annualised basis grew by 22%, reflecting a move in assets from equities to income bearing investment trusts, corporate bonds, renewables. If readers are interested in this, I’ll do a separate post on what each of these allocations comprise, probably over on the Portfolio review board. This post is long enough as it is!

Shelford

TUK020
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Re: FIRE starts in two weeks

#236433

Postby TUK020 » July 13th, 2019, 1:35 pm

Well done.
Seems well thought through. Good position to be in.
Tuk020

Brodes
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Re: FIRE starts in two weeks

#236448

Postby Brodes » July 13th, 2019, 2:55 pm

Shelford

Congratulations on such solid numbers! I think you will really enjoy your newfound freedom.

I am 10 years younger than you. Since you evidently know what you are doing financially, I would be grateful for your thoughts on quitting the 9-5 world earlier. I’ve read all the ‘retire in your 30s on not much money’ type blogs. But truth be told I’d like to walk out the office with closer to the sort of income you are looking at. I may just look for interesting work projects in the tech world, although I have zero tech experience currently. But I’m reasonably clever and from a science background, so I’m hopeful I’d pick it up.

What would you say If your 44 year old self called you up and asked about quitting the 9-5 with (not working) wife and 2 young children, a paid off house, 400K in a SIPP, and 900K ISAs? No DB pension or other savings.

Thanks!
Brodes

Pheidippides
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Re: FIRE starts in two weeks

#236452

Postby Pheidippides » July 13th, 2019, 3:11 pm

Welcome to the club. I haven't broken my numbers down in as much detail but your asset allocation looks interesting. I will do some crunching and revert

Regards

Pheid

Jabd2001
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Re: FIRE starts in two weeks

#236536

Postby Jabd2001 » July 14th, 2019, 7:58 am

Well done, great position to be in.
Re LTA issues - I suspect you may need advice on this. I am also above LTA with most of the value due to DB payable at 60.
I think it will be better for me to defer crystallizing my SIPP until after I've started the DB, so that I pay any excess charge from the SIPP rather than the DB pension. Perhaps your strategy will differ, but I'd be interested to hear it.

Alaric
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Re: FIRE starts in two weeks

#236544

Postby Alaric » July 14th, 2019, 8:45 am

Jabd2001 wrote: I am also above LTA with most of the value due to DB payable at 60.


There is a possible arbitrage opportunity with DB benefits. The 20* multiplier is invariant with age, which means that you can reduce the headline amount of benefit by retiring early. Unless its Rules are more generous, the DB scheme will calculate an reduced pension with the reduction of equivalent value to the extra years of benefit you get by taking the income early. But perhaps you had already factored that in.

TUK020
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Re: FIRE starts in two weeks

#236545

Postby TUK020 » July 14th, 2019, 9:22 am

I am 58, and also am likely to be above LTA through a combination of DB & SIPP.
When I turned 55, it coincided with a period of market sogginess, so i crystallized the SIPP then, took 25% TFLS which I recycled into ISA, kids' ISAs.
My reasoning was:
1. take TFLS before government changes rules and limits this
2. Crystallize SIPP when the market down means better use of LTA - the limit is indexed to inflation, but is age invariant.
3. Reduced TFLS because market down gets compensated for in buying at the same time in ISA & taxable accounts

I am not intending to take TFLS from the DB scheme. If I stop work sooner than 60 (when the DB becomes available without too much penalty), I may draw down on the SIPP as an interim measure. My intent is to adjust the draw down to take max while staying in the 25% tax bracket.

Plan is to live on 25% tax bracket income, try not too touch the ISA pot (this becomes the care home fund insurance for later years), and use the rump of the SIPP as inheritance. The main fly in the ointment is that I will breach the LTA, and pay this from the DB scheme.

If you think the market might hit a downturn in the next couple of years before you access your DB scheme, it might be worth crystallizing the whole SIPP then.

flyer61
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Re: FIRE starts in two weeks

#236558

Postby flyer61 » July 14th, 2019, 10:54 am

25 per cent tax bracket????

TUK020
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Re: FIRE starts in two weeks

#236565

Postby TUK020 » July 14th, 2019, 11:53 am

i.e. below the threshold for higher rate taxable income

monabri
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Re: FIRE starts in two weeks

#236609

Postby monabri » July 14th, 2019, 4:43 pm

TUK020 wrote:i.e. below the threshold for higher rate taxable income



Like Flyer, I'm not sure what you mean by 25% tax bracket...

Jabd2001
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Re: FIRE starts in two weeks

#236620

Postby Jabd2001 » July 14th, 2019, 5:22 pm

Alaric wrote:
Jabd2001 wrote: I am also above LTA with most of the value due to DB payable at 60.


There is a possible arbitrage opportunity with DB benefits. The 20* multiplier is invariant with age, which means that you can reduce the headline amount of benefit by retiring early. Unless its Rules are more generous, the DB scheme will calculate an reduced pension with the reduction of equivalent value to the extra years of benefit you get by taking the income early. But perhaps you had already factored that in.


I have considered that option. The break even point if I take my DB reduced at 55 is 81 years, and I think there’s a very good chance of living rather longer than that. I am also reluctant to give up the DB - I like the simplicity of it, and it’s big enough that once both myself and spouse reach state pension age, we will have a very comfortable amount of secured income. I don’t really need my SIPP, and I don’t really need a big lump of tax free cash.
So, I think the most likely strategy, with my circumstances and preferences, is for me to take the DB at 60, crystallise the SIPP shortly afterwards, and drawdown any growth thereafter to age 75. The LTA excess charge will then be payable from the SIPP.

TUK020
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Re: FIRE starts in two weeks

#236696

Postby TUK020 » July 15th, 2019, 7:20 am

monabri wrote:
TUK020 wrote:i.e. below the threshold for higher rate taxable income



Like Flyer, I'm not sure what you mean by 25% tax bracket...


Sorry, I will take another go at explaining what I mean.

My portfolio is spread across both SIPP and ISA.
I also have a DB pension.
My plan is to harvest disproportionately more from the SIPP, and less from the ISA.
The intent is to maximise the taxable income while remaining in the lower rate tax band.
Currently this is £50k/yr, but I will move this boundary as the tax rules change.

Jabd2001
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Re: FIRE starts in two weeks

#236701

Postby Jabd2001 » July 15th, 2019, 8:05 am

@TUK, to put you out of your misery, I am sure the posters are well aware of what you mean. They are picking up on the fact that the basic rate band is currently 20% and not 25%. (Of course your overall tax rate will be less than 20% because of the personal allowance).

monabri
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Re: FIRE starts in two weeks

#236704

Postby monabri » July 15th, 2019, 8:32 am

We've just saved you 5%.... not bad for a mornings work...breakfast calls! :lol:

Shelford
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Re: FIRE starts in two weeks

#236718

Postby Shelford » July 15th, 2019, 9:39 am

Brodes wrote:Shelford

Congratulations on such solid numbers! I think you will really enjoy your newfound freedom.

I am 10 years younger than you. Since you evidently know what you are doing financially, I would be grateful for your thoughts on quitting the 9-5 world earlier. I’ve read all the ‘retire in your 30s on not much money’ type blogs. But truth be told I’d like to walk out the office with closer to the sort of income you are looking at. I may just look for interesting work projects in the tech world, although I have zero tech experience currently. But I’m reasonably clever and from a science background, so I’m hopeful I’d pick it up.

What would you say If your 44 year old self called you up and asked about quitting the 9-5 with (not working) wife and 2 young children, a paid off house, 400K in a SIPP, and 900K ISAs? No DB pension or other savings.

Thanks!
Brodes


Hi Brodes

If you have a portfolio of £1.3m at 44 and no mortgage, that's impressive.

in answer to your question, my starting point would be to establish a) what target income you think you need to support your lifestyle and/or what budgetary savings you intend to make, all the time being aware of future commitments viz higher education for kids, care homes, dream travel b) as importantly, what you/your wife will do if you quit your well-paid job. You may wish, for instance, to work part-time and/or work in a charity/not-for-profit. Or spend more quality time with the kids - I wish I had.

Only you can formulate an answer to (b).

With regard to (a), there's any amount of online chat re: safe withdrawal rate. given your youth, i'd be relatively cautious on this point, and be looking therefore at a SWR of between 3-3.5% if you wish to see a RPI linked increase per year, every year. Build a cash buffer of at least 6 months. I have a cash buffer of 24 months. The size of this depends on your attitude to risk - we are dealing with probabilities here. Read Monevator blog on SWR point - numerous references to literature on this subject.

TUK020
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Re: FIRE starts in two weeks

#236737

Postby TUK020 » July 15th, 2019, 11:24 am

monabri wrote:We've just saved you 5%.... not bad for a mornings work...breakfast calls! :lol:

Ah, but I was looking in my crystal ball and picking up on what Jezza Corbyn will do next

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Re: FIRE starts in two weeks

#236801

Postby jonesa1 » July 15th, 2019, 2:55 pm

TUK020 wrote:Ah, but I was looking in my crystal ball and picking up on what Jezza Corbyn will do next


Many a true word written in jest..........

Brodes
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Re: FIRE starts in two weeks

#236853

Postby Brodes » July 15th, 2019, 5:29 pm

Thanks Shelford
The 900K ISA is my ‘work becomes optional’ number. With SIPP as a backup. I’m not there yet on the ISA, but should be after a few more years of saving, or a plunge in the pound.
And it’s interesting to get the view from someone who is taking the FIRE plunge. Most of the blogging on the 3-4% SWR debate comes from people who are theorising, rather than doing.

Hope your notice period goes well!
Brodes

TUK020
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Re: FIRE starts in two weeks

#236861

Postby TUK020 » July 15th, 2019, 6:01 pm

Brodes wrote:Thanks Shelford
The 900K ISA is my ‘work becomes optional’ number. With SIPP as a backup. I’m not there yet on the ISA, but should be after a few more years of saving, or a plunge in the pound.
And it’s interesting to get the view from someone who is taking the FIRE plunge. Most of the blogging on the 3-4% SWR debate comes from people who are theorising, rather than doing.

Hope your notice period goes well!
Brodes


Brodes,
I would suggest that you spend some quality time thinking about how you want to spend the second half of your life.
What do you want to do for your next career, now that earning an income is no longer the primary constraint?
Where do you want this to be? Which country?
What do you want to give your children the early opportunity for? bilingual? private education?
You've answered the first big question: How do you get independent? which leads to: what next?
Anything that you think will give you meaning and sense of accomplishment? Teaching Science to school kids?
well done for the first bit, good luck with the second.
tuk020


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