The post where I lay out factors that affect when you can retire. When am I hoping to retire and how do I plan to get there?
In my last post I discussed how much money you need to retire (using the 7 Stages of Financial Independence). In this post I thought I’d give a bit more thought to the when. Again, this will massively vary depending on your income and savings rate. This is what I’m aiming for and how I hope to acheive it, for those that enjoy the number-crunching.
I’ve summarised this in the table below. All figures are in 2018 money although my spreadsheets factor in inflation.
|STAGE||FUND||CASH BUFFER||AGE GOAL||NOTES|
|Financial Stability||£335,000||£15,000||42||This works on the assumption I would live off of an ISA of £153,000 from 42-60 and then a pension of £182,000 from 60 until death. As noted in Part 1, this is really just theoretical as I wouldn’t actually retire at this point. It’s more a psychological milestone that I could support myself from passive income if I had to.|
|Financial Independence||£590,000||£50,000||49||This works on the assumption I would live off of an ISA of £272,000 from 49-65 and then a pension of £318,000 from 65 until death.|
|Financial Freedom||£825,000||£50,000||54||This works on the assumption I would live off of an ISA of £400,000 from 54-65 and then a pension of £425,000 from 65 until death.|
Isn’t this a futile exercise in crystal ball-gazing?
Quite possibly. Also, for me it isn’t as simple as retiring when you reach a certain monetary figure. If you want to retire early in the UK your retirement plan will be split between pre- and post-pension years. A change to the age you retire affects the fund you’ll need due to different tax treatments of the ISA and pension.
However, it still helps to have a goal in mind and adjust as time goes on rather than stumbling blindly towards retirement.
What do I mean when I say my retirement fund lasts until “death”?
If, like me, you are planning to eat into the capital of your retirement fund, rather than just living off of the income, you’ll have to make some sort of guess as to how long you’ll live. By my calculations, the above figures comfortably lasts me until late 90s (except for the Financial Stability stage). But for the various reasons explained below, it will probably last me much longer.
Aren’t the figures arbitrarily split between ISA and pension?
Looking at the figures above some might be thinking the split is a bit odd between the ISA and pension. Take the Financial Freedom row for example: am I really going to get through £400,000 between 54 and 65 and then only £425,000 from 65 until death? Clearly not.
The £400,000 should last me way beyond 65 (even with quite poor returns) so there will be plenty of overlap between ISA and pension. This begs the questions “couldn’t you just retire earlier on an ISA of that size”? To which I have two responses:
I tried out various spreadsheet simulations retiring earlier than 54 and each time even one year different makes a big difference to the sums due to compounding of gains. This was the point at which my fretful leanings could be satisfied.
It gives me a decent cushion to play with if there is a big overlap between my ISA running out and when I can draw my pension. My family have appalling genetics so it is probably unlikely I’ll live to 110, but you never know.
What financial cushions should you have in place?
With all of the above calculations I build in buffers – in particular the switch from living off my ISA to living off of my pension (as I’ve explained above). I make sure that even with my “pot” only averaging real returns of 2% per year, I would still have enough in the ISA to last me slightly beyond when I estimate I can access my pension.
If returns are better than this then I would have a significant amount of overlap where I could delay accessing my pension for many years and continue to draw on the ISA.
Some would inevitably look at my figures and think I’m being too cautious and am wasting years when I would clearly be in retirement. But I wouldn’t be Fretful Finance if I didn’t give myself this cushion.
And there will always be others who think I’m being too cavalier. That a pension that I only forecast will last until 100 is reckless when I could live until I’m 110. You need to decide what cushion helps you sleep at night.
Other ways in which I consider my figures are cautious include:
It doesn’t include the state pension. In my view it is almost unthinkable this will be cut completely and I even consider it unlikely it will become means-tested. But it is probably going to become accessible at a later and later age, so I prefer to see it as a nice bonus.
It doesn’t include any inheritance I might get in later life.
It doesn’t include the fact that I am planning to have a fully paid-off property in London by retirement and could downsize/move.
At the Financial Freedom stage I could comfortably cut back my spending without feeling like I’m living a miserable, deprived life, so I won’t get too worried if I’m not making 4% real returns.
Equally there could be things that cause my projections to take a hit: Brexit could cast us into a 20 year recession or ill health could affect my ability to keep doing my well-paid job. I want a balanced approach where I won’t get upset if things don’t slot into place for me retiring at, say, 45.
54 isn’t a very ambitious age for someone pursuing financial independence
No it isn’t but it’s where I would feel comfortable totally retiring based on current projections. I hope these will accelerate with time if my income grows faster than expected or investment returns are better than expected. Also, 54 doesn’t sound mega-young for retirement now, but give it 20 years and 54 may be the new 44 in terms of retirement goals.
Isn’t £50,000 too high for a cash buffer?
I used to have it at £100,000 for the Financial Freedom stage! And then I listened to Karsten at Early Retirement Now on the Choose FI podcast. He doesn’t have a cash buffer at all and puts forward a very strong argument why it’s illogical to have one. I completely get that the numbers don’t support a cash buffer that high, but I’m fretful, so for now the cash buffer stays at £50,000.
How long to reach your retirement goals?
So how long before you can retire? In my case, what do I need to be saving in order to get to the numbers in the table above? I must admit this is all a bit theoretical at the moment. I am in the very slow and painful process of trying to buy a flat.
If that goes ahead I (potentially) have short-term goals including extensions and conversion works that will delay my plans for starting to invest in index funds. I was going to delay starting this blog until I was a bit more certain about what I’m saving where, but I got impatient.
My forecasts assume that from 35 I will be maxing out an ISA every year and putting 15% of my salary into a pension.
As to when you can retire, the best way to find out is to get friendly with Excel. My spreadsheet is nothing special. It just involves plugging in my predicted savings, increasing them by estimated investment returns and seeing how many years it takes to get to the goal number.
Disappointed by your retirement forecast?
If your predictions don’t see you retiring as early as you’d like you’ve got three options:
Find ways to increase your income
Cut your expenditure
Just accept that you’ll need to work a bit longer. This isn’t a popular thing to acknowledge in the early retirement community. But there’s only so far you can slice your expenditure. And not everyone will have the means, time and ideas to make significant extra money from a side hustle. Plus, some careers have limited scope for big pay rises.
So find the balance between the three that best works for you.
Update: I’ve since purchased the flat but decided to not do any conversion works for the time being, jumping straight into investing instead. This shifts forward my projected retirement date by a couple of years.
How does paying the mortgage fit into this?
My current salary matched with my ISA and pension savings goals doesn’t leave much left for overpaying the mortgage.
Most people will have to make a choice between investing their money or overpaying the mortgage. Whilst mortgage rates are so low, I’m prioritising ploughing money into savings.
I’m seeing paying off the mortgage as a separate workstream (if I may irritate you with management buzzwords). As my income increases I should be able to overpay the mortgage, likewise with any bonus I receive. I also aim to earn extra income from side hustles and have plans to get to grips with matched betting.
I may also potentially monetise this blog if anyone ever bothers to read it. Although I’m not sure how I feel about that as aggressively monetised blogs piss me off.
There is, of course, also the chance I might meet someone and have a partner to share the mortgage repayments with. Although I won’t hold my breath on that one!
This is the one area where I worry I’m too bullish. I’m hoping to have paid off the mortgage about the same time I reach stage 4 (i.e. at 42). Realistically I might have to settle for doing it concurrently with stage 5 or 6.
So that’s it for now. I plan to tweak my figures once a year to keep them in line with inflation. When I do that I’ll factor in any other major changes and post blog updates.