As I mentioned in Part 1 of these ‘Retirement’ Blogs, this second Part really digs into the ‘Income’ side of things and how you generate Cash to cover the Spending we discussed in Part 1. This will give a much clearer idea of how much Starting Capital is needed and there is a ‘Conclusion’ at the end which I think brings it all together and emphasises some Key Aspects.
Having said all that, most of what I have covered in these two Blogs is also relevant to ‘Retirement’ as most people understand it.
Income Sources - not from Stockmarket Investing
After having figured out your Spending each year, obviously you need to think about how you will get enough Money each year to match that Spending. However it is vital that you don’t just ‘match’ the Spending - you need to generate extra Money that you save to cover Inflation as a minimum - and ideally you will be saving way in excess of likely Inflation to give a nice cushion and to ensure you have an enriched Lifestyle in Financial Terms as well as having the Freedom to do what you want.
Like with anything around this Retirement subject, Income Sources very much depend on the Individual - everyone will have different Income Streams and varying amounts. Anything you get as an Income Stream, however small, will be a big help to be able to Retire. For instance, if you perhaps have a Forces Pension or something, that would put you in very good stead.
Income can be from all manner of things - perhaps a Buy to Let (Buy Toi let?) Property or a Part Time Job or something. Robbie Burns, the Naked Trader, is a Distributor for ’The Utility Warehouse’ (Telecom Plus TEP) and gets a Residual Income from this - anything along these lines is worth exploring. An added benefit, is that something like this can give you something to do to make sure you fill your time and don’t go batty.
Another idea that hit me whilst I was re-potting Tomato Plants earlier today (yes, I know they are a bit late !!), was that if you own a House and have a Spare Room, you could consider taking in a Lodger. Hey, we all used to do it as Kids - maybe if you can find the right person it will be a laugh. You could do this whilst still working to boost your Starting Capital and you could continue it whilst Retired. There was a Tax Free Allowance of just over £4250 that you could earn from such a source, but Steve Holdsworth has pointed out to me that it is now up to £7500 following Ozzy’s recent Budget:
I must point out it is a different ‘Ozzy’ to the one who bit the head off bats and has a missus called ‘Sharon’.
In the ‘Comments’ to Part 1, Steve Adams (@SteveAdams007 on the TweetBondmachine) gives the example of how he does Consultancy Work occasionally to boost his Income and pay for any “large one-offs” he needs to purchase. If this is an avenue that may be open to you, then it could make a lot of sense - at least in the first few years when you are finding your feet in the ‘Retirement’ world.
Income from Stockmarket Investing
There is a School of Thought that says you should not retire until the Income that is naturally generated from your Portfolio after Tax (via Dividends, Interest Payments, Bond Coupons etc.) covers your Spending. My view is that this is a very conservative way to look at things and if you do this, then you may be a very long way from Retirement - probably not what you want. Such Natural Income might only be around 3% to 3.5% - so you will need a Chunky Starting Pot to get a decent Income.
I think if you can get a few small Income Streams going then this is a huge help towards Retirement - you can also do a lot more on the Capital Growth side and I will come on to that later in this Blog. I am sure you have probably seen my comments on Tweets and on this Website about my Income Portfolio - where my intention is to build up the Portfolio so that a large part of my Yearly Spending is covered by the Dividend Income generated by this Portfolio - so I don’t need to worry about selling Shares to get Cash. It could well be that you decide to have part of your Portfolio as an Income Generating pot in a similar way. Please see the ‘Trades/Portfolios’ Page of this Website for full details on my Income Portfolio.
As an example of how using the ‘Natural Yield’ of a Portfolio could work, let’s assume you have a need for £25k a year and the Dividend Yield of your Portfolio is 3.5% (this seems to be a realistic Divvy Yield for a Portfolio that is structured to try and capture some Capital Growth as well - although maybe 3% is more realistic).
Therefore, with a 3.5% Divvy Yield you would need a Portfolio of £720k to generate this as a Natural Yield - that is a big Portfolio !!
Capital Growth from Stockmarket Investing
The way I do things, Capital Growth is a key part of my way of matching Money generated from my Investing Activities to my Spending.
If you have not managed to yet, it might be an idea to look at my Blog from the 6th May 2015 ‘Why Invest? The Power of Compounding’ which you can find here:
I am also assuming that you have read Part 1 of these Retirement Blogs and you have understood how to figure out what your likely Yearly Spending will be. If not, then you should be able to find it on my Blog page just a few Entries before this Blog.
Looked at simply, as I have said in many Blogs etc., my aim is to hit 10% Annual Growth on my Main ISA Portfolio. If I can hit this figure, year in year out, then I hugely cover my Yearly Spending (after Other Income Sources unrelated to the Stockmarket as we investigated briefly above) and I have a sizeable amount leftover to re-invest. Using the kind of Methods I use (as outlined in my ‘M3 Manifesto’ webpage), I think 10% Return is very realistic and in fact, I have beaten this by a lot over many years. Please note this Return on my Portfolio includes Dividends received and reinvested.
Working on the same logic, if you can cover all your Spending by perhaps 5% Growth on your Portfolio (which would then leave another 5% to grow and cover Inflation), then you will be in a lovely position to Retire.
As an example, let’s say you need £25k a year to cover your Spending at your current level (i.e. before Inflation in following years). So, if 5% is going to cover this amount of Spending, then you need a Portfolio Pot of £500k (this assumes that all your Pot is shielded in ISAs and no Tax is paid - you could also reduce the Tax Bill by things like use of your Capital Gains Allowance and your Personal Income Tax Allowance and if you have a Partner, then you would have double the Tax shielding capabilities).
OK, you may gasp at this and say “how the hell am I going to get £500k together?”, well, all is not lost (yet) - you can do some tweaks to this, depending on your abilities as an Investor, your Confidence (or Over-confidence !!), your Risk Appetite, your Spending Needs, other Income Streams, etc.
So, let’s do a tweak or two. Let’s say you only need £20k after Tax per year to cover your Spending. In this case, 5% of your Portfolio Growth would mean a Pot of £400k is needed (remember, we assume you will make 10% a year on average and 5% is retained in the Portfolio to cover Inflation and give a Cushion).
If that is still too painful, then maybe we can tweak again to take on more Risk - but if you do this, you need to think hard about the ramifications. For instance, if you fail to be able to meet the Return Target of 10% or if Inflation runs away, then you may need to get a Job again - this will depend on your Age and Physical Health to a large extent.
So, taking on more Risk, let’s say you will use 7% of the Annual Return and you will still need £20k after Tax. In this case, you will need a Portfolio of about £285k (this still uses 10% as the basis Return but only retains 3% to cover Inflation - there won’t be much of a Cushion).
It is important to realise that when I talk about “10% Return on Exposure year in, year out”, in reality there is considerable Volatility around those Results. For instance, over 5 years the Actual Returns might be something like 4%, -6%, 22%, 8%, 15% (I have no idea if these numbers work out to give a 10% CAGR - they are just random to give an illustration of my point). For this reason, it is critical to have a separate Pot of Cash that you can use if things get tough on the Stockmarkets - I probably carry about 2 years worth of Spending in Cash and I have other fairly Liquid Assets worth maybe another 4 years on top - although this is probably an overly large cushion. In terms of Returns, consistent, steady Returns over the years are far better than wild Swings - if you are not getting Steady Returns, you are probably using a Strategy that is suffering from far too much Risk (leave those Miners and AIM ‘Story Stocks’ alone !!).
The big danger of such Volatility and Risk and the consequent Wild Swings is that you will get scared and jumpy and not stick rigidly to your Methods - these Psychological Behavioural drawbacks could seriously impair your ability to build enough of a Pot before Retirement and such swings once you are Retired may mean you need to get a Job because it all goes horribly wrong.
Hopefully that will give you an idea of how you can think about the Problem and enable you to work out Examples yourself to plan what you need to have in place to enable you to retire.
What if the numbers are tight but I am desperate to Retire?
In the last Example in the Capital Growth section above, I said that if you need £20k after Tax to cover Yearly Spending, then you need a Pot of £285k, assuming that you are happy that you are able to grow the Pot at 10% per annum and you will spend 7% of the Pot and reinvest the rest to cover Inflation - but of course it might be tight.
However, there is the mitigation that in practice, you might actually beat the 10% Return - this is very difficult and it is dangerous to assume you will do it, but, if you are able to take on some Risk (for instance if you are fit, young and healthy then you could go back to Work if you had to) then maybe it is a Risk you are happy to take because the wonderful aspects of being Free from the Working World are of huge appeal to you.
As a guide to what is actually possible, my Returns have exceeded 10% for many years - certainly my Return on Exposure is probably 12% CAGR and the Return on Capital (because I use Leverage) is probably 14% to 15%.
Let’s imagine that you are still some way off the £285k you need to hit these return requirements. All is not necessarily lost. The key here is that the £285k is your EXPOSURE that is needed to the Markets if you grow it at 10% a Year. By taking on a Small Amount of Leverage using Spreadbets, you might be able to achieve this Requirement but with a lower amount of Starting Capital. I would expect that with perhaps £250k you could manage this - but maybe it can be done with a little bit less. In this case, I guess you would need about £185k invested in Stocks, £25k in Cash and £40k in the Spreadbet Account (geared up to £100k, to give £285k Exposure to the Market in total). This is just to give an idea - you would need to work out exactly how you want to split the Capital.
Obviously if your Spending needs are less than £20k - for instance, you might have paid off the Mortgage and only need perhaps £16k a Year after Tax as you live very frugally - in this case, the Return at 7% on your Exposure would need a Pot of about £230k - and this could perhaps be achieved with about £200k if Leverage via Spreadbets was used. In this case, you may need about £140k in Stocks, £25k in Cash and £35k in a Speadbet Account leveraged up to £90k to give £230k Exposure). Again, you will need to figure this out properly.
To be honest, it is all about how much you spend. I actually know people who live on tiny amounts per year, far less than me - quite amazing.
Please see my Blog Page and click on the Category ‘Spreadbetting’ to see my detailed Blogs on how I use Spreadbets to get Leverage with Managed Risk. Spreadbets can be extremely Dangerous if you don’t know what you are doing - I suggest you start small whilst you are still in a proper Job and gradually learn the ropes - but, above all, don’t take unnecessary Risks and make sure you understand your level of Exposure at all times. People get screwed up on Spreadbets and Leveraged Trades because they do not understand Exposure - make sure you don’t join their Club - it is entirely avoidable if you know what you are doing.
Danger in the early Years of Retirement
This is a small section that I am adding just before this Blog goes finally live - so it might not fit fully with the flow - sorry if this is the case.
One of the biggest challenges Long Term Investors face is the Risk of a sudden Market Meltdown like the collapse during the Credit Crunch in 2007 / 2008. In these, thankfully rare, situations, Markets can drop by maybe as much as 50% and can do incredible damage to a Long Only Portfolio.
To a large extent they are pretty much unpredictable, and this makes the challenge even greater. The only real defences we have against such Events is to have a broad spread of Diversification in our Portfolios (this may include large Cash Holdings and perhaps Bonds, although Bonds look quite Dangerous themselves at present), and using Technical Analysis to tell us when Charts are looking Toppy and starting to turn down - failure of Long Term Uptrend Channels is usually a sign that something is up. Crossing and falling Longer Term Moving Averages can give indications that we have a problem also. Some people use Stoplosses but Readers will probably be aware of my aversion to such things, with odd exceptions.
Once it is determined that a drop is likely (although the extent of such a drop is impossible to predict really), it makes sense to take precautionary action like Selling some Stocks and increasing Cash Holdings and I think the best Safety Tool is to Hedge using FTSE100 Shorts - via Spreadbets or ETFs (Exchange Traded Funds) like XUKS.
All over my Blog Archive there are chunks of Text about Hedging - but I do intend at some point to pull them all together and write a specific Blog on Hedging. In the Credit Crunch meltdown I shorted a lot of Individual Stocks using Spreadbets - particularly the Banks. This was pretty useful and helped to Hedge the Longs - but it is very High Risk and difficult. I do recommend Stoplosses for such Shorting of Individual Stocks.
The Danger of a Market Collapse is particularly acute and could have significant consequences if you have just started Retirement (or are just coming up to Retirement) when the Collapse strikes. If you have played things tight and have little Margin for Error in your Retirement Calculations, then a big hit to the Portfolio might mean you need to go back to work or maybe delay Retirement for a few years - not a pleasant scenario if you have been looking forward to Retirement and planning it for many years. However, if you have been a bit cheeky and left the Workforce in your late 30s or something, then maybe you just have to accept that working a few more years in the Rat Run might not be the end of the world.
The mitigations to this are obviously to try not to cut your Assumptions too tight when doing Retirement Projections and Leverage will make your life harder if things go badly against you. If you do decide to use Leverage, then I think it is essential that you understand Hedging and YOU PRACTICE IT FULLY IN THE REAL WORLD BEFORE ACTUALLY RETIRING. Above all else, keep a Cool Head and don’t make any Snap Decisions - especially during the Trading Day when your Emotions are thrown all over the place.
Diversification can be a major help but remember Stocks are Stocks and as much as we try to spread Risk across Sectors, Styles, Market Capitalisations etc., to a large extent Stocks are correlated with other Stocks - it is pretty much unavoidable that a Market Collapse will hit a long only Portfolio.
A high level of Cash would be a major help - particularly because you need Cash for your Day to Day Living Expenses - you don’t want to be a ‘Forced Seller’ having to sell good Stocks at the Bottom just because you need to eat. In addition, having Cash means you will be able to pick up some Bargains once the Bottom is in and Stocks are on the Rise again.
Before taking the Retirement Plunge - it might be worth ‘Stress Testing’ your Portfolio and modelling what would happen if the Market was to fall 50% - how would you cope?
I am of the view that Passive Approaches using Funds etc. are very susceptible to Market Collapses - this is a major Drawback and means High Cash levels are essential and a Long Term Investment Horizon is the only sensible approach - Fund Managers are terrible at managing downside. Rebalancing across Assets once a year is a must - this will help reduce over-exposure to Equities in such a Portfolio. After many years of a Bull Market, we are probably overdue some sort of Major Correction and if you have not Rebalanced your Portfolio, you might inadvertently have a dangerously high Equities Weighting - it would be wise to sort this out ASAP.
These Dangers of Market Meltdown are particularly acute when you first Retire and have not had a few Years of adding to your Pot from successful Investment etc. For this reason, it is also wise to be pretty careful with your Spending in the early years. This is very much how I played things and now, 6 years down the line, I have hugely grown my Capital Pot and been able to loosen the Purse Strings a little if I want to - not that I have that much in practice !!
How I do things myself
As I have discussed above, I guess at a very high level there are 2 basic approaches to the Income side of the Retirement Decision when exploiting the Markets - there is the ‘Natural Income’ generated from a Portfolio from things like Interest Payments on Cash, Coupon Payments from Bonds and Dividends from Stocks; and secondly there is a more aggressive Approach that uses Capital Gains from Stocks etc. to create Income.
For the last 6 years I have mainly derived my ‘Income’ from the latter (apparently Higher Risk) Approach and this has worked extremely well. However, as I have made clear on my Webpages, Blogs and Tweets etc., over time I want to build up a much larger Income Portfolio from which I can gain big Dividend Payments to make a lot more of my Income ‘Naturally’ derived, as opposed to having to Sell Stock Positions to free up Cash. To be honest, it’s no big deal to do such selling of Stock Positions, but I just don’t want to even have to think about it. I just want the Cash to magically appear in my iWeb Account and I can just take it out and spend it. Simples.
Funnily enough, as I type this I am actually now beginning to question the logic of my Shift to more of an Income Portfolio generating Cash from Dividends. I am sure Readers will smile at this because it is the kind of daft thinking and questioning of my own actions that I do a lot - I guess that is a healthy thing but it may be plain Paranoia or Schizophrenia (or Quadrophenia for that matter……… why didn’t Pete Townshend call it ‘Modrophenia’?…….I digress). On the evidence of the last 6 years, there is starting to seep into my current thoughts an element of “if it ain’t broke, don’t fix it” and maybe I am being silly.
It’s doubly funny because I was thinking about half an hour ago, while slicing up a Fresh Loaf from my Bread maker (trying not to slice my fingers off with the Chainsaw), about where I would get Cash from to shove into my Income Portfolio ISA for this year. One of the annoying things about how my gains go each year is that the bulk of them tends to be in my iDealing ISA and I have a psychological block on taking money out of this Account - I never have done and am desperately trying not to. I think this is really rather dappy and obviously one of those weird Psycho Flaws we all have - but I think the real reason is that I am obsessed with trying to grow that Account and I would dearly love to see it hit Huge Numbers (I am sure most Readers can relate to this).
The way it works in practice is that I make a huge amount of Cash from my Spreadbetting Account (it is an amazing Cash Creator, ‘Magic Money’, when you figure out what you’re doing and learn how to control the Risk) and this funds the majority of my day to day Spending and leaves plenty extra for investing in my Income Portfolio ISA. I guess I am trying to think about when things don’t go my way, and where will the Cash come from in that eventuality. This may need more moving around of Assets - and this is one of the constant challenges once you are Retired - how to allocate your Capital across various Assets and make sure you rebalance on a regular basis.
It’s a tough life not having a real Job you know………
Anyway, back to the logic of the Income Portfolio, because although I have gone off the Piste a bit (and probably Piste off a few Readers by now as well), it is sort of relevant. My thinking has always been that when I hit 60 (I am 50 now - yes, I know, a grumpy old git), I want to have more of a ‘ready made’ Income Stream that just magically appears and I can spend it on day to day living.
My thinking really is that maybe by the time I get to that ripe old age, my Interest in Stocks might have waned a bit (ok, I admit that is unlikely) and realistically my Health might be a bit iffy (it’s pretty pants now !!) and that might preclude me from doing so much on Stocks. So, as I mentioned at the start of these Retirement Blogs, a lot of this text is very personal to me but it hopefully will get Readers thinking with regard to their own circumstances and feelings about how they wish to do things and how they see their own Futures mapping out.
Another good aspect of a separate Income Portfolio is that it adds to Diversification. People in general massively undervalue the ‘Free Lunch’ that good Diversification can bring to an Overall Portfolio of Assets - it really is something that’s not that difficult to do pretty well and it has a huge impact on your Returns over time (by the way, and nothing to do with the subject, other ‘Free Lunches‘ are Momentum and Compounding - use them. I intend to do a Blog on these in the distant future). More importantly, it avoids the Big Losses which really are the scourge of Investors - especially when you are Older and Retired and cannot be doing with big Drawdowns to your Capital - because you do not have the years left on the Planet to make up any shortfall and you just don’t want the Stress.
It Diversifies in a couple of ways - firstly it means I hold 12 different Stocks to those in my ISA but it also means I diversify by ‘Investment Style’ - i.e. these Stocks are Income Generators by definition which differs from the Value, Growth, Special Situations, total cock-ups by me, and Momentum Shares I hold in my ISA. Another nice aspect is that I often do shorter terms ‘Trades’ based on my Income Portfolio Stocks within my Spreadbetting Account - because I hold the Shares in my Income Portfolio, I am watching them every day and am aware of Opportunities.
Rather than the kind of Active Share Investing that I undertake (and I am sure the majority of WD Readers do this), it is possible to take a more ‘Passive’ approach where you in effect outsource the daily Investment Decisions to Fund Managers.
You could use an Income Approach where you buy Funds that are specifically about Income Generation - there are loads of Unit Trusts and Investment Trusts that do this sort of thing. They are usually specifically called ‘Income Funds’ in their name and Unit Trusts are categorised as ‘Income’ or ‘Accumulation’ classes.
Alternatively, you could go down the Capital Appreciation route and sell Units of the Funds to produce the Income you need to match your Yearly Spending. The logical way to do this would be to Sell Units when the Markets are high and carefully plan what your expected Spending needs are for the next few months. You don’t want to be selling Units when Markets are Low and in one of the Periodic Panic Sell-offs we seem to get every year.
Remember, ‘Buy Low, Sell High‘………..
If you go down the Passive Approach, I would expect you could perhaps make around 7% a year Return on Average. Again, probably the best way to do this is to start investing via Passive Funds many years before you actually want to Retire so that you can get a feel of what kind of Returns are likely. If you find they are not delivering high enough Returns, then you may need to get more Active - assuming you are happy and able to do this. Predicted Returns are very difficult to ascertain really - the theory goes that the FTSE100 has given a Total Return (including Dividends) a shade under 7% a Year since 1890 or something - so 7% should be possible but remember you must allow for Inflation and this could be 3% or more.
One of the hardest aspects around Investing via Funds for me is that it is very different to Investing in Individual Shares. When you buy Shares in a Company, you are buying a Stake in something real (unless it is one of those crappy Chinese AIM Shares !!) and it is something you can measure the value of with P/E Ratios and Dividend Yields and Price to Book Value etc. With Investment via Funds, you are sort of looking at Historic Performance of the Fund and the Markets and just sort of hoping that this kind of Performance can be repeated in future years. You are also going by the Fund Manager’s reputation - but often this is just Marketing BS anyway.
In addition, if you Invest using Funds, you will probably not be using a Hedging Strategy - this exposes you to Downside Risk and you could lose a lot of money when Markets collapse. Of course, you could Hedge using XUKS ETF like I do, but this is a much more Active way of doing things.
I guess the best feature of a Passive Approach is that you don’t have to do much - this is a big deal for a lot of people who have Hobbies and Social Lives and stuff !!
One other fairly Passive Approach is the kind of thing that GrindertraderUK (@GrindertraderUK funnily enough on Tweetpetite) is experimenting with using Stockopedia Stock Ranks - it is a Rules Based system where the Stock Ranks tell him what to buy and sell and the timing - this kind of hybrid could work well - have a chat with Grinder, I am sure he will give you some pointers, he’s a decent geezer.
Another approach some people use is to have a dedicated
‘Wealth Manager’ - it is my understanding that this is very expensive and only really suitable if you have a big Capital Pot - I expect you need something like £300k as a minimum to make it worthwhile and the Charges will eat away at your Returns. In these Approaches, you effectively have your own Fund Manager (a Stockbroker perhaps) who does literally everything for you. Of course you run a big Risk around whether they actually perform or not.
For more ideas around Passive stuff, have a look at my ‘Funds’ Page on the Sister Website, WD2 (no, I don‘t have a Sister, and even if I did I am not giving you her Phone Number):
Obviously a vital part of most Retirement Planning exercises is to start from any Pensions that are expected. These will most likely arise from Employment related Pension Arrangements and of course there is the State Pension at some point.
Strangely for myself, I do not have any kind of Employment Pension. This is because up until the age of 31 I was not really in any settled ‘Career’ where I felt in a position to do a Pension or I felt I was too young and had other priorities. Sadly, for much of my Life I was oblivious to the Power of Compounding……..if only someone had invented the Internet and done a Blog on it for me !!
Once I got in a well paid Job and was able to do a Pension, I decided to channel my Money into buying a House - unfortunately, not long after making this decision I had a Motorcycle Accident and became Paraplegic - this also affected my wish to do a Pension as my Life Expectancy is probably shorter than for an Able-Bodied person and I was not sure how long I would be able to work for. Luckily I made the decision around then to channel my Cash into ISAs and that was a good move.
This absence of an Employment related Pension for me means that I have no real option but to make my Investments work hard for me. Luckily I enjoy doing this Investing lark and, so far, my 6 years of Retirement have gone extremely well, with me fully funding myself and growing my Capital hugely as well. In the first few years I was very careful with my Spending but as the years have passed and my Investment Returns have been good, I have felt more confident and I never really worry about what I spend at all. Obviously I am not stupid and I don’t go out buying new Cars every week, but I pretty much do what I want to do.
This also throws up an important idea that Readers may want to think about. Up until now, I have not mentioned the State Pension and this is partly because I see it as something many years away and of little consequence. However, the State Pension is an interesting beastie - this is because it is changing with the move to a ‘Universal Pension‘. My understanding is that I will receive a State Pension that is the equivalent of £146 per week at today’s money. This adds up to about £7592 per year, and set against the context of my Current Yearly Spending of about £18500 per year, this will be a really nice bonus. In fact, it seems likely that with the other Income Sources I have, I won’t need to make any gains on my Portfolio to be able to fully Fund my Yearly Spending !!
That’s a lovely position that I should be in at some point of my Future, the only catch is that I think my State Pension Retirement Age is about 68 - so I have another 18 years to go - doh !!
Mind you, this throws up another interesting concept that it is worth thinking about. On the assumption that I will be fully able to fund my Yearly Spending once I am receiving the State Pension (once it is combined with other Income Streams I have), then my Investing Portfolio effectively only needs to ‘Bridge’ my Spending for the 18 Years until I reach State Pension Age.
This would mean that even if I stopped Investing, I could fund my Yearly Spending no problem until I get the State Pension - that is a lovely position to be in and Readers might want to consider how they might need their Portfolio to ‘Bridge’ a Gap between when they would like to Retire and when their Employment Pensions and/or State Pensions kick in. For instance, if you are 45 now and you are due to get a good Employment Pension from 60 that you can live on, then you have 15 years to ‘bridge’. Obviously this may mean you will need less in your Starting Pot than you at first thought.
Obviously there is not much ‘cushion’ in there, but it should give Readers something to weigh up.
I view the State Pension as a ‘Bonus’ I will get when I am 68 - I don’t consider it at all in my thinking about Income and Spending. I work on the utterly false Assumption that I will not get a State Pension and I need to fully fund my own Retirement.
Just something to realise - to qualify for the Full Universal Pension you will have to have worked something like 25 years - or at least have National Insurance Contributions for 25 years - I think you can get ‘Exemptions’ for things like being a Student or having Maternity Leave or stuff. If you have opted out of the State Second Pension or SERPS or whatever it is called, then you may get less than the Full Universal Pension - but of course you will be getting a Personal Pension as well - that is why you opted out. I don’t know much about all this so you must get proper Financial Advice.
**PLEASE NOTE - AS PER COMMENTS FROM JAMIE BELOW, THE FIGURE OF 25 YEARS HERE IS WRONG. YOU NEED TO HAVE 35 YEARS OF CONTRIBUTIONS TO QUALIFY FOR THE FULL UNIVERSAL PENSION - SEE JAMIE'S COMMENTS FOR LINK TO ARTICLE**
I just thought of this bit and decided I better shove it in - I will never finish the Blog at this rate !!
My understanding (it could well be incorrect - so you need to check it out) is that SIPPs (Self Invested Personal Pensions) can only be used to take an Income from once you are 55. However, that is the current Law - but it will be changing - the new situation is that as the State Pension Age rises, then a similar number of years will be added to the SIPP Income Drawdown age (not sure if that is the correct terminology).
In other words, although SIPPs can currently be used for Income from 55, for many younger Readers, they may not be able to get Income from SIPPS until 56, 57, 58, 59, 60 etc. To my mind, this is another reason NOT to put money into SIPPs as a preference, and to fill up your far more accessible ISAs before your SIPP allowance. In addition, ISAs tend to not be fiddled with by Politicians in the same way that Pensions are - people are much more aware of their ISAs but rarely look at Pensions and few understand them anyway - so Politicians can fiddle to their Black Heart’s content with their grubby little mitts…….
All through the Blogs I have been bleating on about how you need a Pen and Paper and Spreadsheets and suchlike and to laboriously work your ‘Retirement Plan’ out with Yearly Projections etc.
And let’s be honest, you are dreading this aren’t you?
It does sound ultra tedious - so much so that I haven’t even bothered doing it myself - what a hypocrite !!
But wait, I have a solution for you……..Ladies and Gentlemen, I bring you…….(drum roll)
MONTE CARLO (ok, not that big a surprise, it was in the Heading).
Yep, that’s it - go to Monaco, put all your Money on Black in the Casino and Bob’s your Auntie…….
Surely there must be a better way……..
It’s a link to what they claim are the 3 best ‘Monte Carlo’ Retirement Calculators (this is a generic modelling term for things like this with loads of variables apparently) - they all appear quite good from a quick read - have a look and select one you fancy. They basically allow you to input different things like Return Rates, Starting Capital, Inflation Rates, Contributions, Withdrawals, etc.
And they are all free - something The Wheelies like. My Thanks to Dean Brooks (@lincartbrooks on Tweetyfier) for bringing this software to the wider Wheelie World.
If you are some years off your planned date of Retiring, then obviously you should use these years to concentrate where possible on growing your Capital, but, more importantly, focus on getting your Investments performing in the way you need them to after you Retire. For instance, if you are thinking of using Spreadbets to up your Returns, then get using them now in a small way to learn what you are doing and to see how well it will work for you in practice. If you can’t get it to work, then you will need to adjust your Approach or you may even need to amend your Retirement Plans.
Regularly saving from your Work Income is very important - by adding as much as you can you are massively boosting your ‘Pot’ and increasing the benefits of Compounding. Most people struggle to do this in a disciplined way and probably the best way is to set up a Direct Debit to take the Cash out of your Current Account straight after your Salary is paid in each month.
The Financial Services Industry will tell you all about the ‘magic’ of ‘Pound Cost Averaging’ where you drip feed money every month into a Fund or something. Personally, I don’t like this - yes, you are buying into the Stockmarket when Stocks are low but you are also buying when they are high - and, let’s face it, they tend to be High more than they are Low !!
The theory goes that it is impossible to ‘Time the Market’ - this is self-serving nonsense from the Industry - think about it, it is in their interest to get you sending regularly amounts of money into their Funds - they get paid as a % of the Total Pot !!
It’s a bit like the other ‘myth’ that I hear all the time - “It’s time in the Market that matters, not Timing the Market” - personally, I think this is more self-serving Industry twaddle - yes, I like to be Fully Invested on the Long Side most of the time, but I will Hedge and Sell stuff if Charts tell me to. To be fair, these adages are probably true if you are a Passive Investor (or someone who has no real clue what they are doing and are just trusting the ‘Professionals’) and if you are happy with Pedestrian Returns (bearing in mind the Pros will be taking several % out of your Returns each year).
If is far better to put the Cash to one side and to buy Shares with it when they are low - you don’t necessarily need the overall Market to be low, but individual Stocks that you want might be low - buy those. The point is there is no need to be buying stuff ‘high’ - unless of course the Stock is still good value and has broken out to new highs - buy the Momentum in that case.
Some very simple ‘Seasonal Investing’ techniques will get you in Stocks at the right time - there is nearly always a Sell-off as the Summer starts and you can be pretty sure there will be a Sell-off just before Winter - take advantage of these big Market Falls to buy in as the Market starts to recover - in simple terms, the Summer is a poor time for Stocks but the Winter is superb and that is when you want to be Fully Invested.
It is vital to do some serious Planning with a Pen and Paper and a Calculator !! This cannot be skimped on - the best way is to do proper Yearly Forecasts of Spending and Income needs and to build in sensible assumptions for Inflation etc. Be Conservative - you want to be comfortably able to Retire - don’t Retire first and then get in a situation where you are stressed and worried that you will need to work again - you cannot Invest effectively if your head is not in the right place. If this sounds scary, try one of the ‘Monte Carlo’ Free Internet Tools I mentioned above.
Having said “be Conservative“, one ‘Margin of Safety’ concept you can keep in the back of your mind is that I found my Investment Returns improved dramatically after I retired. I think it is simply that I have more time to do things properly and it gave me time to really sort out what my ‘System’ was - I made far too many Mistakes in my Investing Activities when I also had a Full Time Job - avoiding Errors is the way to make more Money. If may be best to view any such possible improvement in Returns as a potential Contingency to give you more of a cushion - but don’t rely on achieving such improvements - I might just be plain lucky.
To some extent, there is always going to be ‘Risk’ in a Retirement Decision - especially if you escape to Freedom early and are cutting the numbers quite tightly. For many people, this is a Risk worth taking and chances are you will find that once you Retire and have more time to focus on your Investing, Results will improve markedly and the Numbers will quickly move in your favour. If you want to completely remove all Risk around the Retirement Decision, then you will probably need an insanely large and unachievable Starting Pot - maybe something like £1m even - it’s not going to happen. Probably the Bigger Risk is not Retiring and having a miserable life !!
Since shoving Part 1 onto the Website and receiving several extremely helpful Comments (read them, they really are very valuable), it has chimed with me just how important having something to do in Retirement is. When I wrote the Section on this in Part 1, it sort of flowed quite easily and perhaps the enormity and profundity of what I was typing didn’t really hit me. It is only now that I see just how vital it is to have a clear Plan of what you are going to do when you give up Work as you currently know it - without such a Plan you will go barmy pretty soon and drive your loved ones up the wall !!
Steve Holdsworth made the point really well in his Comment to Part 1 - the sort of person who is motivated to get themselves free of the usual Rat Race Lifestyle, is not going to be content just drifting around and not really doing much. That way lies trouble - make sure you have a very clear idea of what you will do to fill your time.
In the Comments to Part 1, GrindertraderUK gives a great example of the kind of Voluntary Work he dreams about doing when he finally decides to give up mucking around on Oil Rigs - this sort of stuff is inspiring and shows what kind of future is out there for you to grab - make it happen !!
For younger Readers (basically, anyone under 40 !!), it is worth noting that many People that are active on Twitter and suchlike gave up Normal Work in their 40s and 50s - this shows just how possible it is and if you are currently in your early 30s, then Freedom by your mid 40s must be very possible if you put your mind to it and listen to the superb Ideas and Guidance that the Older Folk on Twitter etc. throw out. Don’t be scared to ask questions - the kind of Investing Community which is active on the more sensible Twitter Spheres are very willing to help and give guidance (in truth, we all like showing off - but don’t tell anyone !!)
Something I cannot stress enough is that ‘Life is too Short’ - I have no doubt that deciding to Retire was one of the best decisions I ever made in my Whole Life - up with things like deciding to go to University at 27 and to start WheelieDealer (ok, the last was a feeble attempt at humour…….).
Indeed, Chris Dillow in this Week’s Investors Chronicle p16 (dated 24 July - 30 July 2015 with ‘Game On’ as the Front Cover Headline), talks about how valuable experiences and memories are to us and that as we grow older and become less Healthy and able to do stuff, these will be all the more important. He makes the point saying that spending on Holidays and Nights out gives us a Stock of Memories that are valuable in later life. I like that thinking. He also links this to the idea of spending more in the Early Stages or our Retirement than in the later years - making the point that Flat Rate Annuities might not be such a good idea.
Nobody knows when their Last Day on the Planet is - but I can guarantee that each day you live is one less day left. As Warren Buffett says, "each day becomes marginally more valuable" - keep this thought at the front of your mind and don’t waste the most precious thing you have - each Healthy Day left……Perhaps the biggest Risk we face as Investors is not Retiring early enough.
Right, that’s me done, get Planning you lot !!