DISCLAIMER - THIS SHOULD NOT BE TAKEN BY READERS AS DEFINITIVE ADVICE ABOUT RETIREMENT. THESE ARE JUST MY PERSONAL RAMBLES THAT YOU ARE UNLUCKY ENOUGH FOR ME TO BE SHARING WITH YOU AND BORING YOU SENSELESS WITH ON YOUR DAILY COMMUTE OR JUST BEFORE YOU GO TO BEDDY BYES. IF YOU ACT ON THIS GUFF YOU ARE CLEARLY NUTS AND NEED SHOOTING. PLEASE SEEK PROPER INDEPENDENT ADVICE FROM YOUR FINANCIAL ADVISER. INDIVIDUAL CIRCUMSTANCES OF READERS MAY BE VERY DIFFERENT FROM MINE - I HOPE YOU ARE MUCH MORE LOADED FOR STARTERS.
This is quite a difficult couple of Blogs to write, which is probably why it has taken so long - apart that is, from the fact I have been out having ‘Fun in the Sun’ and WheelieBlogs are not my top priority at the moment. It’s hard to write really because it depends on so many factors - and probably the majority of these are very Personal and Unique to every single Reader.
For this reason, I will try and cover all aspects that need to be considered but in the main I will approach it from my own particular angle - which means that to a large extent the Returns mentioned are derived from the kind of Methods and Approach I use in my Investing Activities. These are best exemplified in my ‘M3 Manifesto’ webpage which goes into full details on how I do stuff. The nub of my ‘System’ is that I expect to make 10% Average Annual Return on my Exposure to the Stockmarket year in, year out.
I got a bit thrown by this Subsection. I had done a sort of Outline Plan of how I thought the Blog would go and then I was daft enough to Tweet out that I had started on it and Steve Holdsworth (@sholdsworth1963 on Tweetsterter) said something to the effect of “please include a bit on why people decide to Retire”. This seems a reasonable enough suggestion to help create a really useful Blog and I am therefore doing this chunk - the only problem is that I have no idea what to write in it………
Something I will stick just here in this spot, is that ‘Retiring’ doesn’t actually mean giving up Work altogether - for many people it can mean going Part-time and working perhaps just 3 days a week or something. I know Steve himself intends to stop doing Full Time Work and to do more work with Charities. In fact, it is important to stress here that just stopping Full Time work and doing nothing whatsoever is probably not a good idea. I was very clear when I stopped working that my new focus was going to be on Full Time Investing - and this worked extremely well for the first few years but around Year 4 I found that I didn’t need to spend so much time on Investing and I actually got a bit bored. This was very bad for me and Readers may have seen on my Website somewhere that one of the reasons I started doing ‘WheelieDealer’ was to give me some sort of new Project to get my teeth stuck into - particularly for the Winter months when my Health makes venturing out into the Big Wide World a bit of a Pain in the Butt.
I have a very good friend who gave up work about 5 years ago because she had a baby. It all worked well at first but recently she has got very listless and she is a bit of a lost bunny. She is now looking for a Part-time Job and needs a sense of purpose. It is important to think about what you will actually do when you Retire - sitting around watching crappy Daytime TV is not a good Answer to that Question !!
As you may have seen elsewhere on my Website, I made my Decision to Retire at 44 when the Company I was working for, Fujitsu, started a Voluntary Redundancy Programme. Up until then, I had not really thought hugely about Retiring and I guess I was expecting to do maybe another 5 years or so - probably up to about the age I am now - 50, or maybe 55 if I could bear it.
There were really 4 reasons why I decided to take the bold step of seeking Freedom:
I put the above bit with the Bullet Points in to give Readers a clear idea of how and why I made my Retirement Decision. Maybe you can think about your own Life and come up with a similar List with your thoughts about alternative Futures. For instance, you may be a keen Fisherman or Photographer, or Gardener, or Musician or something, and you wish to focus more time on enjoying these Hobbies while you still have some Youth left and the Health to let you do it.
I guess I have a slightly more pessimistic view of mortality than many people due to my Health, but I do have a view that none of us really knows our future and how many days we have left on the planet. It’s a bit like Risk Management with our Portfolios - if we just assume we will go on living day after day, we are probably wasting valuable days doing pointless jobs that we don’t really like and in reality we could drop dead next week. The danger here is that we keep putting off the things we would really like to be doing and spending our increasingly valuable days on and we might never live long enough to do them. That is a Risk I am not prepared to take on - I want to be enjoying the days I have left (hopefully a lot of them so I can keep on boring you lot !!).
You can ‘Retire’ at any age - it is just (ha ha ‘just’) a case of having enough Capital and low enough Lifestyle Spending to make the numbers add up. If you think you may be able to Retire at 40, for example, look at the Sections later in these two Blogs on Spending and Returns and get your calculator out.
Steve Holdsworth made a great point on Twitter the other day to the effect that many people retire in their 50s or younger and none of them regrets it. This reminds me of something I have found anecdotally through my life - whenever someone gets made Redundant, it is nearly always a shock and a worrying time - but invariably a few years down the line, the person says, “getting kicked out of company XYZ was the best thing that ever happened to me”……..
The Guts of this Blog Series
At this stage of writing the Blogs, I see 3 main Sections - Spending, Income Sources and Capital Growth - I will cover the latter 2 in the next Blog.
What we are trying to do here is to establish how much Money we are likely to Spend in each year of Retirement and how much Income and/or Capital Growth we are likely to receive each year - and we must take full consideration of Inflation and build in Contingency for the Unexpected. These should ideally be properly calculated and recorded as Yearly Spending and Income Projections. This could be done on a Spreadsheet or maybe the old fashioned way on A4 Paper. Some thorough souls will no doubt do both !!
Nothing wrong with a bit of ‘Belt and Braces’………
It is a good idea to focus your efforts on reducing any Debts you have - even the silly things like a couple of grand on a Credit Card Bill are inefficient and a distraction from the job of focusing on getting your Money working for you. Clear these things as soon as you can and don’t take on any new Debt Obligations.
When you actually Retire, you don’t want to be using what might be Scarce Income to service Debts - get them cleared and focus on building your Starting Capital.
Obviously a Mortgage is slightly different because you need somewhere to live - I address this further into the Blogs.
All through these Blogs I will be referring to the Starting Capital that you need to be able to Retire. Obviously the amount you will need is a vital ingredient in the Decision about when you can actually Retire and it is very much tied to the Yearly Spending needs you will have and your Income Sources outside of your Investments, and ability to generate Returns from your Portfolio.
Simplistically, prior to Retiring, you need to be Saving as much Money as you can for Capital Purposes and you need to be Investing it within Tax Wrappers that will protect you from Tax but also enable you to access Cash when you need it. It will be no good putting your Money into a SIPP (Self Invested Personal Pension) if you want to Retire at 45 but the SIPP Rules won’t let you have access to the money until you are 55 or something.
For ease of access, I would fill my ISA first every time. In fact, had I not done this but had used a SIPP, I would not be retired now (mind you, I have never actually taken any money out of my ISAs so that actually is wrong !! In reality, most of my Cash for Living comes from shuffling around Investments and my Spreadbet Account.) Obviously if you do not use a SIPP, then you will not get the Tax Relief on putting money in - but you will pay tax getting the money out - all this needs to be weighed up.
Something to consider here is that in Robbie Burn’s Naked Trader book, he suggests that you need about £250k to be able to Retire Early (I think it is in his book - maybe I read it on his website). Obviously this is a very generalised figure and I presume this is for a Single Person with no Dependents. It is also obviously based on Robbie’s expectations of what kind of Returns can be achieved from Trading - these might be on the high side as he often says he gets 20% to 30% a year. However, in reality, I think his £250k figure is probably not wildly out - although maybe with Inflation this Figure should be a lot higher now.
Don’t let any of this frighten you - I discuss many different aspects and ideas within the coming Blogs so it is worth reading them in detail and thinking through carefully about your own situation - Retirement may not be as far away as you worry it will be.
Please see my Blog from the 6th May 2015 ‘Why Invest? The Power of Compounding’(http://wheeliedealer.weebly.com/blog/why-bother-investing-the-power-of-compounding)
which is a very important Blog which will help with detailed Retirement Planning. If may be worth reading this Compounding Blog first before continuing further.
Once you get the urge to Retire, or at least to set yourself free from too many Obligations imposed on you by the seemingly never-ending drudgery of being a Wage-Slave, you need to get a very clear Budget for how much Money you will Spend each year. For simplicity and to help you get a high level idea of your Spending, I have broken it down into 2 elements - although you can split it however you wish:
If you pay Rent on a Property where you live, it should be easy enough to multiply your Monthly Rent Bill by 12 to get the Yearly Figure. This figure will then be subject to Inflation - you could probably reasonably assume this to be around 3% per year and if you like you could use a higher figure to be conservative. You could then take the Starting Figure for the first year of Retirement (obviously if you are not going to Retire for a few years, then you need to inflate your Current Year figure by 3% each year before you get a Figure for the First Year of Retirement).
It may be worth being ultra conservative and upping the Rent Inflation figure to 4% perhaps - this is a decision only you can make. However, be careful that you don’t scare yourself into never Retiring because you have made Assumptions that mean you need an enormous Portfolio Starting Pot - when this is a false situation (this is a bit like the Pension Deficit problem many Companies face - where overly conservative assumptions are leading to false and unrealistic Deficit levels.)
Armed with this Starting Figure, you should then be able to do a Projection out into the Future of your likely Yearly Rent Bill. You can project it out as far as you like - for instance, if you intend to retire at 55, then you can perhaps to a Projection for the next 30 years to take you to 85 or whatever you like really. I suggest you use your A4 paper and/or spreadsheet and for each Calendar Year make an entry for the inflated Rental requirements.
I have a confession here - I have not actually done this Paper/Spreadsheet exercise myself - although I have done it for other people. By a strange quirk of my paying extremely low Rent (around £548 per month as a result of living in a Housing Association Bungalow which is specially adapted for me as I am a Paraplegic Wheelchair User), and by having an almost Equivalent sized Income Stream that is Inflation Linked; One offsets the other and I don’t really have to worry too much about the Rent element of my Living Expenses. £548 per month is about £6576 per year - peanuts really.
I hope that last paragraph makes sense - it basically means that I have not had to do Yearly Rent Projections for the future as I have it covered.
Depending on your circumstances, this is a bit trickier perhaps. For some Readers it will be dead easy - your Plan could well be that by the time you Retire you will have paid off the Mortgage. If you can get yourself into a situation where you fully own your House, then Retiring will be a Piece of Cake - with no Housing Costs the requirements for Starting Capital and Yearly Returns hugely reduce.
Probably the thorough and most correct way of dealing with this is to do Yearly Projections of what you think your outstanding Mortgage Payments are likely to be. If you have a Fixed Rate Mortgage at the moment and it runs for a few more years, then that part of your Yearly Projection will be simple. After that, the Yearly Mortgage Payments will be a bit ‘finger in the air’ and guesswork. It is up to you how you decide to do this, maybe inflating the Figure at the end of the Fixed Term to 3% or 5% or something is appropriate - you will need to play with this and find a method you are happy with - as ever, it may be best to be conservative.
Of course, in practice, you might do your Projections now and then when you actually are Retired and a few years down the line, you might decide to Fix a Mortgage Rate and this could affect your Projections in a good or bad way. It is always good to build in some Contingency (i.e. use fairly conservative assumptions which leave some ‘buffer’ or ‘margin for error’), I will come back to this later in this Blog. It is probably good practice to amend your Projections through the years as you Spend and Earn from your Investments etc. - if you alter your Mortgage, you should amend the Projections accordingly.
I have a good friend who retired around the same time as me and he has a ridiculously small Mortgage that costs him about £120 a month - it is so small that it is never an issue and if Rates start to rise, he could just pay the Mortgage off and end it. He keeps it going because the Interest Rate is so low and the Returns he can make from the Stockmarket are far higher than the Interest Rate on the Mortgage.
If you are Retiring in a few years, you might decide that one of your Priorities upon Retiring is to pay off the Mortgage and you may set aside a Pot of Money to do this. Whatever floats your Boat and all that - but make sure the Money you set aside is earning a bit of a Return.
Living Expenses other than Rent / Mortgage
Every year at the end of December or the Start of January, I do my ‘Scores on the Doors’ Results which covers the Actual Returns I made on each of my different Portfolios and on things like my Prudential ‘With Profits’ Bond and Income I get from other sources. On the other side of the Returns Ledger, I work out exactly what I Spent during the Year concerned. I do this to keep a clear track on how much I am Spending and how well my Investments are performing to ensure I am nicely ahead of the game.
I suggest that once you retire (or ‘stop working’ if you don‘t want to be thought of as ‘old‘), you keep all your Projection Forecasts and you record your Actual Spending and Income each Year, and then compare these to the Forecasts. Any discrepancies are worth analysing and you may need to make amendments to how much Money you are Spending each year or you may need to rethink your Income Streams and your Investing Approach if it is not meeting the Returns you need.
For me, the Spending side is dead easy to work out, and takes maybe an hour at the most. I get a nice cup of Tesco’s finest (ok, more like Tesco boggo standard Tea Blend - note, Alcohol is not suitable refreshment for this task), and grab my Calculator, Paper Copies of my Bank Statements and a blank sheet of A4 and a Pen. I then go carefully through each month of the Year and write down exactly how much I spent that month - I may need to do a few calculations to get the exact figure - for instance, sometimes I might have paid a few grand into a Share Account or something, and this obviously needs to be stripped out from the Monthly Spend figure.
The upshot of this is that after a bit of time, I can work out exactly what I have spent for the Year just gone. If you read my Blog ‘Scores on the Doors 2014’ (go to my Blog Page and find the Category ‘Scores on the Doors‘), you should see from there that I spent £18378 in total over 2014 and my Rent was £6432, which left my spend on stuff other than Rent at £11946. These are ‘After Tax’ figures and all the Figures I mention in this Blog are After Tax unless I specify otherwise.
As I mentioned in that Blog, I am pretty careful with my Money and I don’t have Expensive Holidays or anything (this is not because I dislike Foreigners or the Food, I would love to go abroad more but to be honest it is just too much hassle with my Health and stuff). I run 2 Cars but don’t drive either of them much but if I was to get rid of one, I suspect my Yearly Spend would be around £11000 plus Rent. I don’t drink all that much Booze and I don’t smoke or anything.
I mention these figures to give Readers a feel of how much Money you need to live on. If you have desires for a couple of Holidays and like splashing your Cash around and suchlike, then maybe a realistic Yearly Spend is as much as £20000 plus Rent/Mortgage for 1 Person - but to my mind this is a ‘Lifestyle’ choice and my personal view is that if you don’t Retire because you need £20000 plus Rent/Mortgage per year, then maybe you would be better off reassessing your Priorities in Life - I would far rather have a less flamboyant Lifestyle but be free of Work cr*p than being continually stuck in a Job because of a Lifestyle choice (which is often just ‘keeping up with the Joneses‘.)
If you are Married or have a Partner to pay for or whatever, and if you have Children and suchlike (dog, cat, goldfish, hamster, aardvark, etc.), then you need to allow for their Expenditure in your Calculations. As a pure guess, I would think that 2 people without Kids could live on maybe £20000 plus Rent/Mortgage per year - but it would be tight. Add Kids into the equation and the Sky’s the Limit !!!
As a possible rough guide, to be conservative you could just double a Single Person’s Yearly Spending to cover a Wife/Partner, however, it is perhaps more realistic to multiply the Single Person’s Yearly Spending by 1.75 times. Interestingly, with regard to Robbie’s £250k Pot figure I mentioned earlier, this would imply maybe £400k for a Couple.
The bottom line here is that there is no substitute for laboriously going through your Expenditure and working out accurately what you are Spending each year (that‘s a lie, cos I do mention a substitute in a few paragraph‘s time). Obviously once you are Free of Work, there are lots of savings you can make like not having to visit the Mars Bar machine everyday just because you are bored senseless and need a ‘pick me up’ mid afternoon to relieve the tedium……
Not having to buy Suits and Ties anymore must have saved me a fortune !!
Probably an easy way to work out your Spending is to use the same method that I use and actually go through your Bank Statements and work out exactly what you are Spending each Month. As you will be working when doing this exercise, you can make a judgement with regard to how much you need to reduce these figures, or add to them, as a consequence of not working.
Once you have worked out your Yearly Budget for when you are Retired, you can then do a Yearly Projection like we covered in the ‘Rent’ subsection above. Again, it probably makes sense to increase it by 3% each year to allow for Inflation. Interestingly, I have found over my 6 years of Retirement that my Spending has stayed fairly flat - this is perhaps surprising but there is a theory that each of us has our own ‘Personal Inflation Rate’ - the Official Inflation Figures (CPI, RPI) are based on an ‘Indicative Basket’ of Goods and Services, but almost nobody in the UK will have exactly this same Spending Profile. For instance, the Official Basket includes Computer Games - I don’t buy any. If you want to be more conservative, then use 4% or 5% even, but these seem high to me and might mean that your Projections prevent you from Retiring when actually you could take the plunge.
There is a theory, which sounds plausible, that for most people who Retire at the ‘normal’ age around 60 ish, the first chunk of Retirement (I guess maybe 10 to 15 years) is quite high in terms of Spending because health and fitness are good and people get out and about and have expensive Holidays etc. Then the next chunk of Retirement (perhaps the next 10 years), tends to be the lowest Spending years - this is because health and fitness and motivation drop away. The Final chunk of Retirement (maybe 5 to 10 years) is high Spending again because of Care Costs as Health gets more irritating. It may be worth thinking about these kind of patterns and somehow factoring them into your Spending Projections for the Retirement Years.
This is all well and good, but I have to admit that I have done none of this !! When I made my decision to retire, it was much more simple because I am in a lucky position where my Yearly Spending is pretty low but my Capital is very High - this means that my Yearly Spending is covered many multiples of times by my Yearly Income - so I don’t need to do a detailed Projection. In addition, I have made no allowance for a State Pension that I should receive at some point in the future (I think the theory is that I should get it at 68 and it will be equivalent to £146 per Week at today’s Prices). I look at this Pension as something that may never happen (that is probably very pessimistic) but anything I get will be a bonus - more Cash to splash on Stocks !!! There is also the small chance I will inherit some Cash as well. I cover the Pension bit in more detail in the next Blog.
Big Ticket Items
Something I haven’t mentioned here is those Huge One-off Purchases that come about every few years. Really I am thinking about Buying a Car or something like that - maybe buying a new Conservatory or something for the House.
For myself, I tend to buy Cars and then keep them forever - because I don’t really drive them much and this is exacerbated by owning 2 of them !! Obviously this depends on your own preferences, but maybe you should Budget in your Pension Yearly Forecasts for a New Car every 5 years or something - to a large extent it will depend on how many miles you are likely to do and of course you may need to plan for 2 Cars if your Partner / Spouse needs one as well.
I haven’t got hung up on this because my Yearly Returns so outweigh my Spending each year that it is pretty much of no concern to me. For proper Planning, it makes sense to include an appropriate Sum of Money to allow for Big Ticket purchases. Things like Holidays should probably be just included as Yearly Spending - unless you can make do with perhaps 1 holiday every 2 years or something - up to you.
OK, that’s enough for Part 1 - feel free to post any Comments below - it helps everybody to see different viewpoints and queries.
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