We can retire sooner than we thought!By Money Mage · · Retire Early, Financial Independence, Wealth
I want to quit my 9-5! I hate my job! When can I retire?
You’ve heard it all before.
The other-MM and I don’t hate our jobs. I get to the point of hating my job, but I now have an amazing new job. The-other MM works in a white-collar job in Logistics. It’s not fun and it’s long hours, but ‘a job is a job’.
For us, Financial Independence is more about security and freedom than ‘quitting the rat race’. I don’t have a particular problem with the rat race as long as you enjoy your work, and can commute to and from it without wasting your life away.
But one thing that’s irked me for a bit is our FI number. It’s a number that gives you a rough idea of ‘how long till Financial Independence’.
For those of you who follow our monthly Savings Report, you’ll know it’s at about 12 years for our meaningful measure: liquid assets! It ticks down, or up as per Q1 this year, attack of the COVIDS and all.
Our FI Number
Our FI number is about 12 years away. In our late 40s.
That’s OK. We’d settle for that.
But it just doesn’t feel right given our financial position:
- We own our own house outright
- We have decent & growing pensions
- We have decent & growing investments
- We have low outgoings (£1K/mo)
- We have a high savings rate (80%)
We’re at the end of the scale where FI should be reachable within a few years. If you listen to the hyperbole in the FIRE movement.
So why, given our position, earning potential, does our FI number come out at 12 years away?
Could it be our approach?
How our FI number was Calculated
Our FI number is calculated in the usual, simplistic way:
FI Number = Yearly Required Spend * 25
This is equivalent to a Safe Withdrawal Rate of 4%:
FI Number = Yearly Required Spend / 0.04
Then to calculate how far away that is, it’s simply:
Years To FI = (FI Number - Currently Saved)
It is a bit of a heuristic. It’s based on the Trinity study (also known as the Safe Withdrawl Rate). But it’s good enough starting point.
Plugging in our numbers, and Years To FI comes out 12.
Calculating a Retirement Age
Retirement Planning in the UK is a little more complex than the FI Number heuristic above.
But it’s still relatively straight forward.
There are three main phases:
- Before Drawdown (before 57)
- Before State Pension Age (before 68)
- After Stage Pension Age
The UK benefits from tax-advantaged accounts to help:
- Individual Savings Account (ISA) which is a ‘tax-exempt-exempt’ wrapper that can be used to hold a variety of assets, including stocks, funds, P2P and cash. In ISA can be accessed anytime, but importantly Before Drawdown.
- Pensions, a somewhat complex field. Simplistically they are a ‘exempt-exempt-taxed’ wrapper that can also hold a variety of assets. A pension can be accessed Before State Pension Age.
‘Tax-exempt-exempt’ means that the contributions are made from taxed income, but gains and drawdowns are exempt. ‘Exempt-exempt-taxed’ means that contributions and gains are exempt, but drawdowns are taxed.
Super Early Retirement Planning in the UK is therefore about having sufficient funds in your ISAs & taxable savings & investments such that you don’t run out before your pension drawdowns beings. And having sufficient funds in your Pension such that you don’t run out before you hit State Pension Age.
It’s a little more nuanced. You probably want more to be living on more than the basic State Pension!
Plugging our figures into a spreadsheet modelling a very conservative 2% inflation, 1.5% bond growth, 4% stock growth and a relatively conservative bond/stock split shows us being able to retire at 43!.
43 is not that far away at all, about years.. Awesome!
But there are a couple of hairy years in the planning, and starts to run low by the time we’re in our mid 80s. That’s fine, we’ll be spending less then, if we even get there.
Monte-Carlo Simulated Risk
To add a little more certainty I wrote a Monte-Carlo drawdown calculator using historical inflation, bond and stock market data.
Consider rolling a dice. If the dice lands less than 3, I win, if it lands 3 or more, you win.
We’ll roll the dice hundreds or thousands of times and plot the outcomes. Patterns will emerge. They’ll align broadly to the probabilities of 2/6 I win and 4/6 you win. But some cases I’ll win despite the odds being against me. That’s the nature of probability.
We can use Monte-Carlo simulations to visualise and better understand risk.
Financial markets are much less predictable than dice rolling. And historical data is not a predictor of future market performance or inflation rates. So this should not be taken as gospel. But it’s a more informed model than a naive FI number.
Running the Monte-Carlo simulation for our figures and retirement at age 43 has a success rate of 85%.
Where the definition of ‘success’ is that funds last till death.
The other-MM is somewhat more risk averse than I am. A 15% failure rate would be lost sleep.
The following table plots the percentage chance of success of our portfolio for a given retirement age and bond/equity allocation.
|Age||0% Bonds||33% Bonds||66% Bonds||100% Bonds|
Higher equity increases chances of earlier retirement but decreases certainty. Which is what you’d expect.
This is giving us comfort that we’ll be able to retire before the 12-year forecast made by our FI number.
A couple of takeaways:
- More equities mean a higher probability of earlier retirement due to their higher growth potential.
- More equities mean less certainty of a retirement age due to their volatility.
- A large swing to bonds after retrement did not impact our failure rate significantly. This was a bit of a shock. Some swing to bonds reduces volatility.
- A few extra years of earnings makes all the difference.
- Knowing that an extra couple of years does make all the difference, you can take an informed risk-assessed choice and make the jump earlier. Supplement with additional income, or a plan to return to work if things don’t work out. Or you can continue working full time to reduce your probability of failure. The choice is yours.
- Inflation is the retirement portfolio killer. Years with wild inflation hurt. If we hit periods of high inflation like the 1980s, and there are not accompanying gains in other assets, I think many FIRE plans will evaporate.
This looks like we have a solid foundation to retire completely in our mid to late-40s. Never work a day in our life again if we chose to.
With a predicted success rate of 99%+
Unexpected things might happen between now and then. Ill health. Redundancy. Who knows. Plans are worthless, but planning is everything.
So why is our FI number so far away?
Our FI number is off in the distance for two reasons:
- We have heavily invested in Pensions. They are not included in one of our FI numbers, as they cannot be accessed before age 57.
- We have heavily invested in our primary residence. We own it outright. This is not included in one of our FI numbers, as you need a roof over your head right?
If you include both our Years to FI number is 4, not 12.
Our pension investments are completely the right choice. They are heavily tax-advantaged and are highly skewed to equities.
The decision to focus on the house and mortgage first was not optimal. We know that. It would have been more optimal to go heavily into the markets instead of paying off the mortgage. But then we wouldn’t have an amazing house. The security of having a roof over our head forever. That we own outright. With tiny monthly outgoings.
Our house could be liquidated and we could buy an RV, retire, and live forever in that tomorrow. We choose not to. One good reason is I have IBD and the thought of shitting every day in an RV’s composting toilet gives me the boak.
If you liquidate our property and rent forever more at £600/mo + inflation (which you can do easily where we live) we could retire in 18 months with a 90% chance of success. We choose not to. Flats with ringpiece neighbours are pish. Flats without a garden are pish. Not as pish as a composting toilet, but still high up the pish scale.
The difference between Lean & Fat FIRE laid bare: A composting toilet with IBD.
Our scales point to overweight.
That’s the great thing about Personal Finance: there is no ‘right way’. And you should question anyone who tells you that their way is the way.
FI or FIRE?
We’re now faced with an interesting choice:
Wait until our late 40s and have a 99%+ chance of success. Or ‘Semi-retire’ in our early to mid-40s. Supplemented by some extra income or part-time work.
When you hear about 30-something bloggers being retired almost all of them are earning some extra income. Be it from whittling, their blogging, freelanced writing, their ebook, or rentals they bought with their inheritance windfall (without disclosing that, obviously).
Anecdotally, many retired 30-something bloggers are still earning.
And that’s cool.
The semi-retired route is a calculated risk: If things get tough, reduce expenditure. At worst, you can go back to work for a couple of years.
I do like the peace of mind that when I quit, I can be done and never return. A concurrent hug and two fingers. The other-MM is keen on us retiring as soon as we can but predicts I will be ‘working’ on something after that date.
I can go and pursue other things. Like downsizing to a more self-sufficient house. Some hobby projects. Those hobby projects will probably earn some extra income.
Our mid-40s for us is not that far away for someone in their mid to late 30s. It’s just over half the time I spent at my previous job. A third of the time that the other-MM and I have been together.
It’ll be here before we know it. And that’s a pretty exciting thought. In a few years, we’ll be free.
And if we wait an extra couple of years to get closer to that 99.9% certainty so what. A couple of years makes all the difference.
One thing is for certain: there is no way we’ll retire and do nothing. There is no way we’ll be playing golf, or sitting on a beach.
We’ll be active, and I expect getting paid for some of that activity. That means we can start to think about retiring sooner than our spreadsheets and models tell us.
You can try the monte-carlo simulator in this article for yourself. Let me know how you get on.
Subscribe now, follow me on Twitter @moneymagery, stick by your principles and you’ll be mortgage-free in no time.