It is completely doable! If you are willing to put in the effort and make some adjustments. I am 36 now and am planning to retire at 45. I did not come from money, have no inheritance, no lottery wins, and earn what I think is a pretty moderate salary (31k). I also didn’t start earning that until later in life as I was mid 20’s before I left uni. But I don’t have kids. You don’t mention if you do or not.
our game plan included avoiding debt and lifestyle creep (buying better/more just because you can), paying the mortgage down as quickly as we could, though knowing what I do now this may have no been the best move vs investing sooner. You need to know how much you need each year so get obsessive about tracking spend...and I mean every penny....will 30k really work for you? You may need much more, or much less. Only once you know that can you calculate how much you need. Then get those savings working for you in a s&s ISA suggest an index fund with a low fee, for a invest and forget approach. If your DB pension provides enough money from 68 then you just need 13 yrs x your annul £. If you have no kids or anyone else to leave it to you don’t need to worry about maintaining the sum in the long term and so drawdown rates are not so important. Good luck!
If your DB pension provides enough money from 68 then you just need 13 yrs x your annul £.
Just about no one under 50 is eligible for a DB pension any more, nearly all schemes have closed to new members over the last 20 years.
My DB scheme fell into the pension protection fund and exited with much reduced benefits (basically no index linking).
I am 42 and have a 55 plan broadly as follows:
-DB pension from previous job (20 years accrued)
-Release equity by downsizing house and living off some of the proceeds
-Maxed out the risk on my DC pension, (aware that I could lose it all) currently at 7%
-Will do some form of work post 55 to supplement income and keep active
-Wife will probably be motivated to work beyond 55
I see so many people working themselves into health problems trying to put away enough to fund their retirement never mind an early retirement. Trouble with this is the lifestyle they think they need to be happy. This includes big house, nice car, multiple holidays abroad and in some cases even 2nd homes, spoiling their kids and grandkids etc etc. Yes, you could invest smart, work longer and harder chasing higher salary, hope a loved one leaves you something in their will when they die, whatever else you need to do to chase that retirement.
Or my approach is to live a simpler life and take my happiness from things that don't require much of an income. Downsize to as small a place you can be comfortable in, strip away all expenses that are not a basic need and see how much you free up. Then reintroduce one or two expenses to cover some of your luxury wants. If you rotate these every 6-12 months that gives you a chance to sample something else without additional expense. Take up hobbies with low entry requirements - hill walking, cycling, fishing, woodworking, photography, painting or whatever, there must be thousands of things.
That £30k a year retirement dream just became a £12k a year one. Much easier to finance that.
Just about no one has DB pensions anymore” true but the OP has said they do so that makes it much easier. What rene59 said! If you want luxury then it’s not likely to happen but if you can adjust to a modest living then it’s completely achievable. And by modest I don’t mean skint!
A dumb question but ...
presumably if you save money in addition to your pension contributions, you can take it as and when you feel like and pay only capital gains tax on it (if applicable),
Can't remember where I found this the other week, FT I think...
Current yields are very modest, which makes even the whole 3-4% a year draw down rule look optimistic...
[url= https://farm2.staticflickr.com/1906/44121723185_c74f46a256.jp g" target="_blank">https://farm2.staticflickr.com/1906/44121723185_c74f46a256.jp g"/> [/img][/url][url= https://flic.kr/p/2adTn8g ]Top 15 Dividend Funds[/url] by [url= https://www.flickr.com/photos/brf/ ]Ben Freeman[/url], on Flickr
presumably if you save money in addition to your pension contributions, you can take it as and when you feel like and pay only capital gains tax on it (if applicable),
If in an ISA, tax free and take it when you like (£20k pa limit for investing).
If in a SIPP, limited to 25% tax free at 55, then the rest taxed at 65 (although 55 / 65 rise, can't recall when).
I use both, SIPP for tax benefit and ISA for flexibility.
@ff - and for common or garden investments, outside of tax-free or pension options, take it as you wish, I suppose!
@ff – and for common or garden investments, outside of tax-free or pension options, take it as you wish, I suppose!
Yes, but given you can put just about anything in a tax wrapper these days, no real reason to have anything outside one.
IIRC Peer to Peer lending can't currently go in an ISA, but I think that's about to change.
You need to factor in 20 years inflation of into your calculations. £30,000pa sounds a reasonable income today but by the time you retire you'll probably need twice that - £60,000pa to achieve the same standard of living.
No you really haven’t. That is an impossible statement.
You may well have realisde 19% annualised gains but they have not been ‘low’ risk. You, like almost every other schmuck out there, don’t understand the risk/return principle. You cannot have both. That is the sort of financial alchemy that got into trouble in 2007.
I dont think you understand the word "impossible" What is it about my statement that is "impossible"
I do understand the "risk" principle and that is why the word "low" was in quotes. Any investment involves risk (and you are hardly adding much to the conversation pointing this out) but my stocks and funds (other than some very small holdings) all fall within the Morning star "average" category. I suspect they know more than you.
I suspect when you use the term "schmuck" you are inferring I am a fool, maybe, but at least I am not drawing assumptions without any evidence. There is probably a nice "Americanism" you can call on for that?
That is the sort of financial alchemy that got into trouble in 2007.
And actually, it really isnt
Save, save, save. Save half your age as a percentage of your salary as a minimum. Multiply your defined benefit by 20 for annual contribution, then top up as much as you can.
So if you have a salary of 50k and accrue 1/60th per year, that’s equal to 16.7K per year in the pot. You can add another 23K of savings to that. Saving 40K per year for 20 years will give you 800k pot equivalent.
Then move somewhere cheaper and not worry about paying down your entire mortgage. That’s my plan. I can take my DB pension from 55 and think earlier is better. I also plan to work doing consultancy, or return to academia.
Expect the chancellor to raid the pensions contributions of people saving heavily. 40k and 1M lifetime will probably be lowered in time further.
IIRC Peer to Peer lending can’t currently go in an ISA, but I think that’s about to change.
Funding Circle are introducing one (if not already) My returns using that platform over a few year are less than advertised when you factor in bad debts. I think I had returns of around 6-7% and being outside an ISA eats into that.
1M lifetime will probably be lowered in time further
If you expect to breach this then you can make the same investments using your ISA allowance (you really can put quite a lot of money away with either tax free contributions or at least tax free draw down at the other end)
Schmuck
<span style="font-size: 0.8rem;">There is probably a nice “Americanism” you can call on for that?</span>
Yiddish, innit.
Multiply your defined benefit by 20 for annual contribution, then top up as much as you can.
They pretty much no longer exist! Nearly all DB schemes closed to new members over the last 20 years.
1M lifetime will probably be lowered in time further
Supposedly it's to track RPI moving forward e.g. went up 3% last year. Although I agree it's an easy tax grab to lower it. Having said that, you could freeze your fund and escape the reduction in each of the previous lowering events.
Pensions aren't quite what they were, but still useful. The benefit of putting money in a personal pension is that you pay tax when you take the money out, not when you earn it, plus you get 25% tax free. So a pension is more useful the more tax you pay. In return your money is locked up until 55 or whatever age that increases to. A company pension usually has the added benefit that they put money in as well, but carries the risk that the company funds the pot and may not play fair.
I will be retiring at 60 - 2.5 years away) or maybe sooner. We will be poor until we get our state pension at 67. I don't care. I am happy to live simply and to do a bit of part time work. e have bits and pieces of pension. We also have a small flat we let out that I have invested a fair amount of money into
My advice - live a frugal lifestyle and put everyting you possibly can into property.
Check this out op:
http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement
That Mr Money Mustache article is interesting - although reading a few articles on his site, it must be somewhat more straightforward saving a cool Mil when earning 6 figures!
Cheers
From the FT..
What lies ahead? Predicting the returns on stocks and bonds is hugely difficult; that is why so many people are paid so much money to try to do it. Nobody can know exactly how markets will perform over the next 10 years. But historical patterns do make it possible to ascribe a probability to future returns, and to give a central likelihood. The key insight is this: the biggest factor determining a return on your asset in the future is the price you pay for it now. If it is expensive when you buy it, your likely return is lower than if you buy it cheap. The best way to value an asset is in terms of the cash flow it will produce. Buy a bond with a low yield, or a stock at a high multiple of its earnings, and you are less likely to make a profit. That is a shame because bonds look historically expensive (yields hit a record low two years ago but they have not risen much since), while US stocks have only been more expensive at the height of the dotcom bubble in 1999 and 2000. Assets from outside the US look better value, but do not offer exciting returns. There are many ways to calculate predicted returns. Here is a summary of the forecasts used by some of world’s most respected investors to drive their asset allocations:
[url= https://farm2.staticflickr.com/1938/45000757642_4cb24b5fa5.jp g" target="_blank">https://farm2.staticflickr.com/1938/45000757642_4cb24b5fa5.jp g"/> [/img][/url][url= https://flic.kr/p/2byyDrL ]FT Future of returns looks glum[/url] by [url= https://www.flickr.com/photos/brf/ ]Ben Freeman[/url], on Flickr
Really interesting read, to read for free google "Legacy of Lehman Brothers is a global pensions mess" and then click on the link, their paywall allows access via Google search redirects...
The benefit of putting money in a personal pension is that you pay tax when you take the money out
Not necessarily. You still have your tax allowance so you will pay at your marginal rate. If you have income from ISA's then they are tax free (although you paid tax on the money going in at the other end!) If you now pay tax at 40% and you post retirement income is likely to be less than the higher rate (we can only take an educated guess at this) then it probably makes mores sense to move your ISA into a SIPP (keep your eye on annual limits) then risk paying tax (at the lower level) when you retire.
Agreed, highly unlikely most people will be paying 40% tax on pension income as you would need a few £m saved to achieve that...
Although ISAs offer flexibility so if you are made redundant before 55, you can at least use those whereas you can't touch your pension even if destitute.
Probably a stupid question but how would you tackle the pension contributions for the period of time between when you retire and when you claim your pension?
I get the save up, invest, downsize etc so you have enough money to survive from 50 odd when you retire until when you can start claiming your pension but surely the pension would take a fairly big hit if not contributed to for the last 15 odd years? All my statements give me a figure of XX per year provided I keep contributing at the same of greater amount until retirement age.
If you retire at 50, then you need to live of savings till 55 and won't pay anything into your pension as you have no income to afford to do so. However, your pension pot can still grow, assuming invested in stocks and shares (although you run the risk of a crash wiping out a fair chunk of value*).
At 55 you can take 25% tax free, so live off that till 65/67 when you can start claiming state pension or access the rest of your private pension.
* it's a tricky subject. Conventional (annuity) wisdom has been to move your pension fund into bonds over the 10 years prior to retirement to de-risk it (at the expense of growth) and then buy an annuity on your 65th birthday and live of that.
With drawdown, you have more options and will potentially be living of an invested fund for decades, so will expect to suffer a few crashes (and recoveries). So a mix of growth and dividend funds would be chosen and you'd accept that your % take each year might have to vary with the ups and downs of the stock market.
Given no one knows what the markets will do tomorrow let alone in 40 years time, there is no right answer, just lots of options.....
@Footflaps... Whatever.
The average annualised returns for this decade from the US have been 13.2%. The long term average is 9.6% and the Dow Jones is up 130% over this period. This is not the highest returning decade (so far) and the 50's averaged almost 19% and the 90's almost the same. I dont think anyone is assuming these high rates will continue forever but without any evidence, simply saying "we are all going to hell in a handcart" tells us very little, particularly as few accurately predicted the crash 10 years ago.
The fact of the matter is that with a fair wind a return of circa 10% over a long period is achievable (timing is everything of course) and all this does is match the long term performance of the US (last 90 yrs)
If you retire at 50, then you need to live of savings till 55 and won’t pay anything into your pension as you have no income to afford to do so
I may be wrong but I think the question refers to state pension contributions?? If so and you havent built up to the amount required to get the full state pension then you can continue to make contributions to "buy" it, I think. You need to get advice on this as one thing I am sure of is its "cheap" to buy.
With regard to the years contributions for state pensions - you only need 30 years worth of contributions at a surprisingly low level to earn one at present - The years I worked part time at uni for instance was enough for them to count as "qualifying" years.
You can check via the HMRC website quite easily how many years you have in the bag.
I was advised that on top of my 15% pension contributions I should buy the most expensive house I can afford... really max it out. Then live a simple life.
i was advised against property investment how we normally understand it; don’t buy rental properties as the pitfalls are many and expensive to manage, but buy sensibly and max out on my own house.
The plan would then be to sell up and downsize, with the proceeds forming part of my pension. In other words, don’t commute part of my pension into a lump sum, take the maximum monthly pension I could and if I needed a lump sum use the equity from selling the big family house. If I don’t need it, then reinvest at this point.
I've no idea if it was good advice, but it made sense to me.
The fact of the matter is that with a fair wind a return of circa 10% over a long period is achievable (timing is everything of course) and all this does is match the long term performance of the US (last 90 yrs)
How can the future be a fact?
The last 10 years have been an unprecedented bull run, which is very unusual. All the current trends suggest reduced growth / yields moving forward, so it would be prudent to plan accordingly.
NB As a 'stake in the ground' to test your hypothesis, if making 10% per annum was so easy, how do you explain that annuity rates are significantly below this? The fact they offer near to 5% in a competitive market, would suggest that the long term expectation is closer to 5% (and that's with half the annuity owners dieing early and subsidising those who live longer).
To be fair annuities are (forced to be?) very risk averse. I certainly anticipate getting a lot more from my own personal investments than an annuity would yield. However, I wouldn't retire early on the hope of an indefinite 10% index-linked income.
To be fair annuities are (forced to be?) very risk averse.
It's a contractual agreement, you give them a lump sum and then guarantee a payout till you die. But in a competitive market they're not making huge profit margins, so it does give you an idea of what you can expect. My point being that If it was so easy to do better, they would offer better rates.
How can the future be a fact?
Well you seem to be predicting its so I thought I would have a go.
The last 10 years have been an unprecedented bull run, which is very unusual. All the current trends suggest reduced growth / yields moving forward, so it would be prudent to plan accordingly.
Not unprecedented, not even the highest if you read what I wrote. The 9.6% is the average over the last 90 yrs.
in a competitive market
Hehe... Very good
My point being that If it was so easy to do better, they would offer better rates.
Are you here all week 🙂
I certainly anticipate getting a lot more from my own personal investments than an annuity would yield. However, I wouldn’t retire early on the hope of an indefinite 10% index-linked income.
If 5% is not enough and 10% is too much to expect. What do you plan on?
There's plenty of DB pension schemes open to new joiners - Civil Service, lecturers, teachers...
If 5% is not enough and 10% is too much to expect. What do you plan on?
surfer, an index-linked annuity for someone my age (even if such a thing existed!) would not be 5%. Joint life with RPI would be under 2% according to a couple of pages I've just looked at. I was using numbers ranging from 3-5% inflation-proofed and was comfortable with the results. I do expect to do a bit better than that really but would not have jumped off the hamster wheel if I needed 10%. Even one bad year could make a real dent in that. And I'm probably happier with a bit more risk than some posters.
I'm aiming to retire or at least take a big step back from work - some time between 8-12 years' time (i.e. 2026-30). I'm 38 now and have a family.
One of the biggest motivators for me was one friend taking his own life and another having a cataclysmic misfortune. It taught me that life is short...
Of course, some people would go and buy a shedful of Santa Cruzs or a 911 - but, for me, my response was to set myself a target within reasonable distance. It led me to discover the whole "FI/RE" thing about 18 months ago and getting my plan together soon afterwards. Mr Money Mustache was a great starting resource and inspiration.
The whole idea of retiring early and / or achieving financial independence seemed rather abstract before doing some number crunching, but - without having really thought about it before - I'd had some big pieces of the jigsaw in place for some time. These being:
1) Modest spending, not growing much over time
2) Being in a pension scheme since 2003
3) Regular saving habit since 2006 (equities, via ISAs)
I'm in a DB pension scheme and, although the old scheme is now closed and then new one is watered down (costing me 13.5% personal contributions!), I was in it enough time to give me about 40% of the income I need to live on from age 60. Assuming I work for another 8 years at the same level I am at now, that rises to 100% of what I need from age 68.
I therefore have a plan that plugs the gap in between the two pensions' income between age 60-68 and, before that, provides an income from ages roughly 46-50 and 60. I have a sum in mind, which I now need to reach.
There are lots of unknowns and assumptions. I have of course already seen one market crash in 2008 and realise that there are lots of other things that can change.
However, even if I don't reach the sum I need to 100% retire by those ages, I hope that I could - for example - at least kick-back and find a more chilled out job with a smaller income.
I'm in a DB scheme and was in a really good place for early retirement, then had 2 boys. Current plan is bought a large house to renovate, which will take many years, and when we sell on and downsize we should cover the gap between normal retirement age
DB with fixed final salary calculation compounded at 2 % means I know what I will have at retirement. I took the buy a very expensive house option, with an aim of withdrawing 25% of my pension pot to fund some of this at 55. Sadly I can’t selectively take the AVCs I’ve saved for the last 20 years (7.5% of salary on top of DB), it’s 25% of The pot value, so the index linked DB part will be reduced and I’ll have a pot for an annuity or income drawdown with tax
My contention still holds. You need to save a lot more than you think, but not so much that you can’t live. Saving it in a pension means you get tax relief, can’t touch it and don’t miss it.
i still think in the longer term, early retirement is beneficial provided I can still support the offspring as needed.
I'll pick up my Gold plated final salary public sector pension in 523 days.
Also on a DB pension scheme accruing at 45ths which is very fortunate and maxed out on the annual contributions. Hope to retire at 55 and will be mortgage free 6 years prior to that. Already have a diverse setup to make the early retirement possible although uncomfortably exposed to my employer via share schemebs but 5.5% dividends are oh so tempting. Hoping to move back to the mother land (Wales) in 2019/2020 to aid the transition to early retirement via remote working.
One thing I would say all is don't stop yourself enjoying today by worrying about and planning for tomorrow as we don't know what the future has in store for us. JK.
DB accruing at 45ths? As in return after 40 years on 40/45ths of your final salary?
😯 wow
Not necessarily. You still have your tax allowance... etc
Yes, agreed. That's the point I was making and why I wrote "the benefit..." You need to manage your contributions so that you keep as much income as you can out of the higher band while working, and also when drawing the pension. That applies whether you're trying to stay in the personal allowance or the 20% band (depending on how much you earn). Otherwise the only benefit is the 25% tax free, and if you're only saving 20% tax on 25%, that's only 5% of your pot. Is that worth tying the money up, and possibly paying a bigger fee to pension company than for an ISA? Even 0.5% extra charge at compound interest for 20 years would kill the benefit. But if you can save 40% tax, it gets much more worthwhile using a pension.
Anyone planning on taking late retirement or is that just me?!