A question about : Semi/Early Retirement at a young age
Hi Everyone,
I didn't want to post in the Early Retirement Wannabe thread as this is gonna be a long post. I hope thats ok? I joined a few years back but have lurked for some serious time taking in everything the ERW thread has offered up as education.
I'm in a slightly different position from most here as I'm planning semi-retirement / early retirement at a younger age and so my position while mostly the same is somewhat different. I typed out this post to explain to my wife, my thoughts and plans for the next few years. I'd really appreciate your input and thoughts, as I've looked at this document over and over. The more you stare at something, the more blind you become to its content.
My ultimate goal is to be financially secure and travel in a low cost of living area for 6 months a year, return to the UK for work the other 6 months.
I'm 32 years old.
Retirement Planning
Annual joint expenditure currently - over estimated at Ј25,000. Realistically no more than Ј20,000, but I'm being cautious with all numbers. I've been very fortunate to have a successful business that has grown steadily over the past few years.
Current financial status:
Cash:
Ј181,000 nested 60/40 in SIPP/ISAs (Vanguard LS 100% / LS 80%)
Mortgage 1: Ј153,000 (paid off) House value Ј185,000. Potential Rental Income per month - Ј650
Business Property: Ј41,600/Ј100k owed on an interest free loan. Not owned within the company. Potential Rental Income per month - Ј500
Last Years Salary: Ј120k
Notes: 51% shareholder in a business owned with another family member
Incorporating this year with an approximate goodwill value of Ј220,000 (my share) as and when funds permit.
For ease of calculations, all income and funds are combined
Goal 1
To get the correct amount into the pension pot to fund retirement from 57 onwards. Using a withdrawal rate of 3%, I budget this as a Ј750,000 pot to be had in 2039. To get there, the following needs to be completed.
In reverse
Stage 2: Using the monevator.com compound interest calculator, to achieve approx Ј750,000 over the 17 years after I SR, I need to have Ј355,000 saved at age 40. I think 4.5% is very conservative, as is the amount I’ll have in our SIPPs at that time. I'm open to alternatives.
Stage 1:
Again using the monevator.com compound interest calc and with a current balance of Ј120,000 invested, over the next 8 years, we need to contribute approximately Ј20,000 per year to reach the required target for stage 2. In fact anything over and above this should show much bigger returns, due to compound interest.
Goal 2
To fund the period between SR and retirement, allowing us to travel for extended periods without having to worry about money. I’ve worked this on the basis that we need to fund the whole Ј25,000, so technically if we hit this, we could fully retire once this goal is met, but as we’ll be most likely working/continuing to earn through the different methods below, this will allow for more opportunities in our 40s/50s
17 years x Ј25,000 = Ј425,000
This needs to be funded by a variety of means. Firstly though, at some period during the next 8 years, I will have the ability to take Ј220,000 from the business tax free. So I’ll remove this from the bottom line. Because I’m not sure how early or late this will be, I’ll not be able to bank on the interest from it.
Total left to accumulate - Ј220,000 - Ј60,000 (already saved) - Ј160,000
According to the compound interest calculator once again, we’d need to save Ј10,000 per annum to hit a target of Ј183,347. This seems like a good enough target and completely doable.
None of the above takes into account the aggressive saving /investing we've been undertaking for the past few years that will continue as long as possible. Really these are minimum guidelines I'm planning to follow.
It doesn't take into account any salary I'll be taking from my business, rental from our own property or the business property. If everything remains constant, things should be on track for financial independence in a few years.
I guess my question is, does everything above look sensible and reasonable or am I deluding myself that this is a possibility?
Best answers:
- I may have missed it but how are you accounting for inflation?
- Good point. I'm not. The investments will hedge this to an extent, but I should make reference to this. Is there a compound interest calc out there that accounts for inflation?
Also is a 4.5% return too pessimistic over the long term? - What I believe this is:
The 220k is goodwill generated over the past few years, so when we sold the business to ourselves last month, we can claim back this goodwill at 10% tax. Not really free, but the most tax efficient way possible.
The Ј120k was my half of the retained profit (gross), but as we were a partnership at the time, sal/divs were not really applicable.
The above plan makes me financially independent at 40. I could essentially retire then, but I love my business and because its owned with family, I dont see me ever leaving it. Things may change and if they do, I'll be fi.
We have been advised to do as you say and keep as much profit in the company as possible until the voluntary liquidation. This is the plan bar a small wage and the drawing of the sum above. - Thankfully my wife is very much on the same page as me with this and if full retirement comes a little later as a result of taking a longer semi retirement period, I can see that being ok by me.
I've been very conservative with all the figures, the only unknown is the valuation, but our accountants figure was higher, so I've dropped this a bit. I'll let them deal with the HMRC, they are so much better at it.
The two things I haven't really adjusted for
1) Earnings in SR / ER.
Our earnings won't drop to zero. We'll have rentals, the business and if all else fails the will to work for money.
2) Aggressive saving much above what I have outlined below.
In the last four years we have saved/invested over Ј300k. This will continue and puts us way ahead of my goals.
Before I started my own business we had very average salaries Ј25k each. Our lifestyles haven't really inflated with the income. Yes, we have nice things, but our saving rate is very high and our main goal is to be financially secure as early as possible.
After that, the world is our oyster. - Could family-related issues affect the plans? Children? Parents? Siblings? Health?
- By all means map out a plan. However monitor it carefully and be prepared to revise it as the wind changes direction. Investing is all about timing. So yes there's wonderful statistics of 5% compound growth. However if you have have the misfortune to buy the wrong shares on the wrong day, or even the right shares on the wrong day. The result may well be very different from the statistical average. Shares or other investments may even dip just at the time you expect to cash them in.
- Hi,
Looks like you are flying!
Like others have said, inflation will eat away your returns. Always better to be prudent than optimistic in these things. 3% return after inflation should be achievable in the long term and hopefully would turn out better than this.
The amount you are able to put away, it looks like your goal of FI should be doable. A few of things perhaps worth considering;
- How stable is your income?
- More diversification with investments?
- How are you investing? Regularly or lump sum?
Good luck. - Its great having a plan......but make sure that you have built in enough flexibility -you are a long way out (25 years!) - I decided at 40 that I wanted to retire at 55 -very good job in a very stable industry which had been successful for the previous 100 years or so........however, things changed so rapidly over the next 15 years that I only "retired" at 59 when I was forced to due to a 3rd redundancy in 8 years!! Financially now I'm worse off than my original predictions for 2005!
- My income fluctuated as the business has grown, but over the past 3 years its been Ј100k+.
Everything is invested in VG Lifestrategy 80/100% and a few thousand in VG Emerging markets etf tracker.
We've just incorporated, so my previous saving (take drawings every month and invest) technique won't be as applicable going forward.
We are to pay ourselves a small salary and take a dividend. This is all new to me. The rest stays in the company.
Currently myself and my wife have SIPPS but I guess come April we should set up a company pension. This side of things is all very new tbf. Anyone have any experience being LTD and planning for retirement?
I guess I'm saying SR instead of ER at 40 because I'm never taken time off work, I don't know if I'll even like it and my business has always come first. If my financial plans don't work out, I'll have no issue continuing work as the longer I plan this, the more secure we'll be. - Just "butting in" with a point you may or may not be aware of that helped us. It may or may not be a current opportunity - so you'd need to check.
We started and ran a company and were lucky enough to have an ex-Tax Inspector in our accountancy team and a few years before we retired he asked us whether we needed all of the cash we were taking out annualy in salary and dividends - and we didn't. We built up a sizeable cash bank balance for "future investment in people" but were then able to take virtually all of that cash largely tax free when we closed the business. Basically we had to show (if asked) that the cash was genuinely being saved for a specific project. We were never asked. It was a large balance. We retired effectively in our early 50's.
Others here can possibly provide opinion but this may be another stream for you.
Good luck with your well thought out and attractive plan. - If you are now incorporated, then using the company to pay your pension provision each year could be very tax efficient.
- How much is your pot worth today? There is a LA of 1.2M
If youa re incorporated into a LC, the compnay can pay your pension for you. So you'd not pay income tax on it, nor Nics, nor would the company pay Nics and it would be a business expense so would lover corporation tax.
If you are going to be close to your LA with pension, then S&S isas, Ects and Vcts will be where to save next.
Your OH will have a personal allowance, and if she is made an employee she can have a pension thru the company. As she will have a separate yearly and LT allowance. - Thanks for all the advice. Makes a lot of sense. I've a bit of rejigging to do now and make some adjustments.
Oh and just to throw a spanner in my best laid plans, I'm to be a dad... - Well then, you want to get your income down to 50K max, as then you(or the OH) get Child benefit for the baby. Invest it for them
CB should be int he name of whoever is least likely to work as that person get the credit towards state pension. - It's kind of hit me like a train...
- Congratulations!
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