A round up of interesting or cool stuff I’ve read.
Planning for Decumulation
In the Sovereign Quest March Challenge, Indeedably challenges us to share our plans for how we will manage our decumulation phase. Once we hit our FI number, how will we ensure that it lasts for the rest of our life?
This is a challenging question at the best of times. Even when you hit your number, you have no way of foreseeing what events life might throw at you.
In my case, I am a long way off from being able to declare myself financially independent. “Work Optional” is likely to be at least 20 years away. A lot can change over the course of 20-30 years of work, and then another 20-30 years of retirement!
One of the biggest factors affecting how long your money has to last is your current age.
If I were to retire now, I’d have to make my money last up to 65 years. Good luck with that!
Whereas, if I were to cease earning an income from employment only once I reach the State Pension Age, then it would only have to last, at most, about 25 years. That sounds much more manageable.
It goes without saying that one would need far more money if they needed it to last 65 years rather than 25!
Speaking of the State Pension – it currently stands at £175.20 per week, or £9,110 per year. Using the fabled 4% rule, you would need a sum of £227,750 to achieve the same withdrawal rate. That is more than most people save in their pensions by the time they reach retirement age! So it’s an important part of many people’s retirement planning.
Unfortunately, with at least 30 years before I can claim it, there’s a lot that can change:
- The State Pension Age might increase. I expect it to be 70 by the time I’m of age, but one think tank proposed increasing it to 75!
- The State Pension could become means-tested. In which case, I can’t assume that I’ll be eligible until I’ve burned through some of my own savings.
- The government might remove the current triple lock, causing it to be worth less in the future than it is today in nominal terms.
So, as great as the State Pension is, I can’t factor it into my calculations and assumptions until I’m within 10 years of claiming it.
It turns out that planning that far in advance is very difficult!
My current goal is to accrue around £500,000 split between my ISA and pension accounts, around £300,000 in Ms FIRE’s retirement accounts, and a mortgage-free house (presumably worth around £250,000). This is all ignoring inflation.
Using a 3% rule, this would afford us about £24,000 per year before tax, which is a little more than what we’re living off of at the moment.
Once we reach that sort of number, my plan is to take stock of where we are.
If, at that point in time, we’re in our 60s, then planning becomes much easier. It’s likely that the state pension will be set in stone by that point, so we’ll know whether or not we can incorporate it into our plans. We’ll have a good idea of our current state of health. The money will only have to last until our 90s, at best.
If we’re younger when we reach this number then, again, I’d have to take stock of our situation.
For example, what’s our income?
Are we now in peak earning years, such that another year or two of working will greatly strengthen our chances of not having to work again?
Or have our earnings dipped, to the point that our wage won’t add anything to the pile of money we’ve already accrued – instead, does it make sense to just take part time work to supplement the income from our savings, to ensure it lasts?
On the other hand, what are our expenses?
Are they similar to today (accounting for inflation)?
Have we succumbed to excessive lifestyle inflation, meaning that we’d need to accumulate more savings and investments in order to maintain our standard of living?
Or, having potentially paid off a mortgage by then, are our expenses actually lower?
As things stand, Ms FIRE and I are not planning to have children.
This means that we don’t have to worry about leaving behind any inheritance for any children or grandchildren. As a result, we will have no qualms about eating into the capital as we age.
At least, that’s true in theory. In practise, I realise that it will probably be difficult to break the habit of a lifetime and spend more money than I earn. But that’s a problem for future me.
Despite not needing to leave behind any money when we both die, I do like the idea of having some money left over to buy/install one of those engraved benches that you often see in parks…
I realise that it’s very pointless.
But it’s my money, so pipe down.
Of course, this is very much a “nice to have.” If we can’t afford it, I’m sure I’ll manage! (Truth be told I haven’t even looked into this, so I have no idea how much it might cost. I’ve just had the thought on occasion when walking around our local parks!)
Indeedably specifically mentions managing some of the behavioural aspects of the change. People can change a lot in twenty years, so who knows if my answers will stand the test of time, but here’s my thinking as it stands:
How will you manage the behavioural aspects of the change: filling the void, loss of professional identity, no longer socialising with your former colleagues, seeing too much of your spouse?
Starting with that last point – the last year of lockdown and working from home has shown that spending “too much” time with my partner shouldn’t be a problem! In fact, it should be easier, as we’ll actually be allowed to go outside and do stuff to pass the time!
Likewise, no longer socialising with colleagues doesn’t strike me as a bad thing right now, as I haven’t seen any of them face-to-face in almost a year!
As someone who indifferent to their current job, loss of professional identity doesn’t bother me at the moment.
My feelings regarding those last two points may well change once I change careers, so watch this space…
As for filling all that newfound time… In theory, I’d do more of what I enjoy doing now, and maybe even take up a new hobby. In practise, probably lots of books and videogames.
The short and sweet answer to Indeedably’s challenge is “it depends.”
The current plan is to accumulate around £1 million in assets between me and my partner, and then see what’s going on in the world.
So much can change in the next 20-30 years, that I think anything more detailed than that is asking for trouble!
Interesting links that caught my eye this week:
- Get Rich Slowly – The Power of Low Expectations
“When you expect the best, you’ll never be better than satisfied. If you do get the best, you’re getting only what you expected. There’s no way for anyone or anything to please you by exceeding expectations. And most of the time things won’t live up to your expectations, so you’ll be disappointed.
When you lower the bar, however, you’re less likely to be disappointed. Sure, sometimes people will fail to live up to your expectations, but because you don’t expect perfection, these failures will happen less frequently and cause you less woe. Most of the time, you’ll get exactly what you expect. And sometimes someone or something will exceed your expectations, and that will bring you joy.”
- Life After the Daily Grind – Comparison is the Thief of Joy
“It’s easy to reflect and agree that comparing our lives to others doesn’t make sense and we should be grateful for what we have. This isn’t a solution though as we can’t change how our brain operates, regardless of how illogical it can be. Abstinence is the best solution, so if you’re an Insta or Facebook addict then deleting your account is likely what’s best.”
- This is Money – Do you have to worry about Capital Gains Tax if you take in lodgers?
In the UK, you don’t have to worry about CGT if you sell your primary residence. However, is this true if you’ve been renting out one of the rooms?
- Financial Superstar – The Illusion of Control
“Many of us live under the illusion that if we just work hard enough and do all the “right” things, we can largely control our own destinies. […] The uncomfortable truth is that we often have far less control over the future than we’d like to believe.”
- Indeedably – Frustration
Inspired by The Accumulator’s recent Monevator post, Indeedably kicks off the Sovereign Quest March Challenge, pondering how best to plan for decumulation in retirement.
- Mr MedFI – The Con Is On
Mr MedFI weighs up the possibility of a side hustle, and whether the reward is worth the effort.
- The Rational Walk – The Price of Misery.
“Financial security is extremely important but it has more to do with your lifestyle decisions early in life than maximizing income. Trading misery for money seems like a terrible way to get ahead because the temporary has a way of becoming permanent. |
Of course, the ultimate solution is to work in a career you love that also pays extremely well — but the best of both worlds is not always possible.”
- A Wealth of Common Sense – Owning Individual Stocks vs. Owning the Stock Market
The old stock picking vs index tracker debate. Ben’s main argument here is that, whilst the wins from picking a few stocks can be great, so can the losses! Meanwhile, with an index tracker fund any individual losses are likely to be lost amongst the noise.
- Banker on FIRE – Why Money is Hard
Damian outlines some of the reasons why so many people struggle with money.
- Sign up to Trading212 via this link and we both receive a free share.
- Sovereign Quest – A new personal finance curation site launched by Indeedably. Check out the March Challenge.
Thanks for reading. Hope you’re all having a great week!