How should you fund Early Retirement? Save after-tax money now or put it in a pension to be accessed when you are 58+ with tax advantages? It’s a tough choice and one that I’m struggling with.
We are currently saving as much of my salary into my salary sacrifice workplace pension as possible. My wife’s employer doesn’t have it, so we only put in the matched 5% in for her. But it does mean that overall, our pension savings (including LISAs) are outpacing our non-pension investments. And we’ll need the non-pension investments to FIRE on. If we don’t do it right, we could end up with a tight FIRE and rich retirement. Essentially, it’s a balancing act between benefits of Pensions vs. cash in the bank now.
I should write a post about the benefits of salary sacrifice but essentially, it means for every £1 reduction in take home salary I get, I get around £2 in my pension. It’s a good deal. I wrote a recent post about LISAs and an defense of why the Lady and I like them (and dislike them at the same time) – but it has brought me along to think about how to fund FIRE. At the rate we are going, we’ll have our ideal minimum retirement income full funded* soon enough. If you spend less than you earn, invest wisely, you’ll eventually reach FIRE. However if you spend too much (as we are at the moment) and put all your money into the pension (as we are at the moment) then you can’t FIRE safely (our FIRE fund is not predicted to increase based on current income/expenditure through to 2022).
Based on rough August 2018 figures:
- Ideal minimum retirement income: £20,000 (£1,667 per month)
- Current Final Salary Pension annual value: £11,000
- SIPPs & LISAs: £225,000 = £9,000/annum on a 4% SWR
- Total = £20,000 = 100% of what’s required to retire
- Woo hoo – I’ve done it! Except I am in my 30’s not 50’s and so I need some money in the meantime.
So for an early retirement scenario (before pensions kick in – accessible in 22 – 25 years time).
- Ideal FIRE-lite income: £24,000 (£2,000 per month)
- Approximate net worth less pensions (the FIRE fund): £450,000
- FIRE income = £18,000 on a 4% SWR which is 75% of the £24,000 required
- Shortfall = £150,000
- Approximate annual savings: £36,000 means ~4-5 years until we’re fully funded.
Sounds simple? Well, to muddy the waters a bit – future financial commitments:
- LISA = £120,000
- Mortgage = £150,000
- Giving a total pre-retirement shortfall = £420,000
That’s the situation we are in. Pension rich cash poor. There are some obvious solutions to all of this like: push FIRE back to 2022 (as originally planned), get a pay rise, pay less into the pension, revise down the FIRE spending, use a higher SWR of 5%; or my favourite which is to accept that the numbers don’t fully add up but to FIRE anyway next year. It could be just for a while before rejoining the world of work, starting a home business/expanding some activities I have already – or my favourite of sending the wife and kids out to work.
In summary, our Pension years look safe already. The next 20 or so are not guaranteed but I don’t think that having lots of money should make your afraid because you don’t have even more. Money is an enabler of all sorts and I intend it is to enable FIRE for GFF. Maybe you all think that I’m letting the Pension dog wag the FIRE tail and I should scale back my Pensions payments now to charge towards FIRE – thoughts are appreciated.
*Note, retirement income doesn’t include the state pension which I don’t want to rely on in the year 2050.
**Increasing SWR from 4% to 5% almost gets rid of the whole problem and puts me into FIRE. Although I am a bit unsure of how to treat consecutive SWRs on pre/retirement funds – which is covered by ERN and by 7 Circles.