Planning for Decumulation

Part of financial independence is greed, selfishness and doing what’s right for you. Those habits of saving and investing get turned on their head when you stop earning – how do you expect to get by when your monthly paycheck is going? Well, this is my plan.

Just like last month’s Origin post, I think that this was a really provocative challenge by in·deed·a·bly / Sovereign Quest which itself is based on a great series from the Accumulator at (Monevator) – Decumulation: a real life plan (Parts I, II, and III).

Of course, there’s some other great posts out there already and if you’ve read this far but are losing interest, try these ones:
Weenie gives her unique low stress take

Dr Fire lacks the kids to make retirement a huge challenge

Not to be confused with MedFI who has a Minimum Viable Plan post

Mini Millionaire gives a good guide

Thinking to the Future

Because retirement and living to 100 is a strange concept; it requires a step back from our usual day to day or month to month earn/spend/invest cycle, our low single digits SWRs to then excitedly extrapolated numbers and charts that rise off to the right in our fantasy financial futures. The future won’t be as smooth as any graph you can produce and even then, the numbers don’t give the full story.

So telling the future is possible but you’ll be wrong and the thing is though, I don’t have that much extrapolation to the future in my main spreadsheet. There is one sheet that is a bit messy but rough and ready and it looks at money flows until we are 100 but every other sheet has a much closer end date – the big 40!

Event Horizon

As I said in my origin post I’ve been keeping a track of my money since I was 18 and nearly broke in Uni. When I entered the world of work, I developed my own spreadsheet to track income, outgoing, assets and debts. It started simply enough but it’s grown arms and legs since.

One thing that hasn’t changed was the end date – December 2022, by which time I’ll be 40 and in my head (back then) I’d be retiring. This was my event horizon and I’d not thought too much beyond that point

Bridge over the River FIRE

As I mentioned in a recent post, I’ve been lucky enough to have had a final salary pension and saved a lot of money towards our pensions in SIPPS (benefited by salary sacrifice), LISAs and we can even count the state pension in our plans (or should we?).

So from the age of 57+ we look good. Actually, it looks a bit too good if you ask me – especially when the bulk of our lifetime expenses are in the next 20 years which takes us up to “normal” pension age. So, I’m not afraid of our retirement income, it’s pretty secure, diverse and there’s enough of it.

What we need here and now to be actually retired and to not need to work is enough money in savings/investments to cover all future costs. It’s a 20 year cashflow problem. And I’ve heard it called the bridge, bridging between getting a salary every month and getting your pension and it could be 5 years for some, 20 years for others or if you retired in your 20s, almost 40 years!

20 Years of Spending

I read about 20 years ago how millennials are going to have it tough, so I’ve done my best to avoid ending up like so many people are sadly. The result is that we’ve got options, we’ve got assets and we’ve got control of our lives. Some of our assets are illiquid but overall, we’re in a good place. Our pre-pension assets have a higher dividend rate than our pension assets and that’s under the expectation that we can draw on the natural yield or cashflow from these assets to fund day to day spending.

The graph shows dividends (but not pension dividends) versus spending, including spending less childcare. Our dividends are creeping up and our spending is more or less under control – although there’s still a lot of fat! Ideally, dividends would cover all spending but even if that’s not the case, we can survive by selling down.

However, I don’t think that’ll happen as I don’t think that we’ll fully retire permanently. And as I’ve said before, it would be very difficult to avoid doing any paid work of any kind (including picking pennies off the ground) for the rest of your life – and a cheapskate like me just can’t countenance the idea of doing useful work for someone for free and they pocket my productivity!

Future Future and Its Factors

Assuming we stay in the UK and where we live (the grass is always greener though), things will probably look like this:

1. We’ll get through childcare costs in 2 years
2. Put kids in school and fit work around school (thank goodness for WFH)
3. Pay mortgage off over next 20 years (around £130,000 left)
4. Balance cashflow from work, investments & spending

Things that are helping cashflow:

1. Renewable energy projects which pay back capital & interest over the lifetime of the project (20-25 years), this coincides with our bridge.
2. VCTs that pay back over 5 years
3. The usual ISAs and shares
4. We have good control of our finances

Thanks that are not helping cashflow:

1. Kids always cost money and are not cheap
2. That mortgage is a major drag
3. Housing costs should not be ignored (new washing machines, carpets…)

Things that could help:

1. Working more/longer
2. Convert to an interest only mortgage
3. Downsize house or move

Things that would mess things up:

1. Private school fees
2. Expensive habits/holidays
3. Housing/Legal disaster
4. Fraud/financial attack

And the things we don’t want to talk about:

1. Death
2. Divorce
3. Disability

That all seems quite simple really. But funding the mortgage will be difficult in the future, especially since if you pay off a debt that costs less than 2% in interest by selling assets generating 7% in growth then you end up poorer. Luckily the mortgage is modest by modern standards and we live in a relatively low cost of living area. Another big advantage is the NHS in the UK, so we don’t have to worry about funding our healthcare costs.

However the things we don’t want to talk about are maybe as much of a concern. As pointed out by Retirement Investing Today, the chances are that we’ll die before we run out of money and a disability could make our lives much worse. Divorce is another big risk – a close family member is getting divorced and their settlement entitles them to around £5/day that they were married. A bit better than Statutory Redundancy Pay but not by much.

Are we there yet?

Rightly or wrongly, our family wealth is split between pension, housing equity and pre-pension with a 52% / 8% / 40% split. So on our pre-pension funds and current spending we have about 10 years to go before we run out of money. Take away nursery and it’s 15 years. Add on mortgage capital repayment and it’s 8 years and 12 years respectively. But since we are both working, even with generous pension payments we are accumulating money and time is ticking towards getting access to our pensions.

On the face of it we could retire if were in our late 50s but we can’t exactly if we are in our late 30s. But who wants to be old anyway? Better to be young and affluent than old and rich I say!

The Acid Test for Early Retirement

There’s been a lot of talk about Safe Withdrawal Rates (SWRs) for retirement. I find that there’s a simple way to work out what your Safe Withdrawal Rate is for your bridge and that is SWR = 1 / (57-your age). You can access your pensions at 57 as I wrote [LINK]. If you are 37 now, that’s 20 years to go; SWR = 1/(57-37) = 1/20 = 5%.

So if you pre-pension funds are worth around £400,000 and you are 37, you can spend £20,000 a year easily. If you are 42 with £600,000 then it’s £40,000.

It’s simple that really. And for anyone who says that it’s risky – remember that you can always plunder your LISAs (as mentioned here)* and you’ve got your housing equity potentially plus you can always, dare I say it… go back to w**k for money.

Tax – the Elephant in the FI Room

If we were to enter early retirement – as in we stop earning any money from work and we live off our assets – then tax becomes an important factor. I’ve written about it here and it would require a bit of planning on how to minimise it but we’d probably start selling off investments that incur taxes and recycle the funds into ISAs (and LISAs) to reduce our tax burden.

The tax system in the UK seems to exist to punish work and to reward the idle. Land can be passed down or uses trusts and avoid inheritance tax, the wealthy get capital gains tax allowance as well as lower taxed on dividends and no tax due on your principal primary residence.

The young & workers are stuck with PAYE tax/NI, student loans, overpriced property and rent.

We’ve managed to navigate ourselves to the “rich people’s problems” side of the argument but my concerns are well documented but you can’t change the system but you can make it work for you.

Conclusion

Thinking carefully about our situation now and the roadmap beyond my arbitary time hoizon of December 2022 – we are in a great position. I don’t think that we have much to worry about when it comes to decumulation so my plans for now should be to make sure the rest of our lives are as good as possible and the kids have as good a start as possible. That’ll be helped by not having to slave away at a job, get stressed and tired to afford the trappings of middle class life. No keeping up with the Jonses‘, we’re on easy street.

Thanks, GFF

*Finally on LISAs, lots of people talk them down but if you are going to feed £20,000 into your ISA then chances are that you’ll never empty them again before you are 60 – so opting for a LISA is “free money” and even if you do need the money, it’s a sensible bet to make

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