Case Study - UK - Retire June 2020 ?

[highlandterrier]

Topic Title: Reader Case Study - Can I comfortably retire this summer?

Life Situation: UK based, married, no dependents other than a gloriously bonkers  black labrador, myself and OH are 46 years old.

Background:
Our plan has been for both myself and OH to retire in June 2022. My work has been really tough lately and it feels like the end of the road mentally. Have been there 22 years and it’s undergoing some massive changes and I’m looking for ways out. Luckily my FIRE planning has given some options. My OH is happy to continue working for another couple of years, and possibly even beyond, and is supportive of me to stop working if I choose. Thinking about stopping June 2020 and looking for some thoughts. It's weird, you read hundreds of these but when it is yourself, it's difficult to get perspective.

Gross Salary/Wages: Me £55K, OH £30K

Net Income: Me £40K, OH £25K

Current expenses: £26K per year (Comfortable, includes 2 moderate holidays per year etc.)

Expected ER expenses: £25K (some travel and dog care will no longer be required, includes voluntary NI contributions). However, we would prefer 30K when we both retire for some travel fun, at least at first.

Current Assets: Amount & description -
£380K in ISA’s/GIA’s (accessible now) allocated 45/55 equity/non-equity
£150K in Defined Contribution Pensions (accessible from 58) allocated 80/20 equity/non-equity
£15K per year (DB Pension RPI linked) for me from 60. Widows pension 66%
£9.5K per year (DB Pension CPI linked) for OH from 60. Widows pension 50%
£3.5K per year (DB Pension CPI linked) for OH from State Pension Age (likely 68) Widows pension 50%
? in State Pension from  ?
Paid off house which we are both happy remaining in long term
Term life insurance for me until 55 of £100K.

Liabilities: none

New plan timeline:
Age 46-47 - live on OH’s £25K net income then OH retires too.
48-60 - ISA/GIA’s should be £400K by this summer, then defer any withdrawal for 2 years. Cautious asset allocation of 40/60 so low growth or loss potential. Once OH retires live on inflation adjusted £30K per year. This should be tax free.
60-67 - £15K + £9.5K per year + around £5K per year from DC pension (3% of £150K although will likely have grown by then) = £29.5K
68+ 29.5K + £3.5K
State Pension not included as not comfortable relying on any forecasts this far out, but likely some amount at sometime.

Renew term life insurance at 55 to 68 for DB Pension £150Kish to cover risk of me dying as widows DB pension would reduce OH income from £15K to £10K per annum. At 68 OH has additional pension kicking in. OH is the spendypants so I am less concerned about the drop in my income if the opposite happened.

Risks -
OH has to leave work early - probability low, Also, first 6 months off would be full pay and next 6 months at half pay.
Stock crash/high inflation - this mainly affects the years until 60. Mitigated by cautious asset allocation for that stash, bond tent, and income projection at 20% above needs. Plan is to use the 400K pot only for this period but in emergency the DC Pension pot should be accessible at 58 (depending on how the government feel). Firesim has success rating at 93%, and my trusty spreadsheet has the portfolio survive with annual figures from the 2000 crash onwards.
Death reduces DB pensions - risk covered by lump sum in Term Life insurance.

Specific Question(s) - Does this seem sensible ? Any risks you can see that I have not thought of ? I’ve been so focused on my original plan that it’s difficult to be objective as to whether this is sensible or if I am being rash so looking for some independent input.

[cerat0n1a]

All looks pretty good to me - those DB pensions really take a lot of the risk away.

Probably worth getting a state pension forecast, or at least checking online how many years NI contributions you have (were either of you ever contracted out?) Obviously you'll be paying income tax on the DB pensions when they start paying out, but as it's spread across two of you, won't be much. Is £26k per year going to be enough to cover lumpy house spending - new kitchen or bathroom every 20 years, for example?

You've focused on the money side of it. What are you actually planning to do all day? How does your OH feel about it? How will it feel to be spending down the painstakingly accumulated ISAs over the next 12 years - the transition from saver to spender is hard for many people?

[londonstache]

I think this all looks good, and you can take the ISA/GIA income at a higher rate than 4% given it's a drawdown facility until DB/DC pensions kick in, and eventually SP.

As previous poster mentioned the DC element significantly derisks the whole FIRE plan.

The only minor modification I'd make to the plan is to open/contribute to a low-cost SIPP the unwaged max of £2,880 per year, as the government will add the 20% tax relief to £3,600 gross and that would be a good return on investment over a reasonably short horizon. You could even factor this from the ISA/GIA amount as it's essentially 'reinvesting' the money into a more tax-efficient shelter. Equally you are pretty well set for fair sailing and so able to pull the plug.

[PhilB]

I don't think it makes sense to disregard the state pension.  For the economy to have disintegrated so badly that state pensions didn't get paid you can pretty well guarantee that your investments and DB pensions would have gone to the wall too.  By all means bet on it coming in later (70?) but don't ignore it entirely.

Assuming you pay the necessary voluntary NICs to get full pension, a more sensible calculation therefore gives you both a combined income of nearly £42k post tax once everything is in payment.  This could be lower if taxes go up, but that's the best estimate.  After the first death the survivor would be on £27k pa post tax (you) or £28k pa (OH).  That all looks fine and dandy so it's just a question of getting to state pension age.   If we assumed that SPA went up to 70 and that you and OH both retire tomorrow then to have £30k pa in the meantime would be 14 years @ £30k = £420k plus 10 years @ £6k = £60k for a total of £480k against your current ISAs + DC of £530k.  In other words if your investments just keep pace with inflation you have £30k of headroom.
The biggest remaining risk would be the pension access age rising to 60 before you get there - that would leave you about £40k short.  Mitigation would be earning more than inflation from investments, dropping spending to £25k pa for some of the time, picking up a little bit of part time work somewhere or, if you were really mean, making your OH work another 2.5 years rather than both of you retiring tomorrow.
Basically you are home and hosed.

[highlandterrier]

cerat0n1a - we both need to make about another 10 years of NI payments to get full SP under current rules, both were contracted out so need 38 years. My approach to lumpy spending is to include £100 a month under "spend"  that's actually gone in a separate account for long term purchases, e.g car. So the £26K spend last year was actually £24.8K spend and the rest is in the bank. Might be light though as mainly aimed at new car every 8 or so years. Spending time will not be a  problem, the spending cash will ! I think that's why I aim for more than is likely required, to give some comfort to future highlandterrier.

londonstache DB 's are indeed a blessing, glad we've not cashed them in over the years, would be looking to top up SIPP's if funds allow. Might also help with the saver to spender transition.

PhilB I could plan for some SP, it will likely reduce in real terms IMHO, and it's not at the risky end of our retirement so have not pored over it. Realistically they could put the age up (again), change the rules about eligibility via NI contributions (again), increase by less than real terms or make means tested in some way. The narrative seems to be that it's unaffordable in it's current form and the value reduced in some way no doubt surreptitiously. When you are closer to receiving like yourself it can be relied on it but over 20 years away is a different matter. Good comments, food for thought.


 

[Playing with Fire UK]

This looks good to me from a money perspective. Monevator has announced a series on bridging the gap between ISA/GIA and SIPP which could be useful to you.

Personally I wouldn't invest more into a SIPP until you are closer to your SIPP access age as the risky bit will be the increase in the pension access age making you cash poor but pension rich before 55/58.

Have you considered taking out a low interest mortgage to increase liquidity pre-55? It isn't for everyone but once you both leave work there's practically no chance you'll be able to borrow again.

Have a conversation about the structure of you and OH's phased retirement. There is a chance that you could fall into some odd temporary dynamics with chores, dog care and housework with only one of you working that you need to rebalance after OH has retired and decompressed.

Finally, do you have a countdown chart at work yet? A chain of paperclips is pretty subtle if you don't want to give the game away!

[highlandterrier]

Playing with Fire UK - I think you are bang on regarding the SIPP, I've changed future investments to accessible pots, thanks for the insight. I'm thinking of 2021 now having talked myself off the ledge, but still trying to work out something I am comfortable with.

[Playing with Fire UK]

Nooo, don't work longer. Quit quit quit!

Whatever you decide, think about how far into the tax year you want to work. There's something to be said for maxing out your low tax bands in the final year.