Are we nearly there yet?

[Etihwdivadnai]

Hi to everyone from a new-ish MMM reader in the UK,

I found MMM and this forum a couple of months ago (via lackingambition.com)
and it is really interesting to find a group of people with what appears to be a similar mindset to mine / ours
and with lots of new and good ideas and interesting views.

What's with the "Are we nearly there yet?" title?

Well I (actually we, 'cos I have a spouse) have always felt a bit at odds with our rather more consumption-based peer-group.
I think we're always thought of as, at least "very careful with our money"
So I think we probably already have some mustachian tendencies like:

1) We don't spend all our income
2) We are mostly only happy to spend money only where we get something of real value for that money
3) We are quite happy with "make-do-and-mend"
4) We are both quite practical (DIY, sewing, cooking etc)
5) We are both committed cyclists

(I daren't list the anti-mustachian traits, because it would be too long a list.)

So, whilst I think we are already on the right track towards retiring earlier than the normal retirement age,
I am struggling to work out how far along this track we actually are.
And  I think I have a tendency towards "just-1-more-year-itis".

So a synopis of our lives:

a) We both turned 50 earlier this year
b) We have both worked in the IT industry, but neither of us are particularly ambitious, so we are in middle-income jobs.
c) At the time we met, we had just started buying a house each
d) So within a couple of years we had sold both houses and put our combined equity into a larger house, with a view to starting a family.
e) We decided that when child / children arrived one of us would give up work to look after it/them.

So we started saving (most of) one salary and (mostly) living of the other.

Unfortunately, for multiple reasons, the child / children never materialized.
(Yes, we do know how it is supposed to happen ;-)

So we have just kept on working, but now with a "mutually assured penury pact"
I.e. if one of us voluntarily gave up work, we would have to accept the financial consequence
of the other person deciding that they could quit too
(Becoming involuntarily unemployed does not count, it just implies, at least looking for, another job)

So the numbers, well actually the percentages / multiples:

So starting with my spouse's *gross* annual *annual* income of £<x> as a reference point

Savings rate:

a) spouse puts 4% of <x> into an employer (defined-contirbution) pension
    to get an additional 6% "match", so 10% of <x>, in total, into a pension (in the UK this means tax-deferred)

b) spouse puts further 11% of <x> into another personal pension

c) I also receive <x> *annual* income but employer puts a further 47% of <x> via a salary sacrifice scheme into defined-contribution pension
    (basically I adjust my notional gross income to be the same as my spouse and put the rest + 5% employer-match into pension)

d) We also try and save most of, one of our net-of-tax income, which would equate to 65% of <x>, into tax-exempt savings
    which is pretty good since the cumulative tax-take is 25% of <x>, from each of us
    (and would, if you know UK tax system would actually let you calculate <x>, so there's a challenge for you)

So we are basically saving 133% of <x> (or 66.5% of combined gross income)

The stache:

We have currently saved 34 times <x> + live in a mortgage-free house that is a bit bigger than we really need.

Our spending:

a) In our spendy years (which currently seem to be about 1 in 3, on the basis of spending pattern of last 3 years)
    we spend a post-tax amount of <x>  (gulp, that means *more than* one of our post-tax incomes)

b) In non-spendy years we spend between 75% and 80% of <x>

It is quite clear that at a SWR of 4% we have already easily reached FI

BUT with a lower SWR of 3% we have not reached it yet, at least not with any sort of safety-margin.

Now, bearing in mind we live in the UK, with nearly the worst, if not *the* worst (i.e. highest) Debt to GDP ratio
with a government that seems hell-bent on inflating our way out of this debt
so a SWR of 3% may even be an *optimistic* Safe Withdrawal Rate.

Are we nearly there yet?

Or do we have 1, 2, 3 or 4 more years to go, to build-up a safety-margin

(It will not be more than this, because we are committed to both ceasing full-time employment at age 55)

What do you MMMs think?

--
Eti

[PS241]

Um....what?? You lost me with all the <x> jargon. With that being said you seem like you have plenty based on your savings multiple of salary, so go for it and quit your jobs. Do you really think you will never earn any more income? Take a few years off, do some traveling and then come back to a part time job you really love. You can afford to wait for the perfect job, I would expect you would get bored after a while anyways. Just my 2¢.

[unpolloloco]

If you're at 34<x>, you have a 3% SWR.  Hedge the inflation risk with international funds, and you should be good to retire now with virtually no risk.

[steveo]

You have a house bigger than you need and 34 times your annual expenses in savings. To me you are there right now assuming you don't increase spending ridiculously when you retire.

I don't think you need a back-up option either because you can always downsize your house.

[Gin]

Have you run your numbers through firecalc http://www.firecalc.com/ or other retirement calculators?  If you have 34x annual expenses I would say yes but I am new to mmm.

[Gerard]

I assume you gave us all that extra info (beyond "We have currently saved 34 times <x> + live in a mortgage-free house that is a bit bigger than we really need") in case we could find some potential pitfall, but I can't see what it is. Do you have access to all those savings, or are some of them in a pot that you can't access until you're older, for tax or other reasons?

[happy]

my spouse's *gross* annual *annual* income of £<x>

I am having trouble figuring out what you mean by this description of <x>.

However if: 1. in your spendy years you spend <x>
                  2. in your non spendy years you spend 80% of <x>
                  3. you have 34x <x> saved which you can access
                  4. paid off house or housing costs included in  <x>

Then you already have 3%SWR, with some margin of safety since you can at times live on 80% of your usual annual expenses. At this point its a trade -off between how much more safety you want and how much you want to stop working. Have a think about any other margins of safety you have,  and whether you would ever want to do paid work again or not, ...ultimately when to pull the pin becomes a personal question only you can answer.

[Etihwdivadnai]

Hi

Our problem is that in a "spendy year" we spend £<x> of *post-tax* income
but £<x> is the *pre-tax* amount that we have amassed 34-times the amount of.

And 17-times £<x> is in relatively "liquid" savings and investments,
but 17-times £<x> is in UK defined-contribution pension funds that are only currently available at age 55 onwards.

Our current overall taxation rate on earned income is approximately 25%
So 75% or £<x> just about covers our non-spendy years
But does *not* cover our spendy years.

So the major question is: What is the post-retirement taxation rate that we can expect to experience?

If it is %0, then we have achieved FI at an SWR of 3%.

If it is 25%, then we have not yet achieved FI at an SWR of 3%
(we might have achieved FI, assuming an SWR of 4%, but we don't believe that this is achievable in the UK)

So, overall, I know we are close, but what is MMM members' experience of achievable overall taxation rate?
And what is a realistic SWR, particularly with respect to the UK?

[rollingstone]

This was challenging to read because of all the special characters. I'd be more inclined to take the effort to understand your question if you had used numbers instead. They could be fake ones, but they'd still be readable.

[CommonCents]

I also suggest plugging in some numbers.

That said, I guess the answer is...can you commit to spending less than X from now on?  If you think you'll spend more than your salary (which you have 34x), then it has a higher probability it's not going to work out. 

[happy]

+1 to making your post more understandable.

Our problem is that in a "spendy year" we spend £<x> of *post-tax* income
but £<x> is the *pre-tax* amount that we have amassed 34-times the amount of.

This seems contradictory... are you saying <x> was not always the same amount in your example? Ie in fact you have <x> and <y>.  Otherwise I am trying to solve an equation where somehow post tax <x> is equal to the pre tax <x>, which I think can only be true if you pay no tax.

Tax system and rate in UK  is no doubt slightly different to either US or my country Australia.  Its worth investigating tax rates when you are living a mustachian lifestyle, since this will make a big difference. see MMMs post www.mrmoneymustache.com/.../the-lovely-low-taxes-of-early-retirement/.

I spent a bit of time investigating on Aussie tax sites, and found although our tax system is a bit different to US, if you live on under $35k per person a year, "lovely low taxes" certainly applies, and really up to $50k a year per person, tax is a whole lot better. 

So if you can google, type in UK tax rates and several UK government tax websites and calculators come up. Spend some time plugging in numbers. Work out how to optimize the tax for your situation.

Work out what you want to live on, in post tax pounds.  Add any tax (hopefully not much). Multiply by 25 for a 4%SWR or 33 for a 3% SWR. There is data on international SWRs, only 4 countries are 4% or more, most less than 4% i.e. 3-4%. You can find UK here 3.77%

http://r-center.grips.ac.jp/gallery/docs/10-12_revised.pdf

.

[Etihwdivadnai]

Ok here are the monetary amounts (<x> equals £35K), all per-year figures.

My pre-tax salary is £35K.
My spouse pre-tax salary is £35K.
In addition to pre-tax salary, my employer contributes a further £16.5K into a pension scheme and I contribute nothing more.
In addition to my spouse's pre-tax salary, employer contributes a further £2.1K into a pension scheme.
My spouse then contributes £5.4K into a pension scheme.

We then aim to (but sometimes miss) saving £23K of post-tax income into tax-exempt savings/investments (UK terminology = "ISA").

So on a spendy year we spend £35K (and definitely miss the £23K ISA target).
On the leanest non-spendy year we spend £26K (and manage to hit the £23K target).

We have saved £1.19M (i.e. 34 times £35K) where almost exactly 50% is locked into pension funds that are not accessible until age 55 at the earliest (just over 4 years away), 30% is in various investments and 20% is in cash savings.

The house is mortgage-free so, just local property tax of (currently) £2K per year still to be paid.

Our problem / anxiety is that we don't have a good idea of what overall taxation rate we can expect to pay once no-longer in salaried employment. While in salaried employment the overall earnings tax take is 25%

Note that none of our calculations include any sort of UK state pension (at age 66-ish)
because 15 years out from this age, we are not at all sure that it will still be there.

So clearly, unless we achieve a 0% tax rate after retirement, our spendy years are not sustainable,
while our least spendy years are probably sustainable at a tax rate of upto 25%

Of the two of us, I am clearly the less frugal and also have the greater anxiety about stepping off the employment treadmill.

My spouse is somewhat more frugal and rather more confident about making the break from full-time employment (but will probably expect me to make up any financial short-fall).

Net result is that I feel quite trapped into the "just one more year" syndrome.

Hence looking for others' views.

Regards
Eti

[AccidentalMiser]

I didn't read all of your postings.  If you have 1.2 M saved and own your place.  You have arrived at the place you are looking for.  Please retire now or send me your money and I will.

Welcome to MMM and congrats on your achievements.

[CommonCents]

So clearly, unless we achieve a 0% tax rate after retirement, our spendy years are not sustainable,
while our least spendy years are probably sustainable at a tax rate of upto 25%

Of the two of us, I am clearly the less frugal and also have the greater anxiety about stepping off the employment treadmill.

My spouse is somewhat more frugal and rather more confident about making the break from full-time employment (but will probably expect me to make up any financial short-fall).

Net result is that I feel quite trapped into the "just one more year" syndrome.

So it sounds like you need to work out a plan with your wife.  A concrete, detailed plan so that you
1. Have enough to retire (by working longer or cutting back)
2. Agree when to retire
3. You don't hold her back and work on being more frugal and meanwhile she doesn't expect you'll keep working

With a specific concrete game plan, you'll feel less trapped in the one more year syndrome.

[lentilman]

We have saved £1.19M (i.e. 34 times £35K) where almost exactly 50% is locked into pension funds that are not accessible until age 55 at the earliest (just over 4 years away), 30% is in various investments and 20% is in cash savings.

Our problem / anxiety is that we don't have a good idea of what overall taxation rate we can expect to pay once no-longer in salaried employment.

I don't know UK tax rates, but isn't this just a question you could ask a tax specialist and stop wondering about?  It doesn't really seem like something to have an anxiety about.

BTW, congrats on the life situation.  I looks like you are "there".

[travelbug]

Thankyou for clarifying your numbers I agree the symbols were a bit confusing.

I think you are there.

A fully paid off too large house that you can sell and move if you have to to  something smaller and add the $ difference to coffers, 1.2M and only 4 years until you can access fully your pension schemes.

What are you waiting for????

I would imagine that the tax rates would be easily found out but would be suprised if 35k pounds divided by two = 17.5k would have a huge tax threshold.

Have fun and enjoy.

[Ozstache]

Our problem / anxiety is that we don't have a good idea of what overall taxation rate we can expect to pay once no-longer in salaried employment. While in salaried employment the overall earnings tax take is 25%

Does this help? http://www.hmrc.gov.uk/rates/it.htm#2

[marty998]

I don't know what you are worried about with all this <x> bizzo.

Anyone who can work out who you are with a username of "Etihwdivadnai" and location of "UK" would probably be able to hack your details regardless.

Anyway...enjoy your retirement. Seems like you and your spouse have done rather well for yourselves on quite modest incomes. Good luck