Author Topic: Complex FIRE situation with defined benefits 9 to 26 years away  (Read 2453 times)

jb130

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Complex FIRE situation with defined benefits 9 to 26 years away
« on: November 17, 2015, 02:18:48 PM »
Life Situation: wife 42, me 41. One cat, no children. Scotland UK,

Gross Salary/Wages: Wife $20-40k (highly variable, self employed). Me, $0.

Pre-tax deductions: None

Other Ordinary Income: None

Qualified Dividends & Long Term Capital Gains: None

Rental Income, Actual Expenses, and Depreciation: $1400 a year from a field, offset by mortgage interest until recently.

Adjusted Gross Income: None

Taxes: $2800 property taxes. Wife paid about $1500 in income tax for last year. I have about $27k income tax bill due to pay next year based on previous work.

Current expenses: $40k, might tighten to $30k.

Liabilities: None

Assets: $2m between pensions and property.

Notes:
1. None of the assets are liquid so I'm working on that. About $1.2-1.3m is in property, of which I'm awaiting the share from my previous business worth about $120k after tax. Spending this on the property we are in to build a smaller house for us to live (keeping the field and my wife's business premises on the same site) would release about $750k from the sale of the existing house.
2. The main pension worth about $31k with $93k lump sump can be taken in 19 years, or $20k with $70k lump sum in 9 years. The lump sums are not taxable, the annual payments for life are. Whenever I take the pension, the survivor pension would be $15.5k. We are on track for full state pensions in 26 years with value of $23k between us. My wife's pensions amount to about $5k a year to be taken in 18 years.
3. I can do freelance work at $100-200 per hour, and by the weirdness of how my pension works, making some contribution a year gives me an extra 1.5% uplift on top of CPI on my pot. This is worth about $11k a year, just for showing up, but to be allowed to show up needs a credible minimum work of about say 4-8 hours a week over the year (but it can be spread out months apart), and 60 hours a year of associated compliance/paperwork which is more pleasant than the job itself.
4. I have FIREd by default as I left my previous business due to burn out. The freelance work that is readily available is tolerable but not enjoyable. Total assets appear to support, but the $11k a year for minimal overhead suggests I should continue to do some work, even though I don't like the line of work I'm in. The minimum work plus my wife's income would mean we do not need to live off retirement savings. Defined benefit schemes are years away but they all combine by 26 years time to give an income of about $60k, inflation linked.
5. So I should be able to liquidate $750k in the next year or so and invest in lowest cost trackers available in the UK. Will move the maximum $45k a year into tax sheltered ISAs, and use dividend, capital gains and income tax allowances to pay little tax.

Summary: Due to the long time period before defined benefit schemes pay out, we can raise $750k from property to produce income in the meantime. My wife wants to continue working, but is supportive of me not working or doing what I want. I feel I should work because of the $11k a year boost and favourable rates at which I can work. It is golden to have future defined benefits, but seems odd to get my head around how much to work before they kick in.

Questions:
1. How to value minimal work I don't really like but which pays too well to refuse and comes with an $11k a year defined benefit boost from just turning up?
2. Taking my defined benefit at 50 will mean I pay little income tax compared to waiting until 60. The state benefits from 67 are also taxable. The break even point considering taxes is about 80. I figure, take it early at 50 which is when I always intended to retire. I don't need to decide yet, but thoughts?
« Last Edit: November 17, 2015, 02:29:00 PM by jb130 »

john c

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Re: Complex FIRE situation with defined benefits 9 to 26 years away
« Reply #1 on: November 18, 2015, 01:29:52 AM »
This was a little hard to follow, likely due to pension schemes that I'm not used to (I'm in the US).  We generally don't have pension schemes that pay out lump sums.  Do you know that pension assumptions that the plan is using?  Something like assumed rate of return?

However, the key issue here is your $40k in expenses per year.  If you somehow monetize your current larger house, either by renting it or selling it, you can partially or wholly offset your living expenses.  You didn't mention how much the net rent would be (or even if you want to be a landlord), but selling it for $750k and consuming 4% per year would provide $30k per year.  Your wife's variable income will bridge the gap.

From a financial perspective, working a little bit provides a LOT of extra pension cash.  If you can possibly stand it, work the MINIMUM necessary to get the benefit.  If you're too burned out, then don't, or do so in future years.  You're RE, if not completely FI.  Don't kill yourself for an extra dollar (or quid).  Recharge, and spend your life doing what you want to do.

In general, defer your defined benefit pension as long as possible to get more payout.  However, if you need the money, start taking it.  You'll know if you're out of money when the time comes.  Since the decision timeframe is at least 9 years away, don't worry about it now.  Unless you want to spend down a portion of your $750k now, in anticipation of offsetting the loss of capital with the pension (so-called "pension levelling").

jb130

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Re: Complex FIRE situation with defined benefits 9 to 26 years away
« Reply #2 on: November 18, 2015, 04:20:05 AM »
Thanks john c. It is indeed complex. The returns on the defined benefit scheme are underwritten by the government, not dependent on investment returns. The benefit is based on career average earnings. However, for lifetime allowance/tax purposes (presently limited at about $1.55m), they are valued at 23 times the annual pension amount which accounts for the lump sum of three times the annual pension amount and 20 times the annual pension. The present value is about $750k. However, I can never access that as a lump sum or choose to invest it (apart from the $70k to $93k lump sum at age 50 or 60 respectively)

The expected $750k proceeds from the house sale will be free of capital gains taxes as it is from primary residence. The rental yield on one large property doesn't stack up against selling it and investing the cash in our location. Additionally it would leave us overweight on property if we were to rent out the house. Rental yields are best on smaller houses. In the past I've been much less exposed to property and was out the market completely and renting from 2006-2011 deliberately. That increased purchasing power greatly. I'd previously invested in low cost index trackers, index linked savings certificates, precious metals, individual stocks but sold the lot to buy property in 2011. Since then have redeveloped about 75% of the property.

So we'd be left with about $500k in property/land, $750k in defined benefits and $750k in investable cash. Plus state pensions from age 67 and my wife's smaller pensions.

The move to a smaller house would also cut the living expenses to about $30k quite easily I think. Property taxes, heating bills and maintenance will be lower.

Taking the defined benefits at age 50 will mean less tax, but if I live beyond 80 I will gradually lose out. That is quite likely statistically considering I am a healthy non smoker who does moderate exercise and is at ideal weight.

So all my defined benefits kick in later. I would like my investable cash from the forthcoming house sale to last a long time by not decimating it before I take defined benefits. I can of course decide later, just trying to "get my ducks in a row" as this has all happened a bit by accident (apart from saving very hard since 1998 and making some good returns which I would like to think are due to diligence and good planning).
« Last Edit: November 18, 2015, 04:30:08 AM by jb130 »

Mother Fussbudget

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Re: Complex FIRE situation with defined benefits 9 to 26 years away
« Reply #3 on: November 18, 2015, 03:32:34 PM »
The way *I* deal with doing work I don't "love" - and working with a team of people who are complete idiots - is to realize:  I do not NEED to love my work - that's why they PAY ME HANDSOMELY to do it.

john c

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Re: Complex FIRE situation with defined benefits 9 to 26 years away
« Reply #4 on: November 18, 2015, 06:20:22 PM »
JB;

Okay, the new information helps out.  It looks like the pension assumes a payout of 4.35% (1/23) for the monthly payments, and 5% (1/20) for the lump sum.  The actuarial issue is the delay until you receive them.  You need to figure out your personal discount rate (rate of return) that you're assuming/counting on in order to make the correct mathematical determination.  This will allow you to determine how much you can take out of your 'stache each year, and then level it out with the pension payouts.  You can then spend X per month, adjusted for inflation, forever.

With your new annual burn rate, you are truly FIRE.  Don't worry about the small stuff.  Keep being frugal, and you'll be fine.  The real question is what do you want to do with the rest of your life?  You sound really burned out.  If I were you, and I lived above the 45th parallel, I'd be planning a post-Hogmanay trip trip to the tropics to burn off the chilblains.  I live at 37 degrees North, by the coast, and I'm bitching about the cold and dark!

What part of Scotland are you in/near?

jb130

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Re: Complex FIRE situation with defined benefits 9 to 26 years away
« Reply #5 on: November 19, 2015, 01:58:44 PM »
I'm in Fife, near St Andrews. It is beautiful, but could do with more sunshine. I would emigrate to Madeira, but my wife wants to continue her business. Portugal has a 10 year tax deal for immigrants which is nice. Went to Spain in Sept, going to Madeira in December, Lisbon in January, California in April.

The burn out was awful. I was one of a team of five clinicians, of which two of us were business partners. One went on maternity leave for a year, 6 weeks later another went off sick for a year, 6 weeks after that another went on maternity leave for a year, and 4 weeks later another left. So it left just me and the workload was horrific. We have a recruitment crisis and I was throwing money at temporary staff when we could get them, and they were often slow and of poor quality, upsetting our patients. In the end I left, I delayed the decision as my business partner was seriously unwell and I wanted to give her chance to recover, but I couldn't cope. I kept it going until her return. Now I can do temporary/locum work which is plentiful and well paid, but our socialised medicine system is free at the point of (ab)use and our society is certainly misusing it. Dealing the "entitled demanders" got old even before the staffing nightmare kicked off.

john c

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Re: Complex FIRE situation with defined benefits 9 to 26 years away
« Reply #6 on: November 19, 2015, 05:31:38 PM »
The good thing about burnout is that it eventually fades, unless you have PTSD or similar.  You're FIRE, take some time off and regroup.  It sounds like you're a physician/OBGYN, so you're highly employable, likely is remote spots like Madeira, should you eventually feel like it.  If not, don't sweat it. 

I would think twice about immigrating to Portugal.  The economic/political situation is pretty dicey.  Even if Madeira is remote, the risk to your assets is real.  Why immigrate versus live there long-term? What would Portuguese citizenship provide over British?

I can understand your statement that Scotland needs more sunshine.  At 56 degrees North, no wonder!  This time of year must be tough, though I imagine the summers must be beautiful.  My ancestors left Scotland in the 1860s, so I've never had the pleasure of a Scottish summer.

jb130

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Re: Complex FIRE situation with defined benefits 9 to 26 years away
« Reply #7 on: November 20, 2015, 04:09:01 AM »
The idea of living on Madeira is that it is just awesome, I love the place, the weather, the roads, the flora/fauna, the mountains, the sea, the walking. Portugal does indeed have its problems though. Living there was an idea to save the travel and accommodation costs, but it is nice enough in Scotland from March to October.

On balance being UK resident is preferable because of the relative stability and low taxes on property and investment income and as long as I am in Madeira less than 6 months I wouldn't become resident there. Perhaps a snowbird situation would emerge.

The weather in Scotland really isn't as bad as its latitude would suggest. I'm on the East coast so have only modest rainfall, but only about 1500 hours of sunshine per year with an annual average temperature of 47 degrees F. There is a frost in winter, but snowfall is minimal compared to many continental climates with some winters just having a day or two. Atlantic storms come through but end up just as rain and wind. Nothing really extreme.