One of my favourite financial journalists is Merryn Somerset Webb who writes the editorial for Money Week magazine. This week, she stated the following:
“It is hard wired into the UK financial brain, rightly or wrongly, that capital must not be spent – only income can be spent.”
She’s right, but I need to adjust this wiring. Although I’m not a big fan of being as transparent on my finances as some of my fellow bloggers seem to be – and I kind of admire them for it – I will make this admission: in order to retire early with the lifestyle I want, I need to pretty much burn up my capital reserves between now and 65. (At 65, a combination of a generous defined benefit pension scheme, my other half’s DB pensions and state pensions all kick in. I also think my expenditure will be way lower as I head into my late sixties. No more cocaine parties at that age.)
So, I’m looking at spending, over the next fifteen years, what some other people may call their “life savings”. Well, if they are “life savings” shouldn’t they be used to enjoy life? I’m heading off on holiday soon and am resisting trying to bite my lip over the money I’ll be spending. Shouldn’t I be sitting hoarding that cash as a protection against potential future penury? Accumulating the interest?
I heard Dave Ramsey on a podcast the other day advise a caller as to how to build his savings to a point that he’d accumulate over five million dollars in his bank. At that point, the caller would be 85 years old. Well, I hope he farging enjoys it at that age. He can buy a gold plated zimmer frame. More likely, as an American, he can continue handing it over to medical companies to manage his incontinence. I mean, come on, what exactly are we saving for? Repeat, You can’t take it with you. Yes, you can give it to your heir(s), but is that sensible for them, never mind you? My wife and I will inherit pretty much zero financially from our parents and so what? You could argue that this knowledge spurred us on to make a financially secure life for ourselves. Having our parents around was all the “reward” we needed from them. We’ve made our own way financially in life, and so should our offspring.
This financial bravado takes me only so far, all the same, because I AM as hard wired against spending my capital as much as the next miser. It’s hard to change the habits of a lifetime and, even when I don’t know exactly what I’m saving for, I still like to save! The pain of cashing in investments just to live from month to month is almost physical. As I push the heavily reluctant mouse to click “Sell” on the Fidelity web page, it takes a massive effort of will to do it. I hate the thought of doing this going forward on a monthly basis, I really hate it. In fact, I hate it so much, I spend a lot of retirement time figuring out how to go back to work and earn money! Even though, rationally and logically, I don’t think I actually need to. But my hard wiring seems to be a lot more hard wired than I thought.
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How about an alternative – switch your funds for their ‘inc’ brothers, then just spend the income? Or isn’t the income enough to live off?
Alternatively, you could just look at the boring 4% withdrawal rate and sell that amount off every year (although maybe better to do it quarterly so as to get a more average sale price).
I don’t know your exact financial situation (and I don’t want to I suppose), but if you know you’ve got the rest of your money coming at ‘official’ retirement age, then you should be able to rest assured that you’ve got everything covered.
Another alternative – do some contracting, or other ‘side hustle’. It would be completely on your own terms i.e. you don’t have to work if you don’t want to, but you could get some meaningful employment for a few weeks/months at a time, and then not have to sell off as much of your capital. I mean, if it really is that painful for you, then why not work out some kind of alternative plan?
If you do end up having a lot of capital that you never sell, you can always leave some to charity, even if you don’t want your kids to inherit, because you want them to make their own way in the world.
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Thanks M, the biggest difficulty in thinking about inheritance is that I have no intention of dying. Ever.
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What has helped me not worry–and I’m now in my fourth year of FIRE–is that I tracked my spending for a year and know how much it takes to get me by. I took that number, extrapolated out until I was 90 (using very conservative investment returns and accounting for inflation), and discovered that I was doing fine. One of the software programs I use even tells me if I’m under budget or over for each year. With this info, I’m not worried about dipping into the capital.
I may need to off myself at age 95 though.
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I’ve spent too many hours on those health and insurance calculators that predict the date that you’ll shuffle off, trying to tweak them and shouting “What do you know?” at the screen.
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I think you’re falling victim to a common fallacy if you’re feeling nervous spending your capital because you’re making a sharp distinction between your free capital and your pension(s) and failing to see them both as constituting your overall wealth. I too when I retired five years ago knew that I had to spend my capital before I could draw benefits from my pensions (as an annuity, as I foresaw back then), and felt a bit depressed about it.
Now five years later I have totally come to terms with it because: 1) thanks to a fantastic stock market, my free capital actually hasn’t decreased very much, and 2) I’ve realized that my capital and my pension are really practically the same thing. I have mostly defined-contributions pensions, which means that while I’m spending my capital and leaving my pensions untouched, these are growing by at least the same amount as my free capital is reducing, and so my overall wealth isn’t going down (at least not so far…). Also, now defined-contributions pensions can be converted to lump sums at will, and it is possible to do so after becoming resident in a country that taxes pensions lump sums lightly if necessary. Lastly, when I die my heirs can inherit what’s left from my pension pot, more or less as if it were free capital.
When you’re making simulations about future spending (following the 4% rule etc.), you just need to take into account for the differences in taxation between pension income and investment income (and, true, the latter is usually taxed less, but this is not universally true: for example I would say it is the other way round in France).
And finally, after having argued that there is not much wrong having a big part of your wealth being tied up in defined-contribution pensions, I would point out that having defined-benefit pensions is by not means worse, since you can convert them into defined-contribution pensions if you wish to, and in fact they are widely seen as a better type of pension to have.
I think that when investing and looking at financial independence issues, it definitely pays to always focus on the big picture as much as possible, try to do so creatively, and above all not spoil your new freedom and happiness fretting about inconsequential details (which I definitely did in the beginning).
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That’s good advice David and you’re right – somehow I fail to really grasp the bigger picture when it comes to pensions. I’m almost five years from cashing in my first one, but my focus is absolutely on my capital outside of that at the moment. I haven’t really thought of my future pension growth helping to subsidise my capital spend today. Focusing on the big picture is something I need to do.
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Timely article, I’ve just added a new workbook to my FIRE spreadsheet looking at options between stopping work and pensions becoming available. At first this was just an academic exercise to give me a viewpoint on whether I thought a 4% SWR was too risky. Turns out, that by being willing to spend down ISA capital by more than 4%, but still spending less than 4% of the total portfolio, I could spend a small fortune and still stop work at 42. I agree with David, if you are spending less than your OVERALL growth, and you won’t run out of available money before you can access the pensions, or you have a back up plan, you are winning!
If the action of selling is too much, could you get someone else (trustworthy) to click ‘sell’? I regularly ask my SO to hit the send button when the angst is getting in the way of a decision I’ve made but am doubting. Or withdraw quarterly rather than monthly. If the pain is hitting the button then reducing the pain trumps lost growth in my book.
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Thanks Emma, you’ve just reminded me of a biggie in that I MUST get my other half into helping to manage our finances together. Right now it’s all down to me, which I recognise is a massive “no no” when it comes to FI!
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Re: the whole working full time/not working ever again thing I am more and more thinking that it is best to keep a balance throughout life. My Nan is still working at the age of 85, I am sure it’s one of the main things keeping her going.
Pretty sure she knocked the coke parties on the head a few years back as well mind 😉
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