Pulling the Plug

I tell you something, and I know it’s a cliche, but time zips past as you grow older. I’m moving from the stage of telling myself “I can access my pension this year”, to “I can access my pension in six months”, and it’s shocking how fast this year is going in.

For a long time I’ve been constructing plans about what I might or might not do with my company pensions when I reached 55. I have two significant pots – one a DC one, where I can see the lump sum available and one a DB, where I can’t. Nevertheless, it’s amazing how many options and plans you can build out of these two factors and I think I must have gone through most of them. I won’t bore you with any of that, however, but I also have a third variable that impacts on the other two – do I continue working, or not?

If I stop working, the planning becomes much starker and more serious. The comfort zone that my current salary buffers me with vanishes overnight and, as I have experienced before, when the income tap is shut off it is quite a shock to the system. I’ve previously blogged that if your income equals your expenditure, like Mr Micawber, you’re probably comfortable with that situation. Let’s say you bring home £2,500 a month and that covers all your bills. When you stop earning, not only do you miss that £2,500 coming in, you might still have £2,500 going out. Psychologically this feels like you’ve taken a £5,000 a month hit – or at least it did to me!

Of course, psychological issues aside, the reality of the situation is that you now need to generate that £2,500 (not £5,000!) from your savings and investments to cover your expenses. Hopefully, your investments will generate this income through growth and then you’ll not have to worry – too much – about your pot running out too quickly. Well, “yes and no”, in my experience. “Yes”, on spreadsheets, my calculations told me my investment growth would counterbalance and cover my annual costs. And “No”, I could absolutely not stop fretting about the fact that I may have got both my sums and assumptions wrong. I was, roughly, looking at the 4% withdrawal rate as a measuring stick for my calculations, but you don’t have to Google for very long to see this strategy being pulled to pieces as being far too risky. Many say 3% is a better rule, or 2% just to be safe. It’s not long before you start pining for the security of the days when you put 10% of your income into your pot instead of taking 4% of it out.

In my “retirement”, I set up Google calendar monthly reminder of when I needed to “pay myself” out of my investments – i.e. cash in another tranche of funds to cover my monthly outgoings. This was they way I’d chosen to withdraw the money – I suppose I could have done it quarterly or annually, but I felt that taking a monthly withdrawal was more like “pound cost averaging” in reverse. I certainly wouldn’t have liked to have withdrawn a big amount of annual budget at a time when the market was on its knees. I grew to hate that reminder though, with the ironic “Pay Day” title I’d given it. And this was at a time that my investments were actually rocketing upward – not that I cared, because all I felt was that they’d be rocketing upward even faster if I wasn’t scooping a substantial sum out of them on a monthly basis just to live!

Perhaps one lesson to be learned was that I shouldn’t have “retired” with absolutely no intention of reducing my living expenses from the level I had when I was working. That was partly because I had been made redundant without much notice and therefore hadn’t “planned a retirement life” as opposed to a working one. But it was also partly because one of my Early Retirement ambitions was that my income and lifestyle shouldn’t “reduce” once I stopped working. That’s probably not at all realistic, but it was what I was aiming for. In my head, that would give me all the financial options in retirement that I had when I was working, and maybe a lot more.  I didn’t want retirement to seem like a step down from the life I had been living. Why should I have to sell my home to buy a smaller one because I needed to reduce the mortgage? Why holiday in the UK instead of the US? Why drive a smaller, older car? Why eat out once a month instead of once a week? And so on. That was a choice I made and one that I’d make again today – I’m basing my projected retirement income on the same income I generate today through employment. That’s quite a hurdle rate and, if I stick to it, will mean “raiding” my investments more than I would have to if I made some alternative choices on where I live, what I drive and how I enjoy myself. But each to his own. If nothing else retirement is hopefully going to be your plan, and not somebody else’s, and that’s what FIRE is about – you build the plan on your own terms. So good luck with yours.

 

21 thoughts on “Pulling the Plug

  1. Lots of people claim their spending drops on retirement, not merely commuting costs and sandwiches, but being about to find bargains and do their own gardening/DIY. Of course extra holidays might cost more, but not if you replace city-breaks with month long trips to Peru, where you amortise the flights over a long time.

    And for most the slope goes from saving 30% of post tax+NI salary to just withdrawing what you spend in a tax free way. You go from pushing up that hill to coasting down the other side.

    £4000 a month can be £2500 after tax and NI, with £700 being saved, £200 on commuting you only need to find £1600 to live on, and can get that much nearly tax free (11k+1k+2k+5k)

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  2. Hi 3652,
    I can sympathise with the worrying about the funds – and also not wanting to reduce your lifestyle! If anything I want to be able to expand my lifestyle when I retire – more holidays, more eating out etc.
    I really don’t know how I will cope if I have to sell stocks, so the aim is the income will be generated by the dividends and that will be all I need. For now, I am not worrying about it too much, but chucking as much money away as possible into investments.
    When I hit my “magic number” I will then have to think about what I do, but I have some time before that!
    Cheers,
    FiL

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    • Now FIREd, there is no psychological factor about selling things. The dividends arrive, the p2p loans pay off and I’m constantly selling and buying to use allowances etc. Some if it sticks in my current account to pay bills, the rest continues on the merry-go-round. I’m really not conscious of living expenses at all.

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      • That’s good, but I struggled. I often wonder if I really mentally committed to retirement. I used to wake up in the early hours fretting that I wasn’t contributing, that I was “dropping out”, taking the easy option, not providing. Especially when I saw my peer group still striving away, still “going for it”, determined to get the next challenge under their belts. Whereas when I looked around, all I saw was pensioners in the gym and at the golf course, and I’d think “I’m not ready for this!” 🙂

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  3. You need different peers! My lot mostly plod along and live their lives outside work. Mind you I’ve decided to skip my Oxford reunion in a few months, which probably will be full of over-achievers, for a party of my friends instead.

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  4. Now 57 and been retired for 5 years. Wife now retired too & we are travelling – a lot. I have no final salary pension and I thought about the money going out for the first year. Now we live to a budget of around £2k per month plus a flexible holiday budget. I don’t give money a second thought, don’t miss work & have an active social life. I guess a 50% stock market correction would be a shock to the system and the holidays would have to go, but have zero regret about retiring.

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    • Nice one! I might have had a different experience if my wife had given up her part time job and retired too, but she felt she was too young to do that. Which was fair enough. If I could have got a three day week I think that really would have been ideal for me as a transition, but the working system can’t deal with that at the moment.

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      • How actively did you try? I thought no way I’d be granted by ideal working hours, but it was easy. My spouse has also worked less than fulltime in a sector not generally noted for flexibility. I’m learning that often we decide things can’t be done without actually testing our assumptions!

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  5. @Johnbx, impressive, if it’s not too personal a question, could you say how you managed that (FI/RE) at a relatively young age, so as to provide hope and inspiration for others? Also in case I missed a trick 🙂

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    • It was a fair bit of luck but I also took some chances some of which paid off handsomely. My career was in no way conventional in that I left a well paid job to buy a hotel in my mid 30’s with zero experience of running one and with a young family! That worked well financially in the end as I shut the hotel & converted it to residential. I returned to work for a time as a consultant, formed and subsequently sold a small business and then worked in a business where I got some share options. That all came to quite an abrupt end as I had a very difficult boss who I really didn’t want to work with anymore. I left this company with retirement in mind but also open to another job if a suitable one came along. I quickly came to the view that I actually had enough in terms of finances to keep us comfortable and retirement suited my wellbeing very well.
      Our biggest worry is a Corbyn government. Their property and wealth taxes would seriously impact on our finances. In order to minimise the risk, we intend to sell our home within the next year and then rent so that if the danger looks like becoming a reality, then we can be nimble enough to move abroad and become non resident for tax.

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      • @Johnbx, interesting story, thanks, so it looks like fate dealt you quite a decent hand which you then played well, good for you. (I worked a couple of years as a student in a hotel and even while naive it surprised me just how hard it is making a go of that business) I’m also trying to off-load a property asap because I worry everyone will panic and bolt for the exits at the same time when the 3 million europeans leave, because even if they were renting some landlords will be forced to sell if rental yields go down.

        Re: moving abroad, I had a friend round yesterday who’s done exactly that, retired in Spain, lives like a king for < £10,000 a year (we did the math on all bills because initially I refused to believe it) and is back here only to see family a couple of times a year. This really brought down the total I thought I needed to have to move there, the prices are crazily lower than the UK, not just buying/renting a place, but even food, fuel and clothes. I had no idea, because when you're on holiday, you make no assumptions as you know you're only seeing a very small part of the whole picture in that tiny window of time; he retired at the usual age and was by no means well off, having simply worked hard as a plumber all his life here.

        I now doubt Corbyn will get in, they're as split down the middle as the incumbents and lame ducking as May is, understandably nobody wants the chalice while still full of poison, they'll only stab when brexit is resolved, to avoid any possible blame and start fresh.

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  6. I tell you something, and I know it’s a cliche, but time zips past as you grow older.

    My god – you’re right, its terrifying. Time is of the essence, of that theres no doubt!

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