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.