Early retirement is a big deal. For most people it is not going to happen by accident and needs to be based on a solid financial plan.
I’ve talked about how I got to this point in my journey here. What about moving forwards? Where is the money going to come from to live? What will I draw down from and when? What other income streams will be coming in and what back-up plans do I have?
My Plan Set-Up
This is what I have in place for income streams:
- Savings outside of pension to get from FIRE date at age 49-50 to age 55
- Rental income from 3 properties to supplement these savings to age 55
- Personal pension, SIPP and stakeholder pension from age 55+
- Mortgage paid down to £150k by FIRE date (around 70% equity)
- Long term plan to sell 1 rental to pay off home mortgage (2 of the rentals are owned outright).
- Rental income from remaining 2 properties to supplement income from pensions from 55+
- Bank interest on cash funds at all stages.
The 4% Rule – Safe Withdrawal Rate
I am using the principle of the 4% rule as my guardrail (see here for explanation). So even though much of my money is locked away until age 55, as soon as I have enough in the overall pot so that I can theoretically withdraw 4% a year to live on, I will consider myself financially independent.
The challenge then is to be sure that there is enough accessible funds to bridge the time from leaving work until I can draw down on my pensions. And unfortunately, I am on track to hit my FI number before I have enough of those bridge funds.
I was quite late joining the FIRE party so to speak, in that I only discovered it a year or two ago. Up until then, I had been saving as much as I could into my retirement accounts, thinking I would get myself in shape to hopefully retire at age 55. I didn’t even know that super-early retirement was a “thing” never mind figure out how to achieve it.
Don’t ask me why I hadn’t thought about it before; I kick myself about this regularly. But the fact is, I didn’t and so I followed the traditional advice, paying as much as I possibly could into my retirement accounts. That’s not wasted, in that I benefited from a good rate of tax relief and my retirement account is now quite well funded. The downside is that I can’t access this any earlier than age 55.
Once I realised I could get out even earlier, I wished I had not locked away so much into pension accounts. But at least it provides some comfort that even if all else fails, once I hit that age milestone I will have a new source of funds to access.
I’m continuing to pay enough into this account to benefit from my employer contribution (if I pay 7%, they pay 10%) but any further savings are now being diverted elsewhere – maxing my ISA contributions and paying down my mortgage.
I’m a simple soul with very simple taste. As long as I have a comfortable home that is warm and cosy, I am happy. So the living costs I am projecting are really not that high. And since I have been tracking my expenses in detail for a few years now, I am comfortable that I have a good understanding of what I spend now – and what I will spend in the future.
In order to accumulate enough outside my pensions to bridge the gap years, I need to work and save for another 3 years or so. This also feels more comfortable from the point of view of my children. However well planned, early retirement is always a risk. Stepping into that abyss is something I am very willing to do, but not while I have the boys depending on me for years to come.
What If Things Don’t Go To Plan?
I have several things built into the safety net once I hit the early retirement button:
- 10% expenses contingency – even though I have padded my expenses a bit to be on the safe side, it feels more comfortable having an extra layer on top.
- The retirement budget includes about 30% discretionary spending – something that could easily be scrapped if need be.
- Assumes no slow down in spending in later life (most studies show decreased spending as people age).
- Assumes no equity release or downsizing from current family home – this is probably unrealistic as I won’t need such a large house when the children have left.
- Assumes no state pension – while it’s entirely possible future governments will reduce my entitlement, I think it is highly unlikely I won’t receive anything and I’m currently projected to receive the full circa £8k / year from age 67.
- Assumes no future part-time work or other income ever. Since I will have many years in front of me, I think this is unlikely. Matched betting / writing / dog walking / tutoring – I could write pages on all the things I would like to do if I had time and many of those could provide a small income.
- Assumes no inheritance – I am not from a wealthy family and don’t even want to think about this, but my parents own their home and it is unlikely there will be nothing at all passed on, albeit shared amongst my siblings.
The Fine Print
- In my calculations, I assume 5% net growth (after inflation) and this is what I base my decisions on.
- I also model 7% to give me an idea of how good things could maybe be.
- Every now and again I indulge myself with a view on 9% just because 🙂
- I will have 2-3 years of net living expenses in cash in addition to the above funds, with the intention of using these instead of drawing down stocks should the market drop for a while. (Net living expenses means expenses not covered by rental income).
- I really love the idea of working in a bookshop and I may do this just for fun for a while. The retirement police can arrest me for that.
Join the Discussion
How does this compare to your plan? What do you model in if anything for social security / state pension? Are you using the 4% rule? Let’s discuss in the comments.