As I get ever closer to my FIRE date and am facing the possibility of a much earlier exit from my current job than planned, the geek in me has gone into overdrive and I have been spending some time (…..ok, A LOT of time) reviewing and refining the numbers.
It is often said that there is safety in numbers but for an introverted self-professed spreadsheet addict like me, that phrase has a whole different meaning.
I love numbers, always have, always will. And at times like these when it feels like uncertainty about the future has never been greater, knowing the numbers and having faith in the maths makes me feel secure. If I could wrap myself up in a spreadsheet, I probably would 🙂
A Staged Approach
Until recently, I was aiming to retire at 55 and I built a financial plan around the guardrail of the 4% rule and having 25 x my projected expenses in investments. It’s a straightforward approach for a straightforward situation. That age coincides nicely when my youngest child should have flown the nest – or if not, at least be working and contributing (she says, optimistically).
Once I learned more about the very real possibility of an even earlier retirement, I realised I would need to find a way to bridge the gap between those “very early retirement” years and the years from age 55 onward, when I can access the bulk of my retirement savings. So the plan has two distinct phases – pre-55 and post-55.
Phase 2 – Age 55+
I’ll start with Phase 2 since this is the easiest one to model. I will have no dependants and only need to consider myself and I expect my spending to be stable over many years so I am comfortable with taking a 4% rule approach here, after deducting any other income streams.
Rental Income 10,200
Interest (P2P) 1,000
Projected Expenses 24,000 (including tax)
Net Draw-down 12,800
Pension Pot needed 320,000 (25 x Net Draw-down)
Current Pension Fund 247,804
Future Pension Fund 322,083
The future pension fund takes the current pot and compounds it over 8.75 years at a very conservative 3% (5% growth less 2% inflation). I sincerely hope that growth is much higher than this, but just in case it’s not – I want to see what the picture would look like.
The great news is that this stage of my retirement is now fully funded. If I don’t invest another penny, the magic of compounding should be left alone to do its thing and these later years are covered. I recently removed a couple of items from my FIRE budget because really they were leaning towards a more luxurious standard of living and with my current situation at work, I wanted to remove the pressure of funding these things now. If growth is higher than modelled or if I have any side-income between now and then, there will be plenty of scope to put those luxuries back in. And every month that I can survive in my job adds more to this pot with both mine and my employer’s contributions.
Phase 1 – Age 46-55
Ok, here’s where it gets more detailed. The period of time between now and 55 is not one long stretch where expenses and other income streams will be stable. At the moment I have two children at home. One will be off to university in the next couple of years; the other will likely follow a few years later. I’ve been feeling quite fragile lately too, so I wanted to explore the possibility of taking a year off – simply to rest, recover and regroup. Each of these phases brings different income and expenses and I was left scratching my head for a while of how best to calculate what was affordable.
In the end, I decided to lay out the stages separately, each with their own levels of income and expense.
It’s worth remembering that Phase 1 has a definite end date – at age 55. So every week / month / year (…..?) I can stick it out at work, means I will not only be accumulating more savings, but the period that I will need those savings to pay for gets shorter. Anything left over will pad out the pension income and allow me to be more tax efficient with draw-down.
This plan represents the position if I were to quit now. If that doesn’t happen, it will need to stay dynamic and be updated regularly (yay!!) even if only to account for the passing of time.
This is not set in stone – more a framework to give me something to play with over the coming weeks and months. Yellow boxes allow me to play scenarios to my heart’s content. This particular scenario shows just 3% net growth but a side income of 5k for a few years. If everything were to work out this way I would have 41k left before my pensions kick in – but there will have been no holidays in that time.
If I were to remove the side income modelled above, the ISAs would be reduced to 6.5k by the end of stage 4 – showing I’m at a Lean FIRE stage right now. There is not much padding in the expenses but there is a contingency line – so it looks like I would probably be ok with no additional income. I don’t know though – it feels far more comfortable to have something coming in, however small. I make this much at the moment from Matched Betting alone and there are lots of other things I want to explore once I quit work, some of which may well generate some income.
I’m not joking when I say I spend hours playing with the numbers. I know I’m a bit weird, but I enjoy it – working out “what if this happens” or “what if that happens”. The reality will be none of the above, I know that. But it comforts me to think whatever happens, I won’t be too far out – I won’t have got it catastrophically wrong.
It does show that I am working now for the “nice to haves” not the necessities and if push came to shove – I could quit 🙂
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