Planning for retirement

[second income trader]

my advice would be as follows:

Make company contributions to your SIPP. Current maximum is £40K a year, which reduces your corporation tax liability also. Use the money to invest in a low cost tracker, a global tracker can be had for 0.15% charges a year. Why pay a pension company 2-3% a year who rarely beat a tracker with their stock picking (and if it's good enough for Warren Buffets wife, it's good enough for me).

Also max out your ISA allocations where possible, be it in cash or stocks.

The only caveat is you need to consider your portfolio allocation. Even with a 10 year horizon you don't want all your pension money in the stock market. The more diversified the better e.g. property, cash, bonds, P2P lending, stocks, stamps, fine wine whatever. But as you get nearer to your planned retirement date make sure most of your assets are in low risk i.e. cash. You wouldn't want a market crash wiping you out a year before retirement....

I'd also query any comments that say pay off your mortgage. If your mortgage has an interest rate of 1-2% you're better off keeping it and investing the cash in a savings acct that would pay 3% (or more if P2P).

Hope that helps.

[syrio]

If you are late 40's, expect to get £33k per year from your buy to let and only need another £10k to get an income of £43k then I'd say you are nearly there. Depends on how much you can save, how much mortgage you have to pay off and how much you really need.

Why £43k? It seems like a lot for retirement if you have already paid off your mortgage. What other expenses do you have? Have you actually worked out what you are likely to spend in retirement or have you just picked this because it is the higher rate tax threshold?

You probably want to look at a combination of paying down your BTL mortgage, SIPP and ISA contributions.

Increasing your SIPP contributions would be a good idea, putting in the max of £40k a year would save you £8k on corporation tax. You will then be able to access your SIPP money from 55.

Make as much use of ISA's as you can. You'll need to have money outside of the SIPP if you retire before 55.

Continue paying off the BTL mortgage. But perhaps prioritise SIPP and ISA savings first since you get tax relief on the BTL interest and tax relief on the SIPP. Then maybe when you are retired and have less income pay off the BTL mortgate. You don't give any figures so you'll have to work out what is most efficient for yourself.

Presumably you will also a state pension coming in at age 65 or so. So you can factor this into your calculations.

You sound too negative on pensions, but you really shouldn't pass up on the tax relief. Might be worth looking at the Standard Life scheme costs and perhaps considering a low cost broker with Vanguard Lifestrategy funds.

Also read up on investing regardless of whether you are going to do it yourself or use an IFA. Read the book Smarter Investing by Tim Hale. Look at the Monevator blog. There are also a lot of Financial Independence / Retire Early blogs out there for inspiration and ideas, for example Mr Money Mustache, The Escape Artist, Retirement Investing Today to name a few.

[electronicfur]

That may be correct 'on average', but you only get one life and you may have some 'below average' years (e.g. Chinese slowdown, commodity price falls) that could end up costing you dearly. But I do agree that you should try to achieve inflation-beating returns by the best means possible to yourself, taking into account the risks that you are prepared to take to achieve those returns.

This is why if you refer to the HYP link I provided, you will see that the strategy involves a basket of at least 15 companies, selected not only based on yield, but also taking into account dividend cover, and debt and gearing.

And you cannot avoid things such as the 2007-8 Global Financial Crisis. Whatever strategy you choose for your income, you have to make sure it can cope with such situations. A HYP portfolio suffers less as the capital value does not matter, only the dividends, and dividends are less volatile that the share price. Also you make sure you have a sufficient income buffer to smooth out any potential drop in dividends. My HYP income dropped during 2008 and 2009 but recovered and grew again after that.

[BlasterBates]

Retiring in your early 50's on a decent income is impossible unless you have a couple of million.

By the time you're 60 you'll probably have enough capital and it's possible to buy annuities.

In the end a retirement income has to be steady, you can't live off a stock market portfolio because it's up and down like a yo-yo. BTL does offer a steadier if a somewhat lower income. A stock portfolio will give high returns but you need patience and 10 years to get them. The stock market is a place where you invest and then shut your eyes until the 10 years is up. You may well find all the gains were earnt in the final month, it's a bit like that.

Working part time is probably a more realistic option, if only

[expat]

I am aware of the theory. But dividend can and does change. Dividend cover is very important and a lot of high yielders are not that well covered. Slowdown in the underlying business can cause significant issues.

The yield I get on my TSCO isn't looking too clever. And neither is the capital value.

Of course spreading in a basket will help to alleviate some of the risks.

But, I agree, yield on the capital is important to try and provide a decent income stream.

If the dividend is not well covered then it may be a high yielder but it is not a classic HYP candidate. Yield alone is only part of the criteria.

[ASB]

If the dividend is not well covered then it may be a high yielder but it is not a classic HYP candidate. Yield alone is only part of the criteria.

As I said cover is very important. As is total paid, the amount of profit the underlying company is producing and the prospects for that.

consider oil companies for example. Generally fairly high yield and reasonably well covered. But some of the dividends could be under threat if there is no significant recovery in oil price over the next few years.

it is an entirely valid strategy, but some monitoring of the state of the underlying investments could be wise (or of course could make any issues worse if poor judgement is exercised).

There are alternative of course. Active index funds for example, but internal costs can be high. There are also a number of specialised indices based on yield and other criteria. Then there tends to be etfs tracking these. But cists again can be a little high. Also the replication strategy is important. If it is synthetic rather than replicating then there is additional counter party risk.

I am not saying it is a bad strategy. It isnt, but one has to be comfortable with it and the natural fluctuations in both income levels and capital values.

if one had been running a portfolio like that and it happened to have exposure to banks, which would have fitted most criteria 10 years ago then there would have been a nasty set of surprises.

[ChimpMaster]

Firstly, congratulations on raising 2 kids and getting them through Uni. You should find that once they are both working, they will rely on you less for financial support, and in fact you can start getting them to share the cost of bills (assuming they live with you) while at the same time you can educate them on financial matters, so that perhaps they are better prepared by age 50. And well done on the BTL: one property bringing in £33k/year (when paid off) is awesome and would be worth over £600k at a guess.

So you have a wide selection of varied comments and advice from CUK members, some of it good and some of it (very) bad - like it being impossible for a person to retire by 50...! Financial education has been a hot topic these past 10 to 15 years and it is absolutely critical that individuals learn and tool up for their own financial independence.

Income from contracting is a boon that some are fortunate enough to realise should be taken as an opportunity to save, invest and pay off debts that otherwise would be far more difficult to do on a normal salary.

I'm not here to give advice because each person will have their own circumstances, wants, needs and necessities. I missed all of the booms that the economy has offered in my lifetime, and I have made huge mistakes that have cost me hundreds of thousands (no kidding). But I started learning about financial independence in the early 2000s and started to make plans to achieve freedom from the rat race.

In my early 40s and many sacrifices later, I am now at the position that I can escape the rat race and I might well choose that option because largely I am like you right now, apathetic about work - though most likely I will choose to semi-retire and then do something more interesting for a few quid a year. BTW I have a lot of responsibilities so it's not like I can retire on an income of £1000 a month .... I have a young family and all the usual household bills (no mortgage though) and costs associated with putting kids through school etc. So at the back of my mind is the fact that I need to plan for 20 years of schooling yet, through to the end of Uni. Much to think about yet.

Good Luck Sandy.

[expat]

As I said cover is very important. As is total paid, the amount of profit the underlying company is producing and the prospects for that.

And low debt, and a history of increasing dividends. Then buy and hold forever. Hold at least 15 well-diversified large cap shares.

Personally ISTM IMHO etc that the classic HYP (as proposed by PYAD on TMF as a means of producing income) is an excellent investigation of the possibility, and a serious benchmark for long-term portfolio income performance, but is slightly less robust than it looks.

[BlasterBates]

So you have a wide selection of varied comments and advice from CUK members, some of it good and some of it (very) bad - like it being impossible for a person to retire by 50...! Financial education has been a hot topic these past 10 to 15 years and it is absolutely critical that individuals learn and tool up for their own financial independence.

No-one has said it is impossible to retire at 50, so I think you're referring to my comment where you can't do it unless you have 2 million.

An indexed linked annuity at 55 pays 3.1% that means 1.3 million would give you a pension of 40 grand and you want a mortgage free property you would need an asset of around 400-600 grand. So at 55 you need 1.8 million. At 50 you're talking 2 million.

Of course this is a discussion on retiring comfortably, so this is an implicit assumption, and you can try and build a BTL empire but that isn't retirement, that would mean running a business with all the risks involved.

[electronicfur]

As I said cover is very important. As is total paid, the amount of profit the underlying company is producing and the prospects for that.

consider oil companies for example. Generally fairly high yield and reasonably well covered. But some of the dividends could be under threat if there is no significant recovery in oil price over the next few years.

it is an entirely valid strategy, but some monitoring of the state of the underlying investments could be wise (or of course could make any issues worse if poor judgement is exercised).

There are alternative of course. Active index funds for example, but internal costs can be high. There are also a number of specialised indices based on yield and other criteria. Then there tends to be etfs tracking these. But cists again can be a little high. Also the replication strategy is important. If it is synthetic rather than replicating then there is additional counter party risk.

I am not saying it is a bad strategy. It isnt, but one has to be comfortable with it and the natural fluctuations in both income levels and capital values.

if one had been running a portfolio like that and it happened to have exposure to banks, which would have fitted most criteria 10 years ago then there would have been a nasty set of surprises.

I have been running a portfolio like that and happened to have exposure to banks and BP, and the portfolio responded OK despite the financial crisis and Macondo. This is due to the fact it is diversified meaning that although there was a dip in income, dividend increases in other sectors balanced out the decreases. And the income from the portfolio fluctuates less than the capital value. So not really any major surprises. Dividend income may drop in some years such as that, but it recovers fairly quickly and starts growing again so that one keeps ahead of inflation.