Reply to: Planning for retirement

[syrio]

As for the ISA can I pay for that direct from the company? Or should I withdraw it then put the money in the ISA?? If I did that, the withdrawal would not be counted as an taxable income?

Thanks again.

You will have to make the ISA contributions from your personal income after it has been taxed. But once it is in the ISA, there is no income or capital gains tax.

If you really want to retire early the biggest obstacle is your insistence on spending £43k a year. The more you spend, the more you need to save, but the less you are able to save because you are spending so much. I'd consider this an extravagantly high level of spending, not a 'frugal' level.

The Shockingly Simple Math Behind Early Retirement

[ChimpMaster]

My 'semi-retirement' in the early 40s has been delayed, by a few months anyway

I'm not sure whether to be happy or sad about this but I guess I shouldn't question the workings of the Universe too much. Every penny helps, and so what, it's only a few more months

[ASB]

That was from some out of date numbers but based on taxpayer incomes; no regard to any other demographic.

Some more up to date figures:-

https://www.gov.uk/government/statis...-and-after-tax

[d000hg]

43k is quite a lot (that's not to say you can't achieve it or don't deserve it or whatever). 40k would put you in the top 20% of earners. So, to you it may well not be very much. But to most folks it is.

I can't recall but if it's £43k for the household then it's still comfortable but split between two not that exceptional.

[ASB]

As for the ISA can I pay for that direct from the company? Or should I withdraw it then put the money in the ISA?? If I did that, the withdrawal would not be counted as an taxable income?

43k is quite a lot (that's not to say you can't achieve it or don't deserve it or whatever). 40k would put you in the top 20% of earners. So, to you it may well not be very much. But to most folks it is.

You could pay the ISA directly from the company of course. But it would just be a loan with all the consequences of that. So at some point there has to be dividend or salary to cover it.

About the only thing you can do to get cash out without it being taxable on you is the pension route. This is mainly tax deferment though. However if you are a 40% taxpayer now - and can get full relief - and will be a basic rate taxpayer when drawing the benefits then this is a very real benefit. Otherwise the effective tax break is simply the tax free lump sum of 25% (this is worth 6.25% of the contribution).

Given your age and the limited amount of time you have available you need to be chucking a lot into a pension if that is the way you plan to do it, then manage the resulting investment to produce income.

Equally with the rate on your mortgage you also need to consider whether it is better to pay that down or not. In effect there is little point having debt at 4% and some form of saving yielding less than that (save for flexibility etc).

If you are a standard rate taxpayer then you would need a yield of 4.5% to net 3.6; higher rate 6.0%.

[SandyD]

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.

Thanks very much, bringing up the kids is the biggest financial strains.

[SandyD]

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.

I have a large offset mortgage, which I can't change its a long story, its 3.6% - if I change it as BTL mortgage it will cost a lot more, only residential mortgages interests are as low as 1-2% (I think, if I am wrong please point me to one willing to do BTL for 1/2%)
Also new budget means almost no interest rate relief on BTL mortgages in a few years, plus Interest rates are said to be raised sooner or later, so think its a good idea to pay as much as I can ... once the mortgage is reduced to about 100K or so .. I may consider keeping it.

[SandyD]

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.

Many thanks very useful, I picked 43K because I did loads of spreadsheets on the subject, definitely we need around 40K to maintain modestly comfortable living, I am also factoring bills increase, plus one always needs extra for maintenance, car breaks down, window needs replacements, washing machine breakdown etc etc, also I am not a stay at home at the country kind of person, I want to go out to concerts, theaters, and book trips abroad am not extravagant spender, am quite fugal , but enjoy such activities, suppose I can do what other pensioners do, hunt for bargain tickets, choose free activities and clubs such as museums etc. I am not sure 43K is a lot at all, £3500 a month means about £1000 to £1500 for various bills (electric/gas/water/council tax/ car insurance/ home insurance/ life insurance/TV license, Wifi/TV (but that can be cancelled) mobile phone/ land line phone / perhaps gym membership etc etc can't remember all but am sure there are others)
Then comes the car expenses, petrol plus road tax, plus service etc - I expect I'd need to change my car before retirement to save me money (I may also need to change the existing gas boiler before retirement so not to worry about that later), and if I decide I stay in London -which I really do-, then the tube charges on top... Then of course comes groceries and other home essentials - the occasional new outfit, lets say that comes to another £1000
So really I only have a £1000 spare, for entertainments/travel, not to mention maintenance of the BTL, and my own home... one broken thing can set me back around £500 a month, and if it didn't I could save it for a nice trip somewhere

For the SIPP I will look into it, thanks, I can start adding more into it now.

As for the ISA can I pay for that direct from the company? Or should I withdraw it then put the money in the ISA?? If I did that, the withdrawal would not be counted as an taxable income?
At the moment I have an ISA but am not maxing it, setup a direct debit looooong time ago from my personal account and forgot about it, need to review it.

Thanks again.

[lukemg]

Wow - some really good advice on here. Especially the FIRE stuff, they are on the same page as you.
Also, how much is enough ? 25x your annual expenses (be very honest about these) or 20x if you dont want to leave any to the kids.

Personally I am aiming at being in the same position, work optional. I am close but not packing it all in as finding it ok atm but will prob not work summers from now !
You need to be stashing money furiously at this stage to build the pot up, I use global index funds (lowest cost I can get, Vanguard usually) through SIPP's (to get company cash out) and ISA's.
Vanguard Lifestrategy is a good no brainer fund - see Monevator.com for why and you can also lifecycle it to lower shares percentage as you approach retirement (puts more in bonds)
I am not doing this as I have cash and property assets I consider as a more stable part of my net worth so the investments are all in shares and I hold my nerve so can live with the rollercoaster.
Also - flexibility on getting it out of a pension means you don't have a strict deadline that can trip you up if the market tanks just then.
GLA

[ASB]

I don't see the point of lump-summing into a pension scheme in my 40s.

With the increased flexibility in how funds can be taken, and depending on the level of funding, it can be the case that immediate vesting to put money in, pick up the tax credit, take 25% lump sum and commute the balance to cash can - under some circumstance - yield more that the original contribution immediately.

So, it can be worth investigating at an appropriate point, even if you are not minded to put a chunk in and leave it for a while.

A quick Google turns this up, 6.25% free money on limited sums....

http://www.telegraph.co.uk/finance/p...o-me-true.html

[ChimpMaster]

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.

That's a good point. Wouldn't the aim therefore be to sell your BTL properties as you retire, and ideally make a nice profit as you realise the increase in value since you bought them? You want minimum risk if you are retiring and need to live off your investments.

Yes that is a good point, I'll have to ponder it when I retire shortly

Seriously though, yes I don't want to be too hands-on after a certain age, but I don't have a plan for how to deal with that eventuality just yet. Maybe I can teach the kids on how to manage the portfolio, or maybe (quite likely) we will sell some assets to reduce debt/exposure.

It's important to have diversification after a certain age, but I have missed the age at which starting a pension scheme would have been beneficial. I don't see the point of lump-summing into a pension scheme in my 40s.

[d000hg]

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.

That's a good point. Wouldn't the aim therefore be to sell your BTL properties as you retire, and ideally make a nice profit as you realise the increase in value since you bought them? You want minimum risk if you are retiring and need to live off your investments.

[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.

[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.

[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.