Retiring Early: Investors Chronicle

I spoke to Leonora Walters of the Investors Chronicle this week about retiring early. She read the blog post below and wanted to know more for an IC article:

The IC article is due in a few weeks. My rough notes are below on the questions she asked. I have done my best to recount the main points, buts I have missed lots out as the chat lasted 25 mins.

Maynard

What kind of income can you expect to have?

Helps to be naturally frugal (like me). Key to retiring early is expenses, which you have some control over. More chance of retiring early with low expenses than with a lavish lifestyle.

Level of income depends on the pot size. Investments could include bonds, but I know only about equities. FTSE 100 has yielded 3-4% over the last 10 years, and close to 4% now. 4% yield is achievable, so, say, a £20k income requires a £500k pot. But some blue chips, such as Glaxo, Vodafone, currently yield 5%-plus. So keen early-retirees could require ‘just’ £400k for a £20k income. Pot could use a blend of established income-biased investment trusts as well as or instead of shares.

How should you build it up – in what kinds of wrappers – which is your first port of call?

ISAs. Investments held in ISAs pay no CGT. I have never paid CGT and have saved loads — thereby compounding my pot faster. Also, dividends withdrawn from ISAs do not attract tax. Though don’t totally ignore any employer pension contributions. Doubling your pension investment with a matching employer contribution on day 1 is very attractive, even if the money is locked away for decades.

To what extent can you factor in the state pension?

I treat the state pension as a bonus. If you give up work in your 40s, the benefit rules could have all changed anyway when you reach your 60s. More important is access to any personal pension. You can now retrieve a 25% tax-free lump sum from personal pensions at 55, which could be factored into early retirement plans.

How do you draw from your various savings pots in a sustainable way?

Carefully! No real secret here. Ensure income is greater than expenses, and leave room for error when you take the early-retirement plunge. Avoid capital sales unless you have huge gains and can recycle the sums into better investment opportunities. Don’t try to be too clever fiddling with capital — selling capital to fund expenses can lead to a slippery slope that can be accelerated by a prolonged bear market.

What are the risks of retiring in your forties and what can you do to mitigate them?

Risk is mostly financial — your dividend income drops and does not cover your expenses. This year is a prime example: widespread payout cuts, presumably causing many income investors some difficulties. Nobody ever planned for a pandemic — other surprises may occur in the next 20+ years. Generally you have to keep on top of your investments and expenses. Worst that can happen: you have to go back to work.

But the flip-side is the risk of regret — by not retiring early if a possibility exists, and instead working a further 5-10-20 years in an unfulfilling job.

Is working part time from the time you are in your forties a more realistic ambition?

YES! Before giving up conventional employment, I went from 5 days to 4 days and took a 20% salary reduction. Employees can apply for flexible working, and going part-time first is much better. Go from 5 days to 4 to perhaps 3, to see how the income/expenses balance out. You might find a salary covering 3 days and investments covering 2 days works well, which gives confidence of leaving the 9-5 altogether. But you might find being at home for 2 days boring and want to return to full-time work.

What financial arrangements should you have in place if you do this?

Ideally low/no debt. Being mortgage-free is a huge advantage.

But very tough to become mortgage-free and retire early in your 40s. Realistic aim is to become mortgage-free first. Gives flexibility work-wise, for downshifting career-wise and going part-time etc.

Alongside the income pot, a cash buffer helps. I had 3*annual expenses in cash when I made the jump. Buffer provides room for error in case income/expenses go wrong, and generally reduces worry.

Any other thoughts?

Early retirement for most people boils down to having the appropriate mindset and being careful with expenses and accepting that lifestyle. The alternative is staying in work in perhaps an unfulfilling role. Helps to have saved up/started investing early in life, and enjoy some good share winners to build up the capital. Helps a lot to live with people with the same financial mindset. Sadly, probably too late to suddenly embark on early retirement plans after having children.

1 Like

And here is the article:
IC_111220 retirement planning.pdf (143.9 KB)

One of the quotes suggest "while interest rates remain low, there is little advantage to reducing mortgage debt.

That is true if you retain a useful income and can reinvest for reasonable returns. But if you are considering going part-time or no-time, then ideally you do not want the worry of debts, mortgage payments etc. I would not want a typical size of mortgage with haphazard part-time income. For me, peace of mind trumps financial arbitrage in this situation, and peace of mind can be an under-rated advantage in life.

Maynard

Hi Maynard,

As I mentioned elsewhere I have come late to active investment.

After shifting my investments from SJP I have placed them in a SIPP to gain access to the tax relief which will hopefully help in my compounding. I note that you appear to have used ISAs for your wrapper to benefit from CGT relief.

Just beginning to wonder if I have missed a trick. My intention had been to use ISAs to feed my lump sums through from 2 final salary schemes to drip feed as necessary.

Any thoughts on this as a strategy?

Murray

Hi Murray,

Many thanks for joining the forum.

Both SIPPs and ISAs allow investments to grow free of income tax and capital-gains tax. If you contribute to a SIPP, you receive extra government tax relief to increase the contribution (up to certain limits), but when you come to withdraw, SIPPs do attract tax (the rules of which can be complicated). You can withdraw lumps sums from SIPPs at age 55, but I am not sure of the withdrawal rules if you open a SIPP after 55 and then contribute.

Downside to ISAs is their annual allowance is limited to £20k, although that can be doubled to £40k if you utilise a spouse’s ISA. So your investments would not all have been sheltered within an ISA straightaway if they topped £20k/£40k.

Generally I advocate ISAs over SIPPs because ISAs have no age/other restrictions on withdrawals. I have only used a SIPP because my past employers matched my contributions, and so doubling my investment on day 1 seemed a good trade off despite the withdrawal limitations.

Not quite sure this is of much help, though. Financial planning is a complex subject and without knowing the full details (which you should not publish online!) only broad suggestions can be provided. I am not sure how your investments were held at SJP, which may have also dictated matters. Brokers such as AJ Bell provide useful guides to SIPPs, ISAs etc (e.g. Tax benefits of a SIPP | AJ Bell Youinvest), which might help your thinking. I am not a pensions expert, but feel free to ask any further questions and I will do my best to help.

Maynard

Hi Maynard,

Thanks for your reply the information is useful tbh as it helped clarify a few things I had been thinking about. There is an element of catch up here which I am guessing quite a few people go through as they head into their last 5 - 10 years of full time work.

Hence my decision to choose the tax relief over the flexibilty of the ISA to help bolster/boost my my initial investments.

Currently trying to weave my way through the complexities of drawdowns and taxation. Still have a reasonable time frame before my knowledge needs to be on point.

Thanks,

Murray

1 Like