Possible exit routes
Some of my YouTube channel viewers told me a while back that it'd be interesting to see how I'm planning to withdraw money from my investments once I hit my big number. And as outlandish as it seems to think about it now, where I'm nowhere near that number... we could agree that with a bit of imagination... anything is possible.
Every time I think about the name ‘exit strategy’, I think of Jim Morrison, The Doors and "The End" - some of you might know that song. But then again, most of you probably don't. Never mind! What do you think of when you hear ‘exit strategy’ mentioned? Would be cool to hear so please let me know in the comments. I wonder how many of you actually think of investments.
What do I mean by my exit strategy? I certainly don't mean my Big number - which I discussed in this video. And I'm also not into portfolio rebalancing, asset allocation and so on and so forth. It's all about that moment in the journey to Financial Freedom where I've just landed and walk around the arrivals terminal. Let's assume that I have the big stash, £700k, in my investment account. Accumulation has come to an end, withdrawal stage is here.
Now comes the big question - what year is it? How old am I? And the answer is one: nobody knows. And so I need to add some more to the pile of my assumptions. I have £700k and I'm... 50. Nice, round number and the year is... the year is now. After all, who knows what changes in taxation, pensions and interest rates await us in the future. It's much useful to consider my exit strategy imagining that I need to deal with it at this very moment. So let's do exactly that.
First things first - my investments are split 50/50 between my ISA and my SIPP. This means £350k in each. I'm 50 and so I won't be able to touch my SIPP for another 6 years. As you most probably know, the current rule is: private pension can be touched - and by touched I mean withdrawn in a tax-efficient way, without any penalties... basically, the age of consent of a private pension is - 10 years before your state pension age. Because we have 2021, that is at the age of 66 but my generation is already expected to wait another 2 years because state pension age will be increased by the time I actually do retire to... 68. Lovely.
ROUTE 1 - London, work and play, with a mortgage
My first route is very much London-based. I stay put, I still have a mortgage to pay.
How much money do I want to withdraw from my retirement fund this year? £10,500 This is because I still generate income - an odd design contract here and there or a side hustle that's fun enough to be worth my while. How much do I make? Enough to cover all my expenses and pay National Insurance Contributions so about £18k per year - that's less than 6 months of work. If you wonder why I still bother with National Insurance Contributions... this is to make sure I qualify for the maximum amount of the state pension, right now I need 35 years of National Insurance Contributions so I'm missing quite a few. I know that relying on a state pension is optimistic and all the doom and gloom theorists predict state pensions will not exist in the future. But... I'm an optimist and so I will take the state pension into account when retiring in 2021.
Sooo...
£18k post tax income
£10.5k from my ISA - tax-free. This money is my official fun money and will be used on anything from my vision board. So experiences like this one or drawing sessions or gliding. And quite a few of books as I will have more time to read more of them.
ROUTE 2 - Bye Bye London, work and play, no mortgage
Another option is to sell my house and move somewhere where I or we, together with my boyfriend Edem, can buy outright. No mortgage means my yearly living expenses are lowered by about £10k. I still work and aim to make £18k per year post-tax. But it's not a big deal if I make £10 or £12k. I take the same amount from my ISA - £10.5k tax-free per year (adjusted for inflation) and it's my fun money.
Let's take a look at these numbers closer to make sure they don't come out of thin air. If you remember my post about the 4% rule, you know the assumptions and calculations of the pension experts.
My 10.5k per year is a 3.5% withdrawal rate of £300k - so my Small Number. In reality, if I hit my Big Number, I could withdraw £24.5k per year (adjusted for inflation) for another 40 years or so. But I prefer being cautious in those first years of my Early Retirement so this is the withdrawal rate I'd go for initially. I read a lot about withdrawal stage anxiety and knowing myself to be a classic worrier... I'm pretty sure I will experience it, too.
And so both version of events - Route 1 and Route 2 - will continue for a while. The strategy is to make only ISA withdrawals until age 56, pay off my mortgage (either immediately or regularly) and then get my hands on that SIPP. In short - avoid tax as much as possible.
So now I'm 56, the year is 2027 and this is what my Early Retirement looks like assuming, again, no adjustment for inflation of my withdrawals, no growth and no loss of my investments in the past 6 years:
SIPP - £350k
ISA - £297.5k
What do I do now? I can withdraw 25% of my SIPP tax-free. I can do it at once or in lump sums. Which option do I go for? At once! And so I withdraw £87.5k from my SIPP. What do I do with it? One of these things:
a) Keep enough to cover my expenses for a year or two and put the rest into my ISA to let it recover a bit
b) Spend it - this could be investing in a BTL property, revamp my house or go on a trip around the world - hey, I've officially retired and so can go looney for once! Of course it's not clever as that's a very unwise and extremely unsafe withdrawal rate of 25% in one year but let's see where it leads me.
The year 2029 is here, I'm 58 and I decide that I don't want to work at all anymore. This is highly unlikely as I very quickly get bored but let's assume this, to see if I can afford it.
My emergency fund didn't shrink and didn't grow either and it stands as this:
SIPP - £262.5k
ISA - £297.5k
Things are not looking great. So let's hope these funds do grow a bit in those 8 years! Let's be generous and assume that they do and I have £300k in each. And so I can safely withdraw £10.5k from my SIPP and £10.5k from my ISA for the next 40 years. Until I'm 98, if I'm still alive by then. On my 66th birthday I get a bonus - my first state pension. Currently it's slightly over £9k. This means I can once again reduce the amounts I withdraw from my Early Retirement fund. Or just do more of travelling, yoga or open water swimming.
One last thing - if you ask: what about fees? They're covered by my income and then of course become part of my expenses. What about adjusting for inflation? I know, I know. I simplify things quite a lot here. It's all an exercise in imagination. I'm not 50 this year, my Early Retirement fund is not even close to £700k and who knows what happens in the future. But it's good to sometimes do a bit of wishful thinking mixed up with calculations.
So here we are, guys. This is what with some imagination and current pension rules, one of my exit routes could look like. There are more options than what I discussed in this article. I could stop working immediately (boring) or I could buy an annuity instead of withdrawing the pension myself from my SIPP. I could plan for some years with smaller withdrawals and some with bigger withdrawals. And of course I could completely change my plan after reaching my small number - that £300k. If you'd like me to explore those other options, let me know.
