Part 234: FI Projections and the Value of Pensions

Hello and welcome back to Mortgage Advisor on FIRE.  This week I take a look at some FI projections, and explain why pensions are a worthwhile investment no matter your age.

Weekly Update

This week was mostly standard; working and then chilling out.  Oana has been preparing to start her new job, and just like the buses, after she was offered one job, several more offers materialised.  It will be strange as she will be working from an office much more than in her previous role, which was almost entirely home-based.  In that respect, the new job is a bit of a good news/bad news situation.  She is looking forward to having a routine and salary again, but not so much having to go to an office several times a week.

I’m fortunate in that I’ve not had to look for a job in well over a decade.  However, I’m still amazed at just how bad some recruiters are when I talk with friends and family who are looking for a new job.  I’ll give one example from Oana’s recent experiences.  She applied for a role with the government, and the vetting was being completed by a third party.  The fun started when they explained that they couldn’t accept applications from people who had an underscore in their email address, i.e. firstname_secondname@email.com.

As a result, Oana had to check they were ok using my email address.  She specifically stated that it was not her email account, and was her partner’s.  They said this was ok, but then in the next breath asked her to confirm this was her sole account and no one else had access to it.  Why do people not listen?  It’s like when I worked as a barista at university for a place that did two sizes of drink; large or big.  Conversations would go like this:

Customer: A latte, please.

Me: *pointing to the sign stating the two drink sizes; large or big* do you want large or big?

Customer: er… medium.

Me: I can see you weren’t burdened with an overabundance of schooling.

Anyway, back to the point at hand… 

Following on from that, the checks were absurd with multiple requests for the same information being sent, as well as emails coming through referring to a different job in another city to the one applied for.  It was a complete clusterfuck.  Requests for clarity went unanswered and the whole experience was a confused mess.  Despite being offered the role, Oana, understandably, declined.

It feels as though, over the last few years, people are increasingly rejecting bullshit from current and potential employers.  It used to be the case that most people felt lucky to have a job.  There may be some element of that still, but from my experience, people are becoming more aware of their value.

I always say that employment has little, but not nothing, to do with loyalty; it’s simply a business transaction.  The employer lists the various expectations of the role and the remuneration for completing the job to an acceptable standard.  It’s then up to the employee if they feel the trade-off is worth it.  Loyalty, or more accurately trust, comes into it when you have been treated well.  Then there is an element of quid pro quo, where you are more likely to exchange favours with your employer.

I stated earlier that my week has been mostly standard and I’ll now explain what the non-standard parts were.  I’ve got a lot of medical stuff going on and several appointments next week.  I have two different scans coming up, some blood tests, some diabetes-related checkups, and a minor procedure towards the end of next week.  It’s going to be stressful.  

On Wednesday I have to eat a restricted diet for most of the day and then fast from 8pm.  When I’m not under any restrictions for eating, I can happily go hours without eating.  The moment there is any sort of restriction I turn into a cat, feeling as though I’m going to starve because I’ve not been fed in the last ten minutes.  

Speaking of cats, I had a funny interaction with someone from Facebook Marketplace recently.  They wanted to buy a beanbag sofa thing we have in our home office.  It’s something we listed a while back but shortly after listing it, Poppy decided to claim it as one of her many beds in the apartment. 

See below for screenshots of what happened:

There’s something about random interactions like this that restores your faith in people a little.

Poppy

I love Poppy but sometimes she gets herself tangled up in such a way that you can’t help but stop and laugh.

Poppy got tangled up playing with a string and looks to be considering her life choices. She also likes to decide when Oana can do her puzzles.

Looking Back

If you missed the new Looking Back post from midweek, you can find it here.  I revisit Part 8 of the blog and comment on my thoughts about stock trading.  I also look back at the last positive trip we had to Romania.

What I am doing…

TV: MasterChef (BBC).

Audiobook: Heaven’s River – Bobiverse Book 4 by Dennis E. Taylor.

We’re still in the early stages of MasterChef and, as always, it’s good fun.  I’m not feeling as though I want to watch any other TV right now.  I might give Star Trek: Discovery’s last season a go, as I hear it’s linking back to a story from TNG, but I’m going to wait for the whole season to drop.  

I’m nearly done with all the Bobiverse books that have been released so far, but there’s another book on its way later this year.

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Financial Update

Assets

Premium Bonds: £13,325.00. 

Stocks and Shares ISA: £69,605.59. 

Fuck It Fund: £11.10.

Pensions: £74,681.49. 

Residential Property Value: £229,818.00. 

BTL Property Value: £148,301.00.

Total Assets: £535,742.18.

Debts

Residential Mortgage: £172,638.93. 

BTL Mortgage: £104,885.22.

Total Debts: £277,524.15. 

Total Wealth: £258,218.03.

Investment Income in 2023: £2,109.04 (target £10,000).

Now that the ISA window is open again it feels like I’m making more progress.  It’s purely psychological though as the great thing about investing in index funds is that they are constantly working for you.  

We are still no closer to selling our BTL.  The market in that area just seems to be at a standstill.  It’s frustrating because every month that goes by is costing us hundreds of pounds.  I don’t want to have to rent it back out again, and we’ve already dropped the price a couple of times.  A few friends and acquaintances are also trying to sell a property and are finding it equally difficult.  Hopefully, something will come up soon.

FI Update

In some ways, it feels as though FI will never come.  I know, intellectually, that I’m making progress each day but it can feel like a slog.  The thing about FI is that it’s not one size fits all, and it’s not a simple binary outcome where you either succeed or fail.  There are degrees of success and degrees of failure.  

Now that I’ve switched from BTL being the focus of my FI plans to a more traditional ISA bridge model, I regularly play about with the numbers to see when I can realistically look to retire.

FIRE Projections

Shortly after posting, it was pointed out to me that I got some of the below numbers wrong, as I failed to account for the growth on the funds I’ve already invested when working out what I need to invest to hit my bridge fund goals. Please refer to Post 234: Corrections for the updated, and accurate, figures.

Ask a hundred people aiming for FI what their projections are and you’ll almost certainly get a hundred different answers, with variations on portfolio allocation, SWRs, geoarbitrage, homeowner versus renting, and so on.  My projections are not meant to be my opinion on what is right for everyone, but rather what feels right for me.  Working through these projections can get tricky because if you change one variable it will impact other variables.

For example, if I need a bridging fund to last from 48 years old to 58, I need a decade’s worth of money and I’ll have about 7 and a half years to build that pot from my current age.  However, if I move the target age back to 50, not only do I have a shorter period to bridge, but I also have more time to build that fund.  It’s a balance between a better, later, retirement or an earlier and more risky retirement.

Unless something major happens I will not be able to retire at 45 and bridge to the age I can draw down my pension.  It’s also important to note that when I do retire, contributions to my pension will cease, meaning my pension fund has to be at a value sufficient for coasting.  

A few weeks ago I ran through some calculations regarding the State Pension without knowing where exactly those calculations would lead, and it was a popular part of that blog post.  I’m going to do a similar thing here, where I work through the numbers assuming I retire at 47, and bridge until 58, and then assume I will be withdrawing over a 30-year period.  

I’m now closer to 41 than 40, so to make things simple I’m going to assume that I’m 41 in these projections.  

Bridge fund required: 11 years at £21,600p/a (£1,800p/m) = £237,600.

Current bridge fund: £70,000, meaning I need to accumulate £167,600 in 6 years.  

I would need to invest approximately £1,950 each month, with an assumed growth rate of 7% to hit that goal.  I can safely say that will not happen barring a major boost in income or coming into a lump sum of cash.  Maybe if I sell the BTL or win on the Premium Bonds.

There’s one factor I’ve not considered above, though.  As I draw the funds down, the remaining pot will still be experiencing growth.  So, I’ve looked at this from another perspective.  If I need £21,600 and am willing to go with a 10% withdrawal rate, Firecalc suggests this would work 72% of the time.  Also, with this, I’d need a slightly smaller pot of money; £216,000 instead of £237,600.  It’s still too high a figure for me to realistically achieve though.

Let’s move it back to 50 when I retire.

Bridge fund required: 8 years at £21,600 = £172,800.

Current bridge fund: £70,000, meaning I need to accumulate £102,800 in 9 years.

To achieve this I will need to invest approximately £715 per month, which is much more realistic.  So, assuming this is what I’m aiming for, I need to move to Stage Two.

“Welcome to Stage Two”

I need to make sure that my pension has enough time to grow to a level that will sustain me for at least 30 years.  My current pension fund is approximately £75,000, and I’ll have nine more years of contributions and growth, followed by eight years of just growth.

Current pension: £75,000 + 9 years of contributions and typical growth = £253,000

Future pension: £253,000 + 8 years growth = £442,200.

Assuming I need an income of £21,600p/a, that would be a withdrawal rate of 4.9%.  Firecalc suggests a success rate of 75%.

It’s important to remember that as you get older, you’ll probably be spending less money.  So the assumption that I’ll need £21,600p/a is probably not accurate long-term.  If the figure drops to £18,000p/a (£1,500p/m) then the success rate increases to 94.4%.

What can we take from these results?

The first thing is that FI looks achievable over the next decade, but achieving it sooner requires more income or a lump sum from somewhere.  I’m also approaching the exercise with the assumption that I will have a comfortable standard of living in retirement; not quite FatFI but more than just subsistence living.  My calculations also assume that I’ll either have my mortgage paid off, with no other mortgage or rental commitments.  

This decade, my 40s, is going to be vital.  By the end of the year, I’ll be looking to drastically reduce our mortgage debt, if not pay it off completely.  One thing that I need to decide, as I mentioned earlier, is whether I want an earlier retirement that might be less comfortable or a later retirement that allows more financial freedom.

I’ve calculated that £1,200p/m would be sufficient for a basic standard of living.  So, let’s run one more set of numbers based on that.

Projected FI age: 47.  This leaves six years for me to build the necessary pot.  

Bridge fund required: 11 years at £14,400p/a = £158,400.

Current bridge fund: £70,000, meaning I need to accumulate £88,400 in six years.

I would need to invest just over £1,000 each month to hit the required total.  But what about the success rate?  Well, the WR here is 9.1%.  According to Firecalc, this would be successful 80% of the time.

Another point to note, and it’s a point I’ve made before, is that success and failure here are not instant events.  If you are trying to make a bridging fund last 11 years, you’ll have a decent idea after a couple of years how things are progressing.  You can then change course if needed, perhaps by working a few hours a week.  Earning just £100p/w would reduce the necessary withdrawal from £14,400p/a to £9,200.  As a WR this is now 5.8%, which Firecalc calculates a success rate of 100% over 11 years.

Pensions

There are people out there who don’t see the point in paying into a pension because they feel they’re too old, or because they’re too young.  I’ve heard comments from both these camps recently, and both of these viewpoints are stupid.  The best time to start investing in a pension is yesterday, with the second best time being today.  The younger you are when start saving, the more time that money has to compound. 

Take the difference between having £25,000 invested for twenty years, compared to forty years.  Assuming growth of 5% you would have £68,000 with the former, but £184,000 with the latter.  Time in the market is vital.  Compound interest really starts to show its power the longer you leave it to work.  So not starting young makes zero sense.

At the other end of the spectrum, you have people who may be in their 50s and who already have some pension savings.  Just because you have some savings, it doesn’t mean you shouldn’t go for more.  If you are on a minimum wage job earning £11.44p/h and working 35 hours a week, you will gross £400.40p/w.  

If you pay 5% of your earnings into a pension, you are subtracting just over £20 from your weekly wage.  However, your employer will have to make up the difference so that, in total, 8% of your wage is invested into the pension pot.  When the employer puts in their contribution you are building up your pension pot by £32 per week, of which £12 each week is free money.  

Assuming you are ten years away from retirement, this is thousands of pounds of free cash you are refusing because you don’t think it’s worth it.  This all assumes that the employer pays the absolute minimum required into your pension, whereas many employers offer a better rate of matching as a benefit.  Some employers even go as far as 2-for-1 up to a certain limit, i.e. if you pay 5% they will pay an additional 10%.

Final Notes

That’s all for this week. Thank you for reading, and don’t forget to like, share, comment, and subscribe. If you want to donate towards the running costs of the site, please donate using the form below.

Disclaimer

The views and opinions in this blog are my own, and do not represent the views or opinions of my employer, nor should they be considered advice.

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