Mailbox: Questions and Answers

Hello and welcome back to a bonus edition of Mortgage Advisor on FIRE. A new reader asked some questions and I thought other new readers may find the questions and answers interesting. If you have any questions or feedback for me, please leave a comment.

Sorry, I’m arriving VERY late to the party here, so starting with your latest blog.

No apology needed. Thank you for reading and getting touch.

I see you’ve factored pensions in to your wealth. How have you calculated that? Most pensions can’t be drawn until you’re 55 (some at 50 but with a significant sacrifice), so how will this aid you in retirement at 40 (or there abouts)? Also, there is usually a limit on the lump sum which can be drawn, so at some point I’d expect you’ll be waiting a long time for the remainder.

My pensions are the defined contribution variety, meaning that I can choose how, and where, the money is invested. I can then log in to my account with the pension provider and check the current value of the pension pot.

The current plan works in stages, and has changed since I started this blog. There are three distinct phases;

Phase 1 – The ISA Bridge

The ISA bridge is where you use the value of your ISA to support your retirement until you can draw down your pension. For example, if I choose to retire at 48, I would need a bridge to fund me until 58; the age at which I’ll probably be able to access my pension. For ease I’ll use round numbers. Let’s assume I need £20k p/a, I would need £200k to fund those ten years until I get access to my pension.

Phase 2 – Private Pension

Assuming that I’ve used up the entirety of my ISA in Phase 1, I’d need enough money to see me through from 58 to 68, at which point I’ll be eligible for the state pension. I would do this by withdrawing from the pension pot as and when I need it. Assuming I want to live on £20k p/a, and using a 4% withdrawal rate (a rate which is successful over a 30 year period 95% of the time), I would need a total pot of £500,000.

The above paragraph is a basic overview, but the actual withdrawal schedule would probably vary over time due to market fluctuations and changing demands on my income.

Phase 3 – State Pension

Once I get access to my state pension, assuming it still exists, I would be able to reduce the withdrawals from my private pension and supplement my income from the state pension.

Premium Bonds

Also, are Premium Bonds worth the investment? My BiL swears by them (he’s a boring accountant), and his return (prize wins) come in around 6% a year – which is well above the norm (think MSE says the average is closer to 2.5/3%). Or are you in it in the hope of that £1m jackpot?

This is a question with no clear right or wrong answer. The great thing about PB is your money is safe, and it’s relatively instant access. However, the prize fund isn’t amazing and the odds of winning the jackpot are extremely low.

I use PB as a store for cash I might need in the short-medium term. I could get a better rate of interest in a savings account, but I’ve made the decision that earning £30pm in interest is small change compared to the possibility of winning big. Other people are motivated purely by the numbers and will look to squeeze out every last penny of growth from their investments. It’s all about personal preference.

And finally, is your £10k/annum target for life? That doesn’t go far now, I dread to think how much less it will be in 15/20 years time – and I hope you live happily and healthy well beyond that too.

It’s not my target for life, and after this year I might stop tracking it. The annual investment income goal was when I was approaching FIRE from the angle of property investment. Income isn’t as important now. The priority is capital growth in my ISA and pensions.

I have a relatively simple life; my girlfriend and I have no kids, no car, we don’t drink alcohol or do drugs. We don’t need a lavish life, just a comfortable one. If I had £24,000 p/a to spend, that would be plenty. Obviously there is inflation, but generally one would expect stocks to grow at a faster rate with the odd correction every so often.

Apologies if you’ve covered any of this previously – I’ll start back from 2020 when I get some time! Interesting stuff nonetheless.

I’m always happy to talk about this, and thank you again for your interest. I’ve started going back through my blog from the beginning so I can tidy up, and update, my earlier posts. You can see the start of the updated series here. If you go back to the original posts, please excuse the numerous typos!

PS I think I played against you at Hillsborough in back in 2010/11?! 

I don’t think so? I’ve not played football in a long, long time.