Here's another reader case study where our panel of three experts give our analysis and suggestions.
Today we have a couple in their early 40s, who both have defined benefit pensions which will give them some security in later life. They're asking what they can do to retire early to enjoy lots of travelling with their kids.
Hi Andy
I wondered if we might be a useful case study for your readers.
We're 41 and 43. Both in local government so db pensions which make planning a bit more difficult.
2 very young kids. Have a savings rate of about 60% each and live reasonably frugally - just who we are, not by choice to get to FI really.
We did the Rebel Finance School course in Feb/ March and devoted a lot of time to doing the homework and getting our ducks in a line and managed to invest in the market in April - I was lucky and hit on dip day 7th April, put a bit more in over the next fortnight, partner got his money in over that first week or two as well, and have been steadily investing since.
Combined we have about £42,500 in SIPPs, waiting for the tax to hit, just over £84,000 in S&S ISAs. And a private Aviva pension of £27k.
I earn just under £40k, but this will drop to £35k next March as part of a restructure position change, and my partner earns £31k.
Goals - well, I wish I had known about this in my 20s and started to invest then so I could live off the income now, even if that meant going back to work in say 10 years, as I really wish I wasn't working during these early years of having children. Not because I want to be a SAHM, to be honest, I love them, but I don't think I'm the sit down and play type of Mum I thought I would be. But I'm struggling to work and manage everything at home, and being a calm, present parent is hard, and it would be lovely to have the freedom to have taken a career break/ drop to a nominal 1 or 2 day work week during this time to keep the db pension going!
But our plans now are to retire, or drop down to that 1-2 days in 10 years, sooner if possible. I thought I would do the maths in maybe 5 years and see whether we could 'retire' in say 7 years and let the funds coast the rest of the way.
The goal is to have the funds to be able to take the kids on epic adventure holidays, like 3 months in Canada or New Zealand, travel Europe, etc, in 10 years time when they're 11/16. To have the funds to match any savings they can save for, so they can travel in their late teens/ early twenties, or if they want to volunteer then we can offer to pay their expenses, for example.
Age(s) 43, 41
Kids & ages 1, 5
Earnings:
Salary £40k, £31k
Side hustle income £0
Monthly spending £1900 combined
Monthly spare gap for saving £1550, £1350
Work pension
DB or DC? Both DB
Regular contributions yes
Salary sacrifice?
Employer match details
Balance £6,800pa and £10,000pa accrued so far, if taken at normal pension age
Regular contribution
Provider
Funds
Former work pensions: no
Balance
Provider
Funds
Personal pension/SIPP:
Balance £44,231 (Aviva and IE combined) and £20,308
Regular contribution, into my Aviva £40 a month, personal SIPPs got a lump sum and will revaluate towards year end
Provider, Invest Engine (FWRG), Vanguard (FTSE Developed world) and Aviva (a mix of International passive fund and a with profits fund)
Funds
S&S ISA savings:
Balance £79,024
Regular contribution – yes, all of our gap
Provider T212, FWRG. Vanguard Developed World Funds
Cash ISA savings: No
Balance
Regular contribution
Provider
Interest rate
Lock-in period
Premium bonds balance £6000 EF
Other cash savings balance £6,030, £7,174 (this is now £3,500 less as just moved into S&S ISA, but using June’s tracker figures
Other investments balance No
Emergency fund balance £6k in premium bonds
Debts
Balances - no debt just mortgage
Interest rates
Own home:
Value Roughly £390,000
Mortgage balance outstanding £62,458
Mortgage interest rate 1.34%
Rate expiry date May 2026
Investment properties: no
Value
Mortgage balance outstanding
Mortgage interest rate
Rate expiry date
Rent
Agent costs
Maintenance costs
Void periods history?
Anticipated inheritances No (well, possibly down the line if parents don't need to go into homes, 4 parents in their 60s and 70s)
Goals Retire early? yes
Up/Downsize house? No, with young kids and both wfh so need the 4 bedroom.
Goals – to save enough to stop or go part time in about 10 years, hopefully less, and use the funds to go on big trips with the kids, be more available for them etc. Possibly do passion projects like crafts/ financial coach/ fertility coach, more travel.
Gifts to kids? - we have started S&S ISA for them, they have about £3500 in each. We plan to get ourselves off to a really good start then contribute more, debating £500/1000 into a sipp and then leaving it there etc. We would like to be able to offer to pay for their travel (or match their savings) or pay their bills if they want to do volunteer work after school/ uni, but we're a good way off that yet with them so young!
Mike
The couple appear financially well-prepared: they have a
healthy emergency fund; they paid off most of their mortgage and the remaining
balance is at a low rate; they are both contributing to workplace pension
schemes; they have additional private pension schemes and ISAs in place; and
have started saving plans for their children.
However, the goal to retire in ten years or less with
sufficient funds to enable long-term travelling with the children looks
difficult to achieve without substantial contributions to their ISAs and
private pensions.
The defined benefit pensions provide a guaranteed income but
at the current levels of contributions, these are only likely to produce
something like £34,000 of income at today’s prices. More importantly, these
will not be accessible in full until the couple are 68 in each case.
The private pensions help with this as they will likely be
accessible from 58 for each partner. It’s not clear how these are arranged but
consolidating them into one SIPP each will likely make them much easier to
manage and potentially reduce costs slightly.
Similarly, the healthy ISA balance of ~£80,000 can provide
some income if the couple want to retire before they can get access to the
SIPPs and private pensions if these have not yet been consolidated.
From here onwards, I’ll assume that all private pensions are
consolidated into the SIPPs.
The couple say that they have a savings rate of 60% but only
mention £40/month contributions into one of the private pensions and that the SIPPs
occasionally get a ‘lump sum’. Other comments about ‘hitting the dip’ suggest
that they’re holding onto the money and trying to time the market, whereas in
most cases it will be much more efficient to make regular contributions.
Having a large portion of your retirement funds tied up in
defined benefit pensions makes early retirement difficult, but the couple have
already taken the first steps in setting up parallel private pensions and
investing in ISAs.
Trying to estimate ten years into the future is difficult,
but we can have a go by constructing a year-by-year table and showing the
values of the various investments at each stage.
The focus here is on building a pot of money that will be
available in ten or so years and which can support the couple partly or fully
until the arrival of first the SIPPs and later the defined benefit pensions.
The lack of detail on things like SIPP and ISA contributions
makes it difficult to forecast into the future but I’ve taken some assumptions
based on their 60% savings rate which would suggest that they have around
£30,000 per year to invest.
This is a very commendable savings rate and a lot higher
than many people in the FIRE community, let alone those in the wider world.
Without it I’d have cautioned that retirement in ten years looks unrealistic,
but we’ll see what it looks like here.
I’ve assumed that any savings will be split 50:50 between
the ISAs and SIPPs. With potentially five years between retirement and SIPP
access, the ISAs need to be able to support the family for this period on their
own, then the SIPPs need to take over and support the family for another ten
years until they can get access to the defined benefit pensions.
I’m assuming that: wages go up with inflation; their
spending remains the same in real terms; the DB pensions go up with inflation
and incorporate an extra 1/49th of salary for each additional year
worked; ISA and SIPP investments go up at the growth rate (7% is chosen here as
a conservative figure). I’ve also assumed both partners are 43 to make it a bit
easier. The numbers are in the table below if you want to refer to them.
With these assumptions, the ISAs should be worth somewhere
in the region of £400,000 by 2035. By this time, their basic spending will have
gone up to somewhere around £30,000 so the ISA should easily provide enough
income to last five years (even allowing for additional spending on travel with
the children and some contingency for tax and volatility) until they can access
the SIPPs.
Any unused ISAs at this point would obviously enable them to delay accessing
the SIPPs, although it may be worth utilising their personal tax-free allowance
from the SIPPs even if they are still drawing down from the ISAs.
If they stopped work at this point, the SIPPs should still
keep growing and will be worth around £550,000 by the time they can access them
in 2050. Their annual spending will have gone up to around £35,000 by then, but
the SIPPs should be able to cover the ten years until they can access the
defined benefit pensions (with some contingency as above).
By 2060 their defined benefit pensions should be producing a
combined income of around £85,000 and their living costs will have risen to
around £65,000 so again, this should be covered with some contingency. Any
remaining funds in the SIPPs could allow them to defer drawing down from the
defined benefit pensions and obtain a higher income from them.
These are very rough estimates and not be taken too
seriously, but they give an idea of what sums could be involved.
Any kind of projection is likely to be very inaccurate and the more so for the
longer it runs.
The table here is entirely dependent on the numbers given
for inflation and growth and will give very different results if these two are
changed.
However, by replacing the projected numbers with real ones
each year, the couple will be able to get a picture of how their finances are
evolving. Once a few years of real data has been entered, the whole table will
start to be based on reality and the inflation and growth figures can be
tweaked with actual ones or adjusted in line with recent data.
It is worth noting that the state pension will also be
available around the same time as the defined benefit pensions. This adds
another significant chunk of income to their finances and it may be worth
thinking about gifting to the children at this point.
By showing that the numbers could be made to work within the
assumptions given, it looks like retirement in ten years might indeed be a
possibility if they continue to and maintain their savings rate. While this
nowhere near a guarantee, it is a suggestion that the couple could indeed start
plans with a view to retiring in ten years with a careful eye on their
investments and spending.
At the very least, it suggests that moving to part-time work
may well be an option for them around that time: the proposed plan for
long-term adventures with the children may raise their spending levels considerably
and if not covered by their investments, a small period of part-time or
contract work might give them sufficient to cover the additional outgoings.
John
A great starting position
That is an impressive savings rate from two close to average
salaries especially with two children.
Also, you are golden once you reach state pension age as
your defined benefit plus state pensions more than cover your required expenses
at that point.
You are also a decent way on the road to retiring early with
your approximately £150K of investments.
All this means is that you are already in the FIRE groove
and the most important part, which is the mindset, is mostly or fully there.
Your goals look achievable.
Things to think about
Your spending figure is impressively lean. Does it include
allowances for all the long-term but irregular costs you have? Occasional costs
such as replacing kitchen, bathroom, car, appliances, phones, and other home
maintenance?
“Apply own oxygen mask before helping others.”
What is the reasoning for contributing to junior ISAs at
this point? You normally only do child investments if you are planning for
inheritance and after you are already FI. Or already filling all your ISA and
pension allowances.
A nominal amount to get them thinking about money is fine,
but generally you build your own FI fund first, then you can gift as much as
you want.
Your post state pension income is rock solid as a couple.
Even if something were to happen to one of you, there seems to be enough DB
plus single state pension to support you in later life. Though how you bridge
from earlier retirement is likely to change in that circumstance. You need to have
contingency plans.
I guess one fly in the ointment for your savings rate is the
end of mortgage fix next year and a hike in mortgage payments. How much will
that reduce your ongoing savings rate?
Financing the dream – bucket maths to explore the realm of
the possible
There are two ways to finance the big trips. Either accumulate
a one-off pot to do so or increase your required income to allow you to do this
every few years. In the same way as you allow for big expenses like a new
kitchen, bathroom, or car every few years. I will assume the latter and an
annual income of £30K after-tax for my bucket maths.
Your DB pensions provide a solid foundation on which to
build. I read those as approximately £7K/year and £10K/year now, rising by
about 10% of salary every 5 years you work (at 1/49 accrual rate).
For simplicity I will assume your salaries stay the same as
we will work in today’s money.
Assuming you work for 10 years more that’s DB pensions of
approximately £14K/year and £16K/year in today’s money at state pension age.
Adding those on to state pensions gives a pre-tax income of £54K/year or after-tax
income of £48K/year. More than you need.
That suggests you could bring the DB start age forward to
reduce the bridging pot required, smooth out income and retire earlier. I
assume there is an actuarial reduction of about 5% of income per year early
(obviously find out exactly what this is).
Assuming you both retire in 10 years and take the DBs at
state pension age (68?), then standard FI maths suggests you would need around
£550K of investments split one-third ISA and two-thirds pension. That number is
not as bad as it sounds as that only requires saving about £20K/year with
average returns, due to compounding.
Bringing the DBs forward 10 years with the assumed 50%
actuarial reduction drops them down to £7K and £8K per year. Covering half the
required income from age 58. That then drops the investments required down to £400K,
about 50% ISA. That requires around £15K invested per year.
Retiring at age 50 you need £480K (60% ISA, 40% SIPP) and to
be investing around £30K per year, as you are already doing.
Remember all this is bucket maths in today’s money with
average historical returns.
You have options – now comes the hard part
From those rough calculations its clear you have options and
are well on the way to early retirement. Plenty to think about.
Your retirement age determines the percentage of investments
that can be in SIPP, which costs less earnings than the equivalent amount in
ISA. Therefore, you want to maximise SIPP until the pips squeak while leaving just
enough in ISA. Though that balance is tweakable later as long as the gap isn’t
large and you still have earnings to cover pension contributions.
I would start to model various retirement scenarios and
contingencies and replace assumptions with reality. It might take you a few
years to decide on the course of action and understand all the moving parts. You
have time. And of course, the stock market may have different ideas. Good luck.
Andy
This one is interesting because in some ways it is backward to most people's situations. You are on track to have more post-retirement-age income than you need, so you don't need to build a self-sustaining investment pot - instead you need a pot to burn through on your way to your DB pensions.
First off I'd like to say that living on about £23k for a family of four is a great start. You're right when you say that you are frugal by nature. It makes everything else easier.
Your DB pensions accrued so far, when added to your State Pensions, will give you about £40k of gross income at normal pension age. This will already comfortably exceed your spending, and it will become larger as you stay working there for longer and accruing more entitlement. I think you will be in a position to draw upon it earlier.
Taking your DB pension early reduces it by around 5% per year. The snag is that the State Pension part of your retirement income can't be taken early, and that will be the lion's share of your £23k spending. The most useful takeaway from this is that you'll have excess income which you can use to support your kids at that point. For me this deprioritises use of JSIPPs.
It also means that you can afford to reduce your DB pensions by taking them early. At the extreme, taking them ten years early may cover about half of your spending. I'm making a guess here as to how much more DB entitlement you accrue. But this does mean that as you head to personal pension access age at around age 58 you can afford to have a relatively small pot built up. I think I'd want it to be somewhere above £100k in today's money, but not all that much above it.
You currently have about £64k in personal pensions. With about 16 years until access, left on its own that is likely to become a pot of about £200k in today's money. That's ideal. In that situation I wouldn't throw much more money at the personal pensions, for use as retirement income, though we may be able to use some of it later on to help your higher spending on travels in the time after pension access age.
(One thing to note here is that you should figure on voluntarily paying each year to get your State Pension up to maximum. It's a great deal.)
We can now turn our attentions to your more immediate goals.
Current invested wealth in ISAs:£79k.
Contributions: 1550pm + 1350pm = £2900pm x 12 = £34,800pa.
Plugging those numbers into a compound interest calc, if you got typical investing conditions, in five years you may have a pot of around £320k in today's spending power.
In ten years it may be £660k.
We'll come back to this.
How much do adventures cost?
I've done a lot of travelling. For many years I figured on spending £100 per person per day, and this worked well for everything from cruises to European citybreaks to long-haul slower travel. Prices have now moved on a bit, so perhaps a figure like £130 is more reasonable. You're frugal, like me, so these figures may not be far off.
Families of 4 travelling together will often have economies of scale. In many destinations a family room will be available for the same or not much higher price than a double. Four can share one hire car. Then there's the fact that not all of your spending on travel days is additional to your base living costs - you are still eating only the once.
Let's use a guesstimate of £300 per family per day, across all sorts of travel. That would give us a £27k cost for a 3 month trip.
Should we assume one of these 3-month epic adventures per year? That would give us desired spending of £27k plus the baseline £23k spending, so £50k per year.
Let's loop back to those savings pots and see how they apply to £50k annual spending.
In ten years time you'll be 53 and 51. The £660k pot would need to sustain you for 6 years until pension access age. That pot could clearly sustain such withdrawals and is too conservative.
In five years time you'll be 48 and 46. The £320k pot built by then would need to sustain you for 11 years until pension access age. On a compound interest calc that pot runs dry.
We're hunting, but we already know that you can retire in between 5 and 10 years time.
In seven years time you'll be 50 and 48. A £440k pot built by then would need to sustain you for 9 years until pension access age. On the compound calc this leaves you, on average, with about a £200k pot. Nice.
If we hit poor investing conditions you'd delay your plans, but it looks to me like you're broadly on track to retire in about seven years.
This does include the big assumption that you'd spend an extra £27k per year on travelling for a big 3-month trip, and continuing this until state pension age, and longer if you get that £200k excess at the end. Maybe that will change as the kids get older? Perhaps the profile will be fewer family trips, more couples trips (which will also be a bit cheaper), and then more of this money may go to supporting the kids in other ways - any volunteering or travel goals they have of their own, or perhaps buying a home.
You're on track for about seven years. You could build some extra padding into the plans by working longer. Or you could slow things down by going part-time before then. That part is up to you.
That may also be around the time that your mortgage is cleared. We've not talked about that, but if the payments are in your current spending then it's covered anyway.
JISAs and JSIPPs
Contributing to Junior ISAs can be tricky. The kids get full control when they reach 18, and there are only your stern words stopping them from blowing the lot on vodka and Lego. (Or whatever their vices are.) Many parents prefer to save in their own accounts with the intention of gifting later.
A Junior SIPP is a massively long-term project, but the rewards are equally massive. A £1,000 contribution into it during childhood may equate to around £2,000 per year of income in retirement, in today's spending power.
I think £4k is about the max to put into a JSIPP. If you were to contribute £4k in infancy, with top-up that's £5,000, and by age 58 when they get access that may be a pot of £265k in today's money. It would sustain ten years of early access at £24k per year, followed by ongoing withdrawals of £12k a year to top up a state pension to £24k spending. And this is on top of any compulsory workplace pension contributions they are obliged to make.
With your own saving, you are getting to the point where you'll max out your own ISAs. If you do that, and are faced with instead investing on a taxable basis, that would push more into wanting to use the kids' allowances.
Conclusion
You're in great shape, due to your frugal living. Another seven or so years of this should set you up for life. It may be that you want your kids to be a bit older before you embark on the big adventures - you had talked about ten years, so maybe that would suit you going part-time somewhere along the way. It all depends whether you prefer to work longer at a gentler pace, or go for the travel adventures as soon as possible.
I'm very conscious that there are a lot of moving parts here. How much will you really spend on travel, how much will you travel each year, and for how many years will you maintain that level of spending before slowing down? Will you throttle back and work part-time?
You have enough encouragement to keep on doing what you're doing and begin to make retirement plans with a view to retiring in the next 7-10 years. But beyond that, I think you will need to keep reviewing the numbers along the way, as well as firming up your spending plans. There's going to come a point where you have to make decisions about whether to work a little longer in order to fund more travel spending.
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