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How much wealth do I need in my ISA versus my SIPP to achieve financial independence?

How much wealth do I need in my ISA versus my SIPP to achieve financial independence? post image

This is part three of a series on how to maximise your ISAs and SIPPs to achieve financial independence. Part two explained why the tax advantages of personal pensions make them superior to ISAs later in life. Be sure to also read the first part of the series.

To make the most tax efficient use of your savings, your ISAs need only fund the years between early retirement and your minimum pension age.

Obviously it’d be marvellous if our ISAs piped hot income streams into our lives long after that, but our primary concern is to fund them so we’re unlikely to run out of money before our personal pensions take over.

That’s because there’s no point oversaving into our ISAs, either. That would see you delay financial independence by paying tax that would have instead been clawed back through pension tax relief and added to your growing nest egg.

The ISA/pension balancing act

Should investment returns turn out to be poor, we would expect our ISAs to be running on empty as we dock with our SIPPs.1

We would then discard the ISAs like empty booster rockets and ride on using our SIPPs, and eventually a State Pension slingshot.

To put that plainly:

Phase 1 – You need to be able to draw all your income needs from your ISA / taxable accounts without fear of running out of money,2 until you reach the minimum pension age.

Phase 2 – You need to be able to draw all your income needs from your personal pension, once you can access it, without fear of running out of money until you die.

Lifeboat – It’s quite likely the State Pension will provide some support later in life. The lower your income, the older you are, and/or the sketchier your plan, the more important the State Pension becomes.

We’ll construct the plan so the State Pension is primarily a back-up and, later in the series, we’ll draw upon research that shows how you can adjust your plan to account for it.

How much income and for how long?

How much annual income do you need in retirement? And how many years do you need it to last?

These are the big two questions to answer for each phase of our plan.

Guesstimating your required retirement income is not so hard, especially if you already track your expenses.

Let’s say you’ve decided you’ll need £25,000 per year for the rest of your life. (We’ll assume all calculations are in real terms, so we’re accounting for inflation.)

How much wealth do you need in your ISA to sustain £25,000 in annual income?

It depends on how long you need that income to last (Phase 1) before your pension income becomes available (Phase 2).

There are two basic ways to fund your Phase 1 pre-pension, post-retirement income:

1. The usual sustainable withdrawal rate (SWR) approach – a portfolio of mixed assets in your ISA that you ‘create’ an income from by selling a planned proportion each year.

2. Liability matching – a big pot of cash or bonds3 that won’t grow much or at all after-inflation, but that starts out big enough to take your desired income from each year until you can crack open your pension.

Let’s look at both in turn.

Method #1: Drawing down an ISA portfolio

The infamous 4% rule says we need to build wealth that’s worth 25 times our annual income requirement to become financially independent.

25 times your assets comes from: 1 / 4 x 100 = 25

£25,000 x 25 = £625,000

So we need £625,000 to take an annual, inflation-adjusted income of £25,000 at a 4% sustainable withdrawal rate (SWR).

But the 4% rule applies specifically to 30 year time frames.

What if you only need your ISA to last ten or 20 years until your personal pension comes on stream?

Then your sustainable withdrawal rate (SWR) from your ISA can be higher.

Let’s say you can use an 8% SWR to sustain spending from your ISA for ten years.

We can save much less into our ISA in that scenario:

1 / 8 x 100 = 12.5

£25,000 x 12.5 = £312,500

Now we only need ISA wealth of approx £312,500 to draw an income of £25,000 for ten years. After that, we will look to rely on our personal pension income, if our ISA is exhausted.

Bear in mind that a SWR calculates the maximum amount you can take from your portfolio without running out of money, based on historical returns data. (Terms and conditions apply.)

In most scenarios, you actually end up with a healthy surplus in your account when you use an appropriate SWR, even if your retirement was blighted by economic times of darkness such as the Great Depression, Stagflation, and the World Wars (provided you were on the winning side).

Nonetheless, we want a plan that minimises the chances of being forced back to work against our will.

We’ll therefore use cautious SWRs throughout this series that suit our possible timeframes – no matter if we need our tax shelters to last ten years or 50.

Method #2: Liability matching

The safest way to fund your retirement is to match your future expenses (liabilities) with a treasure chest of near risk-less, guaranteed income.

A ladder of inflation-linked bonds would be ideal.

In the ISA example above, a tranche of your bonds would mature every year, depositing £25,000 of inflation-adjusted income into your account for each of the ten years until you can access your pension.

Alternatively, you could save up enough cash to cover the ten years, remembering to factor in an allowance for inflation.

Liability matching with low risk assets generally requires more capital than investing in an equity heavy portfolio. The more resources you have, the less growth you need, and the less risk you need to take. It’s a trade-off.

My assumptions suggest that it’s likely quicker and safer for everybody to save cash4 to bridge an eight-year gap or shorter, between Phase 1 and Phase 2.

I’ll go into more detail on this later in the series.

Minimum pension age

Our ISAs need to span the gap between our early retirement age and our minimum pension age – the latter being when we can officially smash open our defined contribution pensions like piñatas.

Which will be when exactly?

Unbelievably – ahem – that’s not so easy to pin down.

Currently you can get into your defined contribution personal pension from age 55.

But the 2014 Coalition Government (remember them?) indicated that the minimum pension age would rise to 57 in 2028. Your minimum age would then be set to ten years before your State Pension age, from then on.

Thing is, they didn’t get around to legislating the minimum pension age change. So it’s not yet law. And then Brexit happened. Eyes were taken off the ball. Now no one knows what’s going on.

We don’t know whether the rise in the minimum age will take place as mooted. But many industry insiders say the change is still coming and can be legislated whenever the government likes, so it’s best to assume the worst.

If you were born in 1972, you will be 55 in 2027, so you should be fine, right? You can tap your pension in 2027 before the minimum age hikes to 57 in 2028.

Not so fast. There has been talk of tapering the change in. It could be you’re still caught out, even if you’re 55 a few years before 2028.

It’s a mess.

We’ll play it safe by assuming that our minimum pension age is set to ten years before our State Pension age for the purposes of the upcoming and unbelievably exciting case studies we’ve got planned for this series.

These case studies will also show how to calculate how long your ISAs will need to last (roughly), given your current circumstances.

How much do you need in your personal pension?

By the time you retire, your portfolio – when combined across all accounts – should be funded to last the rest of your life. How long might that be? If you’re age 60 or less today then you have at least a 10% chance of living to age 98 according to UK life expectancy data – unless you have good reason to think otherwise. There’s an even greater chance that one of you could survive if you’re part of a couple.

SWRs tend to reduce over longer periods of time, but the curve flattens out. Multiple research papers point5 to a 3% SWR being suitable for retirements of forty years and over – which likely accounts for the majority of people on the FI fast track.

Carrying on the £25,000 retirement income example, the wealth needed to sustain lifetime spending for over 40 years at a 3% SWR is:

1 / 3 x 100 = 33.333

£25,000 x 33.333 = £833,325.

We’ve established that the ISA portion of this wealth target needs to be £312,500 to ensure it doesn’t run out before the pensions come on stream ten years later.

Therefore, your personal pensions need to be funded to the tune of:

£833,325 – £312,500 = £520,825 by the time you pull the trigger.

My thanks to Monevator readers Aleph, Naeclue, and Oxdoc whose dogged persistence corrected my mistaken assumptions when this article was originally published.

Other income streams – So you’ve got other income streams like buy-to-let property and defined benefit pensions to tap into? Lovely. Just deduct those additional income streams from your assumed retirement income when they’re available. Your portfolio will only need to cover the remainder. We’ll cover the State Pension and DB pensions that become available further down the track at a later point in the series.

In the next post, we’ll cover how to choose a credible SWR that matches your personal timeframe and accounts for a low interest rate world, non-US investment returns and the implications that has for your asset allocation in retirement.

Take it steady,

The Accumulator

  1. Self Invested Personal Pensions. []
  2. We mean without fear on a practicable level. Ultimately there is no absolute safety. []
  3. We’re talking a ladder of individual bonds (not a fund) with staggered maturity dates. Each tranche of maturing bonds delivers a payload of capital to match your income needs per year you need to fund. Inflation-linked government bonds are best. A Purchase Life Annuity could also conceivably fit the bill. []
  4. A lack of suitable bonds makes it hard to build an inflation-linked bond ladder in the UK. []
  5. We’ll cover the research in more detail in the next episode in the series. []
{ 113 comments… add one }
  • 1 AVB January 28, 2020, 10:17 am

    Sounds like a good plan and very similar to my thinking (build up a S&S isa, move it into cash/bonds – realise there’s a timing risk!), then fingers crossed the pension doesn’t go Pete Tong inbetween (though i expect to have a couple other levers).

    One question; did you mean to say ‘deduct from retirement expenses’ in this paragraph below, i may have misunderstood;

    “Just deduct those additional income streams from your assumed retirement income. Your SIPP will only need to cover the remainder. ”

    Look forward to the next post and refining my plan more.

  • 2 Neverland January 28, 2020, 11:09 am

    Depressingly kinda matches my own back of a Post-It note calculations

    In reality its several hundred thousand pounds more as £500 a week before taxes isn’t likely to fund rent, so you need a house/flat fully paid off on top

    So really more like £1.5m all in, more down south / less up north

  • 3 Mr Optimistic January 28, 2020, 11:52 am

    Thanks for the article. Interested in your comment about using cash for a sub 8 year timeframe. Look forward to seeing that explained, but I think I can guess the reasoning.
    There are a lot of complications you could add on, eg bequest motives etc. One thing I would say is that with a mix of ISAs and pension you might be reluctant to actually exhaust your ISA as that represents your source of capital should you suddenly need a wodge.

  • 4 Rob Jordan January 28, 2020, 12:30 pm

    Thanks, this series is very relevant to my situation. I’m just about to move from the ISA drawdown phase to the SIPP drawdown phase. Happily, at age 56, I still have ISA funds, but, lacking any other income, it seems appropriate to use income tax allowance by drawing on the SIPP. Up to now my plan has been clear to me, but I confess I’m still far from clear about how to optimise the various drawdown methods for my circumstances Some guidance on this would be super helpful. Maybe a later episode?

  • 5 Amit Kapoor January 28, 2020, 1:17 pm

    Whilst the objective of the series and the narrative is helpful, I wonder if an easier way to approach the whole problem is through a lifetime cash flow planning tool. It is quite easy to profile ISA and pension drawdowns, either sequential or in an optimal mix, and then work back to define target corpus for both pensions and ISAs. Then look at what contributions are necessary today to reach that target corpus for each vehicle.

  • 6 John B January 28, 2020, 3:07 pm

    For the 10 year ISA bridge if you assume inflation at 2%, then your withdrawals rise over 10 years from 25k to 30k, and so even if you put your initial 300k in a zero-interest current account you’d have £26k left over. With 1% interest paid on the cash, £42k left. So you don’t need to have your ISA in the market. If you do, then downside might be 0, but the upside could be £150k if your total return is 4% over inflation.

    So if you are cutting it fine, get out of the market. But if you have a year spare, stay in and reap the rewards.

  • 7 Gentleman's Family Finances January 28, 2020, 4:06 pm

    I think that more details are needed for individual circumstances.
    The time it will take one person to accrue an ISA worth £300k is maybe 15 years if you ignore growth (and ignore inflation and neglect that the ISA limit may change in the future).
    You don’t need to use ISAs and taxes on investments are lower than those of work but it goes to show that FI is not an overnight affair.

  • 8 Adam January 28, 2020, 4:06 pm

    Mr Accumulator – the problem with the SWR model is you are only drawing down the interest not the principal. In your example you need to have an ISA/ personal pension pot over £1.1m excluding your house, which is unrealistic for most people. Neverland above says he needs over £1.5m. Again unrealistic for most.

    I have put some figures into an amortisation calculator. If you start with a pension pot of £400,000 and assume a retirement period of 32 years and an interest (investments annual growth) of 5%, this gives a monthly repayment of £2,090 or £25k per annum. This is a more realistic target – to save a pot of £400k, which grows by 5% p.a., an early retirement of 32 years from 57 to 89 and drawdown of £25k.

    That way you don’t need a £1m+ ISA/Pension pot.

  • 9 Brod January 28, 2020, 4:24 pm

    @Adam – yes, but what if a crash cuts the value of your pot in half? Then your withdrawal rate of 6.25% (25k÷400k) but 12.5% Ouch! Or, more likely, some other scenario where you don’t get your 5% growth?

    Sequence of return risk is why you need these huge sums. And so you’re likely, but not guaranteed, to be a rich corpse.

  • 10 Naeclue January 28, 2020, 4:34 pm

    @Mr Optimistic Don’t forget that up to 25% of your pension can be as lump sums, free of tax, so as soon as you become old enough to take your pension capital becomes available again.

    @Rob Jordan, yes it is difficult deciding what to do. People will likely end up with ISAs and pensions/SIPPs. Once you start drawing down from the SIPP you may even be able to build up your ISA again.

    If you care about the pension lifetime allowance, death benefits, and inheritance tax it is very complicated to work out what to do and it does not get much easier once you make a plan as circumstances continue to change. For an example of a conflict, take our current SIPPs. At present we limit withdrawals so that we fully utilise the basic rate tax band. We do that for the obvious reason that we don’t want to pay higher rate tax unless we have to, but want to use up the basic rate tax band as we are heading towards paying LTA charges at age 75 if we do not. Is that the right thing to do? Not necessarily, as if one (or both) of us dies before age 75, the remaining pension can be drawn by entirely free of tax and the pension will not be subject to any more LTA tests.

    As well as that, drawing the amount of pension we do means we are not running down our ISAs, which means we have a running inheritance tax issue. So you then start to consider inheritance tax. A good IHT mitigation is to give money away that you think you will not need, but how much is that?

    If you think it is complicated getting to FI and managing the right amount into pensions/ISAs, you may find it does not get any easier once you get there!

  • 11 Kerry January 28, 2020, 4:35 pm

    Great series of articles, thanks very much. They have definitely got me thinking about my retirement and that I am probably going to be a rich corpse (to steal Brod’s analogy). This gives me hope that I may be able to retire earlier!

  • 12 Matthew January 28, 2020, 5:25 pm

    @ta – “Now we only need ISA wealth of approx £312,500 to draw an income of £25,000 for ten years.”

    That seems to assume no growth but covered for inflation, might as well have it cashlike from the point of 10 years before pension

    Low earners can just isa everything now and (within earning limits) sipp it later because they dont have to worry about using up allowances or tapers or deferring so much and it doesnt matter when you apply the 20% uplift, they could even transfer a lisa into a sipp at 60 (within limits if) theyre drawing the sipp
    They can also recycle pension lump sums a little more

    Also bear in mind that I imagine inheritances will go up
    And I think its worth releasing equity before the nursing home gets it

  • 13 LALILULELO January 28, 2020, 6:07 pm

    Really enjoying the articles and comments. I doubt I’ll ever face the first world problem of even maxing pension and ISA contributions for my wife and I, let alone threatening the LTA. As such its a simple combination of company pension (standard 10% of salary without me needing to match) being periodically transferred out to a cheaper SIPP tracker (where my monthly contributions go) and an ISA for the rest. A relatively small mortgage which we are overpaying should hopefully kick start super saving once it has paid down in ~4 years (I realise I’m leaving probably a fair bit on the table with such low interest rates on mortgages but I’m risk adverse and couldn’t cope with potential sleepless nights). RE in 10 years is the pipe dream but potentially achievable with a stiff wind.

    As an aside, at the risk of being accused of bone-idleness, is anyone willing to share their calculation spreadsheet (via google sheets)? I always find it fascinating seeing how others model these things, as inevitably its far more elegant than anything I can conjure up and provides a more advanced starting point.

  • 14 C January 28, 2020, 6:33 pm

    Continuing to enjoy this series immensely. As someone who bodged their way to FI – I like to consider a bit of flex in the system. You can have lean and/or fat years in terms of what you take out of the pot, you might top up with a bit of work or not (or bartering!), you might take in a lodger or AirBnB or access any one of a number of other websites that allow you to rent your stuff out, engage in a bit of geoarbitrage and go and live somewhere cheaper for a while etc.

    And being born in 1972, I am immensely interested in when I’ll be able to take my private pension. I guess it’s hope for the best, prepare for the worst.

  • 15 Jonathan January 28, 2020, 7:28 pm

    Can’t help wondering if TA has simply set up this discussion as a tease for his future pronouncements on the Withdrawal Rate conundrum.

    After all his suggestion of £1.1M to retire age 47 (8 years before accessing SIPP) is a sum that would last 42 years simply drawing down cash, so an ultra-safe investment that just held its own with investment would suffice for the average retiree. Depending of course on how long you actually live, but very modest earnings over inflation would add years of income beyond. At the opposite extreme Adam is happy to assume an investment that increased by inflation plus 5% – historically feasible on average but risky in a real world without a consistent sequence of returns.

    I suspect the answer has to be an approach that incorporates risk mitigation, i.e. goes beyond a simple approach of a planned withdrawal rate, whether or not across two savings vehicles. Of course it is more complicated to model than a single percentage, but it is what anyone needs. For example Naeclue points out that 25% of a SIPP can be recycled into ISAs: is there a model where this contingency is held to cover years in which the SIPP investment has fallen short of a minimum gain? Or should some of the SIPP be used to buy an annuity (to be supplemented eventually by the state pension) to provide a floor which makes maintaining a withdrawal rate less critical?

    Planning to leave inheritances can be ringfenced as a separate financial saving decision, but inheritance taxation still needs thinking since the less discussed side of the longevity uncertainty means dying with significant assets intended for future income. Perhaps when TA has finished the current series he can apply his expertise to inheritance tax planning?

  • 16 OxDoc January 28, 2020, 9:49 pm

    Nice series of articles.

    I don’t get the argument about needing enough in a SIPP for a 3% SWR separately from funds in an ISA. If you combine them and have enough in the ISA that you’re unlikely to run out before you can draw from the SIPP, then it should be essentially equivalent to having all the funds together at the start, and you would just require the SIPP+ISA amount to be enough to fund long-term withdrawals of 3%. (It’s no different to have, say, 25% of funds in an ISA and 75% in a SIPP and withdraw from the ISA until you can withdraw from the SIPP than it is to have a portfolio where you just declare you’re not going to withdraw from 75% of the assets until a certain point – if the first 25% doesn’t run out, it makes no difference to the overall portfolio survival probability – but you have to make the probability of the ISA portion running out sufficiently low, of course).

    This also illustrates a potential pitfall of putting the ISA all in safe assets – the SWR calculation comes out best for a portfolio with a majority in shares, so enough would need to be held in shares in the SIPP so they make up a big enough proportion of the SIPP+ISA portfolio, else you would need more in total. Though it would seem to make most sense to hold as much as possible of the safe assets in the ISA, so the optimal approach may be quite close to what you suggest for people with only just enough in ISAs to last ~10 years and enough in a SIPP to last beyond that.

    I think this portfoliocharts calculator is useful for estimating how much the SWR varies with the time the portfolio needs to last for: https://portfoliocharts.com/portfolio/withdrawal-rates/ – you could use the time until the SIPP can be accessed as the “retirement length” for the purposes of estimating the withdrawal rate you can use for the ISA.

  • 17 No such thing as a free lunch January 28, 2020, 9:58 pm

    I’m enjoying this thread but it’s realistically unachievable for the vast majority of people off their own back. To achieve the kind of sums being talked about in ISA and SIPP saving requires both high earnings and the discipline to live a life of someone on very low earnings; or a future significant post 2008 type equities tailwind that even the most optimistic would deem unlikely in the coming years. The discussion makes no reference to the limits of earning more i.e. that annual pension contributions are capped to a maximum of £10k, which significantly removes the benefit and ability to build pension wealth.

    The “sweet spot” of earnings is therefore about £110k to benefit from full £40k annual allowance pension saving, implying c£70k of after tax earnings. £20k into ISA, £40k into SIPP at c£24pre tax relief cost is a £44k cost leaving c£26k for mortgage repayments, living costs, holidays, contingency fund, kids etc.

    It’s perhaps realistic for a few years but very few will have the discipline to do it for the required 10 to 15 years. the alternative is clearly work longer or live off less. It would be great to see some analysis and discussion on the practicalities of actually achieving the type of sums needed.

  • 18 W January 28, 2020, 10:24 pm

    Any thoughts on whether it’s better to hold your target asset allocation (stocks:bonds) in each vehicle (SIPP, ISA, standard trading account if these are maxed)? Or to load one or other with more of the stocks or bonds and use one or other to hold the required asset type to balance the whole portfolio?

    If you get a bad sequence of returns and want to preserve your depleted stocks holdings, you may want to sell bonds rather than stocks. So should we factor this scenario into how and where we hold our target asset allocations?

  • 19 Naeclue January 28, 2020, 10:28 pm

    I think TA is being very cautious here as he has only assumed a growth rate equal to inflation while the ISA is being drawn down. Even so, assuming no other taxed income stream, the figure of £833,325 in the pension pot can be reduced a little as it does not take tax and tax relief into account. For an amount NET after tax, you need a GROSS amount in the pension pot of (NET – PA/5)/0.85, where PA is the personal allowance. so for NET = £25,000, PA = £12,500, GROSS = £26,470.58. This assumes 20% tax relief on the way in and 20% tax on the way out. To verify this:

    PCLS = £26,470.58/4 = £6,617.65, leaving £19,852.93
    PA = £12,500, leaving £7,352.93 to be taxed at 20%
    After tax amount = £7,352.93 * 80% = £5,882.34
    Total £6,617.65 + £12,500 + £5,882.34 = £25,000

    In order to get a GROSS amount of £26,470.58 into the pension, you only need to contribute 80% of this as tax relief makes up the the other 20%. That means you “only” need to save £26,470.58*80% / 0.03 = £705,882 into your pension instead of £833,325. That’s about 15% less.

  • 20 Michael January 28, 2020, 11:03 pm

    I’ve been trying to figure out my FIRE plan and calculate how much I need in my ISA & SIPP while reading these articles. I had started an admittedly crude (and possibly hopeful) spreadsheet if anyone would like to help copy/iterate on and embed some of the variables discussed to that we can customize to our own situations.


  • 21 AVB January 29, 2020, 12:42 am

    Observations (not advice!!). Hope you don’t mind me commenting.

    (1) how do you know so far in advance exact date and amount of inheritance? Have you considered they may instead spend that money – care home fees are ~£3k a month

    (2) doesn’t look like you’ve factored tax into the pension withdrawal as drawing same amount as had been from the isa. But only first 25% is tax free and your over the personnel allowance.

    (3) why stop drawing from the isa when so much left? The pension withdrawal is taxed, why not put off paying tax as long as possible (also may be an Inheritance tax benefit to leaving a pension over an isa – I think!)

    (4) assume you want to work part time for as long as you do? As you have a lot left in the isa at the point you draw the pension, and you don’t seem to plan on ever withdrawing from isa again. So what’s it for and do you need that much?

  • 22 Matthew January 29, 2020, 1:08 am

    @LALILULELO – you might not fill pension/isas now, but do you think you’ll inherit a significant value of property? – some people can go from never needing allowances one day to having capital gains to diffuse

  • 23 James January 29, 2020, 7:32 am

    Hi. Enjoying this series as i’m also at this stage of planning (1975).

    To me it makes sense to consider the state pension also. Why agonise in such detail over sequence of returns and SWR, but then ignore £8k pa (or 32% of target) for life (from 65-67/68)? I get that the ‘guarantee’ is subject to change (and contingent on 35 years NI), but that’s just another risk.

    Michael – re your spreadsheet, mine very similar but I use varied annual withdrawals for ISA period (tax free), pension period (subject to income tax), and post-state pension age (less amount expected from state pension).

    And nice to stress test with lower SWR, no inheritence and still find it doesnt go negative!

    The other thing I wonder about is risk appetite in later years. Will i still have the stomach to monitor the portfolio through my 70s? Or should I expect lower returns in those later years as I switch to cash/bonds?

  • 24 Mr Optimistic January 29, 2020, 7:40 am

    @W. Suspect in theory it doesn’t matter how you balance things across multiple accounts provided it does balance. However, if you designate certain accounts for different timeframes then I’m not so sure. Owing to my own mental limitations I have designated some accounts as capital protection, some as income, some as first stop for a cash call when I need it. Had to set up a sprawling spreadsheet to try and determine asset allocation across the whole circus which raised the issue as to how to treat conglomerates like CGT or HSBC Globalstrategy. Wondering as to how to address the 25% tax free lump sum, and the current IHT benefits of the sipp don’t help my clarify at all !

  • 25 hosimpson January 29, 2020, 9:08 am

    A very relevant post, thank you
    All being well I’ll be bridging a 13-14 year gap between FIRE and pension. So far I’ve been using FireCalc tool to model my pension and ISA pots separately, adding 5 years to each for safety buffer. perhaps I should add more to pension… or not. My concern is that most simulation tools available online assume a US portfolio, with no allowance for exchange rates, which are relevant to anyone living outside the US. The Portfolio Charts guy has international portfolios available, but again, I can’t work out whether / how he factors in home currency.
    The impact of the FX on my assumptions about FIRE, withdrawal rates and portfolio longevity has been on my mind a lot lately. Especially given the recent trends in geopolitics, the cold currency war between the US and the rest of the world that’s going on at the moment, etc. What’s your view?

  • 26 John B January 29, 2020, 9:38 am

    I went beyond a spreadsheet and developed this web application for forward financial planning,, http://www.johnbray.org.uk/retire/retire.html. It has lots of options, but no documentation.

  • 27 Jonathan January 29, 2020, 11:23 am

    W, I think that TA partially answered your question in the suggestion he made of “liability matching”. If you are planning to draw down one of your investments (ISAs in the scenario here) then that should be very safe bonds or even cash. Presumably the part of your investments you are leaving for now (the SIPP) can have a higher bias to equities while it grows untouched but will need rebalancing back to a safer mix as the access point approaches.

    Certainly that is the strategy we are taking with my wife’s pension – not quite the above scenario, she is drawing down a SIPP until various DB pensions will mature. It is mostly in cash and bonds.

  • 28 LALILULELO January 29, 2020, 12:57 pm

    @Matthew I could potentially inherit something, however the genes are good on that side of the family so if things go well I won’t get anything for the next 30 years, by which time I’ll be close to state pension age anyway (and hopefully well retired). There’s also the issue of care home costs so I’ve mentally accounted for it as a nice surprise only. Its a similar position with my wife’s family as well. I suppose if any windfall ever came through it would depend on how close to FI I would be as to whether it goes into the ISA or pension first, possibly even on a sliding scale

    @MQ Thanks for sharing, I’ll certainly have a play around. Even simple things like layout make me look at the situation in a different way so really appreciate it.

    @JB Thanks for this also, Is there a way to export once it has been generated? Apologies if this is a stupid question as I haven’t gone in depth with it yet, but in line with some other comments, would it possibly be more prudent to draw down the pension up to the basic tax rate after the 25% lump sum (and state pension) and live off the ISA until you need to take the tax hit?

  • 29 Harps January 29, 2020, 1:16 pm

    @John B I had a look at your Web App and am wondering what the advantage of the following assumption is:
    “…afterwards you drain your SIPP quickly (up to HRT threshold) to move money into your ISA”?

    Is that an LTA risk mitigation tactic?


  • 30 Ecomiser January 29, 2020, 2:07 pm

    @No such thing as a free lunch

    I’m enjoying this thread but it’s realistically unachievable for the vast majority of people off their own back. To achieve the kind of sums being talked about in ISA and SIPP saving requires both high earnings and the discipline to live a life of someone on very low earnings

    I agree. However someone on a lower income has lower desired expenditure in retirement, or at least can manage on lower income. Also once the State Pension kicks in, it provides a higher percentage of the needed income.
    Personally, my normal annual spending in retirement is only a fifth of the £25k targeted here, say 2/5 to cover occasional big spends, with the consequent lowering of the needed pot size.

  • 31 John B January 29, 2020, 2:27 pm

    You can’t save the results, but the calculation url has all the inputs as arguments, so if you save that you can preserve your calculation.

    The order of spending is as I wanted it 2 years ago. As I recall I put in options to switch to a different order, but the maths got too complicated, so I disabled the feature

  • 32 No such thing as a free lunch January 29, 2020, 4:43 pm

    @Ecomiser; thanks I agree with you and mentioned that in the post.

    “the alternative is clearly work longer or live off less”

    In your case its commendable that you are able to live off £5k a year, given council tax, water, electricity bills etc. which all need to be paid, I don’t think that for many being able to survive off so little will be the norm, particularly if you live in the south of the country / london. I’d love to know how you manage this? perhaps i’m being greedy and overstating what i’ll need.

    In your example it is reasonably straightforward as the UK government pension will cover your expected outflows in retirement. You only therefore need to work & make required national insurance contributions for 35 years to qualify for full state pension (meaning an early retirement of 51 if you started making national insurance contributions at 16); save £20k in ISA to get you to 55, then access your pension pot of £50k to get you to 65. Job done, feet up, vive la buena vida!

    For those who aren’t able to live off less than £10k a year in retirement, it would be great to see some analysis and discussion on the practicalities of actually achieving the type of sums outlined by the accumulator’s article.

  • 33 John B January 29, 2020, 5:11 pm

    I looked at the code again I think I’ve fixed drawing ISA before pension, but I’m not sure. Doing this is rather too much like work

  • 34 HariSeldon January 29, 2020, 9:34 pm

    The difficulty with all these calculations is that the returns on an investment ’pot’ are hugely volatile !!

    My personal experience of retiring at 49 in 2007 was to experience an enormous drawdown with the GFC almost immediately with an equity heavy portfolio…. yet an income reserve allowed a full recovery quite quickly and now I am way ahead of where I expected to be !!!! ( literally, as I going up the Amazon at the moment)

    But I have only one experience of all the possible scenarios and it has worked out well….. so far.

    I cannot say I made the right decisions, I have the right result so far but that could be despite my decisions and I have just been lucky !

    Diversify income streams, have a plan B and be prepared to roll with it, an optimistic frame of mind helps !

    Self funding and managing a retirement portfolio in accumulation and then deaccumulation is incredibly difficult to get right because of the huge uncertainties that one will face.

    Perhaps the best policy is to save as much as you can and be flexible in your lifestyle costs.

  • 35 Neverland January 29, 2020, 9:37 pm

    @There is no such thing as a free lunch

    Yes, whenever ‘becoming financially independent’ comes up in the UK, inheritance and pre-inheritance is the elephant in the room that never gets mentioned

  • 36 The Accumulator January 29, 2020, 10:16 pm

    @ Adam – with the SWR model – you draw down interest and principal if needed.

    Unrealistic – that really depends. You could live on less. You could be a couple putting two incomes towards that goal. You could retire later and have less in the ISAs.

    In your model, I think you’re assuming constant growth of 5%? After inflation? That’s pretty optimistic and forgets that the real danger is a volatile portfolio that can go irrevocably south due to a bad run of returns. Also, you’ve assumed a 32-year retirement ending at age 89. What will you do if you get to age 89 and don’t feel like boarding the plane to Switzerland?

    @ Matthew – it’s what the research tells us is a reasonable SWR to ensure a portfolio including volatile assets will make it through ten years. I cover that in more detail in the next post. I’m discounting windfalls like inheritances – what if the buggers never die? Leave it to the cat? It isn’t such a good idea to stick everything into an ISA with a view to stuffing it in the pension later if you’re losing out on salary sacrifice, or the tax relief for pensions gets worse, or the annual allowance is drastically cut, or you never get around to it, or you die and a relative inherits less…

    @ Jonathan – you’ll get mugged by inflation if you try keeping it all in cash.

    @ OxDoc – The problem is precisely how much you need in an ISA to stop it running out before you get to the SIPP. See part one: https://monevator.com/how-to-maximise-your-isas-and-sipps-to-reach-financial-independence/

    @ W – that’s another series in and of itself and there are no easy answers. For sure, though, I’d want to have enough bonds in the vehicle I’m drawing an income from so I don’t have to sell equities when they’re in the dumpster.

    @ Michael – love the work status column: 2069 – Dead.

    @ Hosimpson – I’ll deal with the US returns problem in the next post. I thought Portfolio Charts uses UK data priced in £s?

    @ John B – thank you for sharing. I’ll have a play with that later.

    @ No such thing – I’ll be doing some case studies later in the series to attempt to show different scenarios, it’s such a personal thing though. I agree it’s a tough ask. Still some people are doing it / have done it. I’m earning considerably less than your sweet spot and am close now. I couldn’t quite get a grip on how much is a liveable income for you, but I think your numbers are higher than mine. I’m no Economiser though. £5k is astonishing! FI is much more achievable the closer you retire to minimum pension age given the tax advantages of pensions, as Naeclue showed above.

    @ Naeclue – thank you very much for doing that calculation. You’re right the pension figure is much more doable when you recognise the tax relief boost.

  • 37 The Accumulator January 29, 2020, 10:19 pm

    @ C and Hariseldon – great to hear how you’re both managing the uncertainties. Clearly flexibility of mind is as important as flexibility of spending.

  • 38 Jonathan January 29, 2020, 11:41 pm

    TA – no, it is just the money earmarked for drawing down over the next 3-4 years which is in cash. It will be worth a few percent less by then, but over that timescale thought bonds weren’t worthwhile given HL will immediately reduce any gain by 0.45% but risk stays the same.

    (My wife has various bits of DB pension from previous jobs which she didn’t want to reduce by taking early. So prior to her retiring just over 55 we used up various savings so her earned income could boost the DC pension of that job and get the tax benefit, then at retirement switched it to a SIPP so we could control drawdown to match the DB pensions when they come on stream. Plus recycled the 25% tax free cash back into ISAs which are our buffers for the future. Reverse of your strategy, SIPP before ISA, but that’s because of the DB future).

  • 39 Got Brexit Done. January 30, 2020, 12:42 am

    I’ve pondered this problem for quite a long time. There are some things that seem to work for everyone. Firstly start the employer pension as early as you can and structure your contributions to squeeze as much from them as possible. Secondly ISA’s are best created from income that is taxed at 20% (+NI), this can also be drawn upon in an emergency, this is best at the career start. Pensions are best accrued from income that would attract 40% (or more + NI) tax, this tends to be later in the working career. Then things start to depend upon circumstance. A good salary is the next most important part of the puzzle. With a good salary pension contributions can be increased and as of now a good goal is to pension any cash that would attract higher rate tax. Against all this must be balanced buying a house (with a mortgage), I don’t think early retirement is safe unless the cost of housing can be decoupled from inflation. Selecting a partner is also a perilous activity, divorce is crippling, so must be avoided at all costs, marrying a spendthrift who can’t finance their outgoings will also scupper the plan. This covers off the wrappers, what goes in the wrappers depends upon how investment savvy you are. At it’s simplest VWRL, the US weighting bothers me, but if tracking the world market is the aim, then being overweight on US stocks is necessary. I however use High Yield shares, the aim is simple build a big enough portfolio so that dividends generated finance expenditure. It’s therefore necessary to know what that expenditure is. I ran a spreadsheet for a couple years where I recorded everything that went through the banks accounts, I didn’t try and curb any outgoing I merely needed to know how much it all was. Once passive income exceeds expenditure you can retire? Well not quite for most people the pension is the most efficient way to seed the capital and it comes with all the rules we are familiar with. This drives me to say that the earliest optimal point to retire is when you can access the pension ie 55 – whatever it gets moved to.

    Case study my sub-optimal journey.

    Made numerous pension errors, didn’t join one scheme. Did take out a very bad pension with high charges. Had a pension with equitable life. Finally got a decent job that paid well and had income to invest, internet arrived (read the Motely Fool voraciously)

    The steps I took then went as follows 24 years ago.

    Took out a offset mortgage which allowed cash ISA to be offset, religiously funded the 3K we were then allowed. Stoozed credit cards to further reduce interest. I had so much I was frequently offset completely.
    When the mortgage was paid off, turned the cash ISA into stock and shares ISA, re-invested the dividends and continued to use allowance. Started a SIPP and transferred all my old pensions including ELAS one. Then made monthly contributions again re-investing dividends. Some company related changes allowed me to effectively start a new pension and transfer the old one to my SIP, which again bought more high yield shares. At this point my SIPP + ISA exceeded my outgoings comfortably add in my wife’s SIPP and then all our combined outgoings were just covered (she however self finances herself completely through employment). Anyway I couldn’t and can’t get to it. There’s also another problem – risk. A big share portfolio’s value jumps about, mine often fluctuates by more than my entire years salary, you have to become immune to this. Dividends tend to be more stable, but back testing will demonstrate that dividend income does from time to time reduce and can take a while to recover. The answer is a cash reserve. To maximise this cash reserve I did the following I stopped re-investing the dividends the ISA was throwing off, so I could maintain my lifestyle whilst I salary sacrificed as much as possible into the company pension (40K). The idea is simple the company pension will end up being the tax free lump sum. On retirement then I expect to have circa 750-800K of HYP shares in a SIPP generating circa 50K. 200-250K of cash from the company pension taken as a tax free lump sum and the ISA returned to re-investing. The circa 200k cash buffer allows the SIPP and ISA to stay invested in volatile assets that should keep pace with inflation and any dividend or stockmarket falls to be ridden out and the ISA will be available as a fallback.

    I could have got here sooner had I started earlier and not made so many mistakes. I made additional contributions to pensions in my younger years. This was wrong I should have opened an ISA (PEP?) and used that. The cash ISA’s should have been stocks and shares one and the offsetting exclusively done using credit cards.

    Risk must be mitigated low risk investments are one way but they generate a poor return. My way will be to run a big cash buffer, take the risk on the chin and keep several years work of living expenses in cash.

    Running out cash is a risk, I’ll mitigate it not being a forced seller of the SIPP capital, by carrying on investing in a ISA and if times are really tough I’ll cut my cloth according.

    As they say in the adverts some sequences have been shortened, I got married had kids, sold one house bought another etc. Still this strategy works as far as I can tell, I’m a few years away from pulling the trigger, the only micro danger seems to be that I’m forced to retire in the teeth of a crash, however if I pick my moment all should go well. All the macro dangers result in me having more pressing issues that my pension income collapsing.

  • 40 Al Cam January 30, 2020, 12:45 am

    I recognise the strategy you are using for your wife.
    Have you considered her marginal tax rate once DBs and, I assume, her state pension (SP) comes on stream?

  • 41 Harps January 30, 2020, 10:31 am

    @Naeclue’s calculations can be further refined by using the Marriage Allowance (current Tax Code: 1375M).
    In fact, by my calculations, if I use partial crystallisations, including the commensurate portion as a 25% PCLS, together with the Marriage Allowance, I could drawdown up to £68333 and still only pay Basic Rate Tax…

  • 42 Jonathan January 30, 2020, 11:30 am

    Al Cam: yes we have thought about tax rates – and my wife’s pension is of course only half of the equation. At the moment she is drawing down exactly the basic rate threshold so the tax benefit of the SIPP is gained in entirety. That will continue when her first two DB pension elements appear, with the SIPP drawdown reduced accordingly. The loading of the SIPP was calculated so that it should be emptied just about when a third DB pension arrives and takes her over the threshold, and then it will increase more with state pension.

    All assuming tax doesn’t change much over the next 10 years, who knows?

    The plan does depend on us being double income though. I have a DB pension, and as I discussed on Monevator last week I made full use of the ability in USS to boost the cash element up to the 25% of the overall pension value that is tax free. In my case a bit of my salary was taxed at the higher rate so the benefit available was considerable by making extra contributions out of that portion. So even though we had been running down previous savings to make those contributions, once I had retired we found ourselves with higher savings than we had ever had. Wife choosing a later retirement date meant we could repeat the benefit of using savings to compensate putting her income into pension and using the tax benefit to our advantage (though no higher rate bonus for her).

    And now we are both retired we are continuing to boost income from savings, but essentially to allow more discretionary expenditure on things like holidays which we want to make the most of during early retirement. We have both had major health issues over the last few years which are happily currently in remission, so we want to make the most of our current fitness. (Plus my mother’s death last year will boost our finances beyond what we had calculated on, once all the inheritance is realised).

  • 43 Al Cam January 30, 2020, 12:10 pm

    I recognise the MA issue.
    One other consideration to ponder is that if (now or in due course) you may have an LTA issue then drawdown is possibly a better approach than UFPLS (or any other form of phased retirement/partial crystallisations). This is primarily due to the way the various Benefit Crystallisation Events (BCE’s) are defined.

  • 44 Aleph January 30, 2020, 2:35 pm

    @Accumulator – I think OxDoc is right. If you use the numbers in the article, you want 833k to sustain a 3% perpetual withdrawal rate. If you split that as 312k in ISA and 521k in SIPP, then you can start withdrawing at 3% from 10 years before pension age safe in the knowledge that (1) the ISA wont run out inside 10 years and (2) the pot as a whole will never run out. The 3% withdrawal rate does not care that you are pulling money out of the ISA first – the split between accounts is irrelevant for calculating it.

  • 45 Al Cam January 30, 2020, 3:53 pm

    Thanks for the detailed response.

    Firstly, best wishes for both you and your wife’s future health.

    I agree entirely that DC pensions (of whatever flavour) work best where you maximise the differential between the tax relief on the way in and the tax due on the way out. Thus, I view all DC-like arrangements as tax advantaged savings scheme and not really a pension at all. DB schemes IMO however are true pensions!

    What I have not seen mentioned in this series of posts so far (but I could easily have over-looked it) is that a lot of employer DC (& DB, I believe) schemes have a “net pay” arrangement which means the pension scheme automatically claims back tax relief at your highest rate of income tax. Whereas, if you use a SIPP (even with “relief at source”) higher and additional-rate taxpayers must complete a self-assessment tax return to receive the extra relief due to them. The upshot of which is that full tax relief is invested from day1 in most employer schemes, but this is not the case in a SIPP for higher or additional rate taxpayers.

  • 46 Naeclue January 30, 2020, 8:49 pm

    @Aleph, I mostly agree with your analysis, except you need more than 521k in your pension as pension income is taxed. See my previous comment.

    However, sticking with your figures of 833k total, as an example of how it might work, if you went for a 60/40 fund, that would imply about 333k bonds and 500k shares. You would put most of the bonds in the ISA and the remainder in the SIPP along with all the equities. Each year you would draw from the ISA and rebalance back to 60/40, which would usually mean selling shares in the SIPP and buying more bonds.

    If you wanted to for a higher proportion of equities than 62.5%, you would need to add them to your ISA. Once that starts, the ISA starts becoming less safe for the next 10 years.

    This is just an example to show how this might work. I agree with the thrust of Aleph’s arguments.

  • 47 The Accumulator January 30, 2020, 9:22 pm

    @ Aleph – sadly that’s not the case. Your £312K ISA needs to provide an annual income of £25,000 for 10 years. That’s an 8% SWR:

    25 / 312 x 100 = 8%

    You are not withdrawing 3% from your ISA. You are withdrawing 8%. The SIPP can’t help you for 10 years. It’s locked away.

    You can withdraw 8% a year from your ISA for 10 years and probably not run out of cash, but you could have near emptied it.

    Now let’s turn to the SIPP. In your example it was worth £521,000. In a scenario where the ISA is near empty, and your SIPP has grown to £833,000 after 10 years then you’re fine. You’ll now be able to withdraw £25,000 from your SIPP at 3% SWR. But let’s say the SIPP has only grown to £625,000.

    25 / 625 x 100 = 4%

    A vanilla 4% SWR is too high if you’re relying on that amount for 40 – 50 years. I’ll go into this in more detail next post. Also see this post: https://monevator.com/how-to-maximise-your-isas-and-sipps-to-reach-financial-independence/

    As a thought experiment, take a more extreme example…

    You have a £1 million portfolio split like this:

    £1 in your ISA
    £999,999 in your SIPP.

    You need £30,000 living expenses per year. That’s a 3% SWR when you consider your portfolio as one account. But you can’t access your SIPP for ten years. It’s now obvious your £1 ISA can’t sustain spending of £30,000 per year, regardless of how big your SIPP is.

  • 48 WhiteSheep January 30, 2020, 11:25 pm

    > A vanilla 4% SWR is too high if you’re relying on that amount for 40 – 50 years.

    But the SWR over the full period needs to be calculated at the beginning of the whole period of interest, at least in the traditional models? If the sequence of returns go against you in the early years your effective withdrawal rate in a given year can be higher than the SWR. That is an (awkward) feature of the Bengen rule that is independent of where you withdraw the money from.

    Leaving aside the complicating effects of taxation for this particular argument, *if* your ISA funds are large enough have a negligible failure rate for the pre-pension period (which is clearly not the case in the £1 vs £999k example) and you can satisfy the other constraints of the models (e.g. suitable target asset allocations), and your withdrawal rate is considered safe across the full time horizon using all of your assets, *then* it really shouldn’t matter how your funds are allocated between pensions and ISAs (beyond all of the previous constraints).

  • 49 Aleph January 31, 2020, 12:01 am

    @ TA

    I still disagree. That isnt how perpetual withdrawal rates work. Your capital can go down to 521k after 10 years whether or not your money is split across 2 accounts. The whole point of the 3% is it is calculated to withstand a big drawdown in the early years of retirement and still recover. If you want to guarantee remaining at 833 after 10 years of retirement (which is what you require in the article) then of course you need to start higher than 833. But why would that be a criterion?

    Try my thought experiment: you retire at 18 due to fortunate family circumstances with 833k in an ISA. That is enough to guarantee your desired income at a 3% perpetual withdrawal rate until you access your SIPP at 58. How much do you need in your SIPP?

  • 50 Aleph January 31, 2020, 8:45 am

    Actually, a better thought experimemt would be: you retire with an ISA with 833k in it. You start withdrawal at 3%. After a few years, the market has gone down badly and you are at less than 833k. Do you have to go back to work? I say no, because you got your withdrawal rate right. The article implies yes, because it says you need to be back up at 833k some years into retirememt.

    @TA – sorry for being argumentative, I just really want to get this right! Love your work on here.

  • 51 The Investor January 31, 2020, 9:28 am

    @Aleph — I’m confused as to why you’re confused. 🙂 You don’t seem to be engaging with the fundamental question here, which is that you cannot access your SIPP until a particular age, and the early retiree is trying to retire a number of years before that access date.

    Your example of retiring at 18 with £833K in an ISA is irrelevant to this question — ISA money is always accessible.

    Let’s say you have a 3% SWR and you’ve taken your ‘pot agnostic’ approach to building wealth so you reach 47 with £833K across your two platforms, ISA and SIPP.

    You have £75K in your ISA and you have £758K in your SIPP.

    You begin withdrawing 3% a year (c. £25K) from your ‘unified pot’ — which *in reality* means you have to take it from your ISA, because you *have* to.

    The market is wobbles up and down for a few years, and overall portfolio returns are flat.

    After three years-ish of taking out £25K-ish a year, you have no money left in your ISA.

    “Never mind,” you think. “It’s one unified pot so I’ll withdraw money from my SIPP!”

    You call your SIPP provider. They say no, you cannot access your SIPP for another seven years.

    You have no accessible money at this point. You cannot withdraw 3%. You have to go back to work.

    That is what this series is about. 🙂

    Someone might say “well only £75K in the ISA and flat returns is unrealistic, someone would have at least £150K in their ISA…” then fine, that’s what this series about.

    There’s loads of grey here and the question is as valuable as any very fuzzy answer.

    But it’s simply not true you can treat it all as one-pot.

    To be even more blunt, your theory — it’s all one-pot — implies I don’t need to use ISAs at all to retire early. This is silly.

    I reach 47 and have ‘my number’ in my SIPP. Again, I can’t access it for 10 years. I can’t retire.

    That’s the fundamental issue, not managing max drawdown or whatnot.

  • 52 Naeclue January 31, 2020, 10:07 am

    @Aleph, I complete agree with your analysis, with the proviso that the pension pot gross balance is revised upwards due to tax. If you accept that 3% is a SWR at any age, then you need 833k. You could hold the whole lot in an ISA and you would be fine. You could hold 100k (adjusted) in a SIPP and 733k in an ISA and you would be fine. 433k + 400k would be fine. The split only becomes a problem if the ISA is depleted before you can draw the SIPP.

    @TA’s response illustrates the irrationality of a fixed SWR and is the source of the discrepancy of your 2 different approaches. He gave an example where a bad sequence of returns did not leave sufficient money in the SIPP to continue drawing at 3%, but that is a feature of the assumed 3% SWR and is why a fixed 3% SWR is illogical.

    If you start with 833k in an ISA, then you can take 25k per year. If the ISA falls in value to £600k after a year, you can still 25k, but if you left it one year before going into drawdown you would only have about 625k in the ISA, so could not take 25k as that would be in excess of 3%. The fixed 3% SWR could force you into a lower withdrawal amount if you delay drawing for a year!

    This is why I use a variable 3% rule, which I will increase as our life expectancy decreases.

  • 53 John B January 31, 2020, 10:08 am

    Remember that that £25k is not a hard limit. There is so much optional expenditure you could curtail or postpone (new cars, sofas, holidays, charitable donations, house repairs), and you could borrow money with secured or unsecured loans, interest free credit cards etc, that you could easily eke out an ISA for 2 extra years if the market goes against you.

    Charity is an interesting one, as you should always give that under gift aid when actually paying tax. When I FIREd I had to write to the National Trust etc withdrawing my gift aid declarations.

  • 54 Naeclue January 31, 2020, 10:18 am

    @TI. The difference between @Aleph’s and @TA’s approach is explained by @TA’s additional requirement that there must be at least 833k in the pension pot in 10 years time, otherwise you would be drawing down above 3%.

  • 55 The Investor January 31, 2020, 10:36 am

    @Naeclue — Ah, I see (I’m skimming these comments this week). However I think that’s not entirely accurate because he’s not (from what I’ve skimmed but maybe I missed an earlier comment) addressing the accessibility part of the picture.

    Me and @TA have a gentleman’s disagreement about the wisdom of applying SWRs to short-run ISA portfolios anyway (I’d favour the lump of cash approach) but I can see why he disagrees with me.

    I think as I say the question here is the most interesting part, for all the interesting stuff it spins out.

  • 56 Aleph January 31, 2020, 10:37 am

    @ The Investor. Hi, actually I did engage with that in my first post. You need enough in your ISA that it doesnt run out in 10 years – i.e. 325k as in the article. That doesnt change the TOTAL pot needed to support a 3% perpetual withdrawal rate, which is 833k, as also in the article. My diasagreement is not that some minimum money is needed in the ISA, that’s obvious. I just dont think the split changes the total pot you need for a perpetual withdrawal rate. I’m not sure how else to illustrate this because it seems really obvious to me.

    The hypothetical drawdown to 512k total happens whether you have your money split or not. Starting with a 325/512 split at age 48 and finding yourself at 512k left in your SIPP at age 58 and zero in ISA is obviously equivalent to starting with 833k in an ISA and seeing it decline to 512k by age 58. You have 512k left and full access to it at age 58 in both cases. The article is saying those scenarios are not equivalent because it claims that you need to top yourself back up to 833k at age 58 in the split case, but you dont in the all ISA case. I dont follow why I need to be richer at age 58 depending on how I historically split my money between age 48 and 58!

  • 57 The Investor January 31, 2020, 10:39 am

    Remember that that £25k is not a hard limit.

    It’s a hard limit per @TA’s mental exercise here, which is to try to find the optimal way to distribute assets (20-30 years in advance) between the two tax shelters to NOT have to go back to work / run out of money / employ other methods.

    I’m the “keep doing some work forever” guy (and also the “live off dividends don’t spend capital guy”) so my personal mileage is very different.

    But for the purposes of @TA’s conundrum, I don’t think saying you won’t buy a sofa and you’ll whack £50K on credit card (… whole article there… 🙂 ) is a solution.

    (Agree with a wider point that it’s useful to remember there’s probably some flexibility and there’s definitely a need to flex with uncertainty.)

  • 58 The Investor January 31, 2020, 10:40 am

    @Aleph — Ah, thanks for the clarification. I missed that early comment. Your position much more sense with that context. 🙂

  • 59 Aleph January 31, 2020, 10:44 am

    Yep, missed an earlier comment. 😉

  • 60 Jonathan January 31, 2020, 1:02 pm

    Actually the scenario ought to be the perfect one for the modellers trying to design an SWR strategy to attempt.

    The perfect SWR allows you to extract the set amount of money each year, with the capital reaching exactly zero at the point of death. (Planning to leave an inheritance is irrelevant, that can be a separate pot of money). The problem is that you don’t know in advance the date of death to plan for, or the returns on capital and in particular their fluctuation over the time period. In this case the “date of death” is defined, it is the point when the SIPP is planned to take over, so you can model just the strategy to deal with returns uncertainty.

    The usual approach always seems to me a bit of a cop-out, essentially it is to use a model to estimate the spread of final remaining sums and then adjust the withdrawal rate so under most scenarios there is money remaining and the lower end of the spread where the money left goes negative is reduced to some arbitrary “acceptable” probability, typically 5%.

    But actually what would be useful for the modelling to come up with is a set strategy that effectively reduces the final spread and allows withdrawal to more closely resemble the perfect SWR. For example a two-stage SWR where a set core amount is always taken and a second discretionary amount can be held over under some pre-defined conditions (but recognising there is a limit to how long some discretionary expenditure can be delayed, e.g. house repairs). Another might be keeping a portion of the fund in cash (or something cash-like) with a rule about how this is replenished when investments grow but run down when they fall.

    Of course TA may already have got lots of ideas about this but is simply saving them for a future article …

  • 61 Naeclue January 31, 2020, 6:23 pm

    @Harps, “Naeclue’s calculations can be further refined by using the Marriage Allowance”

    I don’t that is true. Transfer of the marriage allowance is quite restrictive and AFAIK, cannot be transferred to a spouse earning over £50k. This link seems to confirm that.


  • 62 Harps January 31, 2020, 7:38 pm

    @Naeclue. Hmm, I’d wrongly assumed qualification was simply being a basic rate tax payer (i.e. taxable earnings after allowances of £37500). I would still be able to download £66667 and qualify for MA and pay only basic rate tax… Doubt I ever would mind…

  • 63 The Accumulator February 1, 2020, 12:12 pm

    @ Oxdoc, Aleph and Naeclue – you’ve finally made me see the light. Yes, I agree and I’ve been too pessimistic. Thank you for putting me straight. Some re-editing ahead for me!

    @ Jonathan – I recommend Michael McClung’s Living Off Your Money for his analysis of combining guaranteed income ideas with a withdrawal rate. Also, this is a good piece on adjusting strategies to remaining life expectancies:


  • 64 Al Cam February 1, 2020, 2:29 pm

    @ Jonathan:
    Apologies if you already know his work, but Big Ern’s safe withdrawal work covers a lot (and I mean a lot!!) of ground (albeit from a US perspective), see, for example: https://earlyretirementnow.com/safe-withdrawal-rate-series/
    Also, your suggestion re a secondary discretionary amount reminded me of the idea of using a percentage of corpus (a.k.a. unitrust). Some more thoughts on the unitrust idea, and a whole lot of other ideas, can be found at

    Spoiler alert – there is no silver bullet, but I am pretty sure you know that anyway!

    FWIW, I personally favour the floor and upside approach over the so-called safe withdrawal technique.

  • 65 Far_wide February 1, 2020, 3:40 pm

    The position I’ve come to is that the best way to tackle SWR’s in context of the bridging the gap is flexible withdrawals.
    Modelling via portfoliocharts and other tools consistently show that having the capacity to reduce withdrawals in the face of a market turning against you really digs you out of the S**T. The magic numbers for me were being able to reduce my budget by 5% a year up to an absolute limit of 20%.
    You still of course have to then save enough to allow for a budget that can then be reduced if so required, but I think most people here probably do or intend to have that flex.

  • 66 Far_wide February 1, 2020, 3:54 pm

    Btw, thanks to Aleph and co. for persisting, as I was bamboozled as to why I would need a huge extra chunk of cash! I’m FIRE’d and have at least 25 years to bridge across to my pension, so the risk of running out of cash prior to that is a very real one to me.
    (As above, my current view of tackling that is to allow flexible withdrawals and a conservative SWR in the first place (2.75% at present).

  • 67 ZXSpectrum48k February 1, 2020, 5:17 pm

    I think all this discussion about SWRs and clever approaches rather misses the elephant in the room. What is your deflator? How much uncertainty is there in that deflator assumption? I love a bit of data mining and a complex model as much as the any nerd (possibly more) but you have to get a handle on the error bars on each assumption in turn. If the deflator has an error bar of at least +/- 0.5% to possibly +/- 2% that will swamp most other assumptions.

  • 68 Al Cam February 1, 2020, 5:24 pm

    Big Ern (see link above at #64) has quite a few interesting things to say about flexibility.

  • 69 Al Cam February 1, 2020, 5:28 pm

    I hear you!
    In essence, the so-called safe withdrawal rate (SWR) is unknown, and indeed unknowable, in advance.

  • 70 Far_wide February 2, 2020, 12:36 pm

    @al_cam – thanks, I’m already a big fan of ERN. Great stuff.

    @ZXSpectrum , your comments always come across as so sceptical about FIRE/SWR’s, no matter how conservatively or flexibly they are employed.

    Don’t get me wrong, there is room for plenty of cynicism. But in challenging uncertainty around how Governments calculate real prices across different time periods? Aren’t we getting to the nth degree of academia here?

    I’m sure one could find all sorts of variables to make anything less than a 0.5% SWR seemingly unpalatable. But, at some point, we have to get on with our lives, and accept that there’s always a (vanishingly small) chance we might end up working a supermarket till to make ends meet. This is the price we pay for being able to live the dream of very early retirement.

    The alternative choice we have is to work until the grave, “just in case”.

    Out of interest, for a typical reader of this site employing a very boring passive 70/30 global portfolio and wanting to retire at, say, 40, what in your view would an appropriate permanent withdrawal rate be? (permanent as for that long, SWR/PWR pretty much amounts to the same thing).
    Or do you believe it’s just impossible to do so with a sufficient level of confidence?

  • 71 Zoe February 2, 2020, 12:57 pm

    Thanks so much for this series. It has made retiring early seem to much more accessible and has made me look into my NHS Pension. I have an NHS Pension which I can access from 67 and looks like I will get 50k a year from this so sorted pension wise. I am 34 now so thats 33 years to go. How can I work out how quickly I can retire on 25k per year lasting until age 67? I think the maximum I can save each year is 30k.

  • 72 Far_wide February 2, 2020, 1:05 pm

    @al_cam , having revisited ERN, I’m with you now re: their warnings on flexibility. Looks like I have some revision to do! Can one ever get to a position where all of the experts will agree that you’re doing the right thing? I somehow doubt it!

  • 73 The Accumulator February 2, 2020, 4:36 pm

    @ Zoe – the next couple of posts will enable you to do that for your own situation.

  • 74 ZXSpectrum48k February 2, 2020, 4:55 pm

    @far_wide. I think it’s fairly hard to think you can define an SWR to better than +/-1%. Most of the constituents used to derive the SWR are hard to define to much better than say 0.5% and there are a number of variables.

    For me the deflator is the most overlooked assumption. First, there is the issue of whether you should use a cost-of-living adjustment or try to attempt to use a standard of living adjustment. The literature uses cost-of-living because CPI indices are available while standard of living is nebulous. It’s probably a function of CPI and earnings growth but it’s hard to pin down. Moreover, over a typical retirement of 20 years, those two time series hopefully won’t diverge too much.

    The problem is that if you think about longer term retirements, say 40-60 years, that approximation is less justifiable. Now, we can use something other than CPI. We could use UK earnings growth instead of CPI over the same historical periods. Knocks 1-2% of the SWR instantly. Not palatable. Ignore that then. Only optimism is allowed in FIREland.

    So back to CPI. Let’s take a typical TV. If we take US Bureau of Labour Statistics data, then a TV set that cost $1,000 in the CPI index 25 years ago, now costs $22 in the index due to hedonic adjustments (quality improvements). Similarly, while the average car price in the US has risen by 30% over the last decade; in the CPI index the increase is just 2%, again due to quality improvements.

    Now, conspiracy theorists argue this is a government plan to under-report CPI so they can pay less on pensions. It isn’t. It’s just that CPI is constructed to compare what a basket of good cost at time t with something at time t+n. It’s doesn’t capture improvements in quality or changes in standards of living (up or down). My concern here is are SWR adherents really understanding that if they use CPI they may well be locking themselves into a retirement that doesn’t include those improvements. Moreover, they can’t actually buy a TV for $22. The difference comes out of their pocket.

    So you still want CPI as the correct deflator, then which one? CPI or PCE in the US; RPI, CPI, or CPIH in the UK. There’s a good 0.5% between most of them. Plus that is just an average statistic. It’s not your CPI. We spend time on asset allocations and clever rules, but so little time thinking about our own personal CPI index. That could easily deviate from the official time series by a couple of percent per annum over 40-60 years.

    That’s just the deflator. When it comes to the asset data, we don’t have enough and the quality is low. This is especially problematic for early retirees With 100-170 years of data, you only have 2 to 3 independent 50-60 year panel data sets. That isn’t statistically significant. Moreover, this idea that the historic data somehow “stress tests” the portfolio is not true. If you had taken the data as of 1990, you’d never had in your sample anything as strong as bond returns of the last two decades. If you’d take asset data in 2010, you’d never had observed such low equity volatility before (and volatility impacts sequence risk). We’re seeing new phenomena all the time.

    Finally, it doesn’t help that even the concept of a fixed SWR violates the concept of stationarity. It’s fair to say the idea of fixed SWR is basically built on sand.

    And breathe …

  • 75 Vanguardfan February 2, 2020, 5:30 pm

    @zoe. If you are really going to get £50k from your NHS pension, then you’ll be looking at life time allowance issues and should therefore be cautious about putting your investments into a pension (although not excessively cautious, as it can still make sense even if you have exceeded the LTA).. However, it’s worth spending some time really getting to grips with the NHS pension scheme to make sure you understand it’s value and limitations, and where that £50k comes from. If it’s a forecast, what assumptions is it based on? That you continue to work until state pension age? And does it assume certain pay progression and full time working? (Also, if you’re only 34, then you won’t be able to access it unreduced until at least 68, and possibly later). You CAN access the NHS pension early, but it will be reduced to take into account being paid for longer. So have a look at that. There are also options for enhancing your NHS pension – have a look at those (but remember the life time allowance).
    I would say that a LISA and ISA should form the majority of your investments for earlier retirement. Don’t discount pensions completely, as if you are a higher rate tax payer the advantages are considerable, but I think you need a clearer understanding of those implications and the nature of the NHS scheme (TA’s work assumes no DB pension benefits).
    And remember that rules will certainly change over the next 30 years….

  • 76 The Accumulator February 2, 2020, 6:20 pm

    Hi all, I’ve edited the article above in light of Aleph, Naeclue and Oxdoc’s gentle correction of my earlier mistakes. My heartfelt thanks to them. With any luck we’ll crack this nut together.

  • 77 The Accumulator February 2, 2020, 6:50 pm

    @ ZX – I understand that you have great knowledge of the problems of inherent in modelling future uncertainties. Your knowledge is greater than the rest of us put together and your scepticism is heeded. Nonetheless, most of us need to retire at some point… 45, 55, 65, 75 whenever. We need to be able to cope with the uncertainty while acknowledging there are no guarantees and plenty of trade-offs to be made.

    This is where it’d be really helpful if you could post advice that would help steer the community.

    At some point, us mere mortals – like good parents – have got to plump for ‘good enough’ over ‘perfect’. My aim, The Investor’s aim, the majority of people here I think, want to plot a course that gives us a fair shot, without falling prey to the ‘Don’t worry be happy’ platitudes that pass for debate elsewhere.

    My appeal to you is to contribute in that spirit. To recognise that others don’t have your level of income, commensurate ability to fund future commitments, or rarified expertise but are definitely willing to learn and use the best advice out there to plot their own course.

  • 78 Al Cam February 2, 2020, 10:17 pm

    re “can one ever get …”
    See my comment #64 above from “Spoiler alert ..…… ” to “….. technique.”
    my comment #69 above from “In essence ….”

    BTW, I am not claiming any expertise.
    However, my conclusion after a considerable time reading about SWR’s, etc is that (like a lot of other things in life) there actually is no bullet proof “right answer”. In which case it makes sense to me to follow the strategy that best allows you to sleep at night!

  • 79 Far_wide February 3, 2020, 10:47 am

    Hear hear for @accumulator ‘s comment. This said, I really do appreciate the comments ZX, as you clearly have specialist knowledge in the area.

    Inflation is a funny one. I’m not going to claim to understand the ins and outs of ZX’s fears here, but what I do understand is that inflation is in reality very personal. From the last 4 years, despite no particular effort, my spending has gone down by about 5% nominal. This is despite Brexit knocking the £ (I live abroad mostly). Of course, that works the other way too, perhaps I will get some unfortunate medical condition requiring regular outlay or some other unforeseen expense. In short, isn’t 1% here or there quickly swallowed up by adjustments we all make to our lives each year?

    Aside from this, I think the reality of FIRE/SWR’s is so much muddier than portrayed. In reality, perhaps ZX is right, and 1% SWR is all we can aspire to, who knows? I think for so many though, FIRE is a springboard really, a confidence booster to live your own dream.

    In reality, anyone retiring at (say) 4o will not have zero other income again. You earn £100 cashback on a product from quidco, perhaps £125 from a bank giving you compensation for some minor hassle. You take a long flight that gets severely delayed and receive 600 EUR for your troubles. Eventually the state pension hits in (which we often don’t count) and/or inheritances are received. Maybe you do some freelance work on the side…..and on and on it goes. Yes there are ‘bad’ things too, but I would argue these are mostly outweighed by the good.

    All of the above said, I hope – hope – that we can find a way that more than a 1% SWR becomes realistic using investment alone. As otherwise, how does any normal person hope to ever retire with the demise of final salary pensions?

  • 80 Al Cam February 3, 2020, 11:39 am

    Chapter 12 of
    provides a review of “Quality change and new items in [UK] consumer price statistics”. The chapter covers, amongst other things, how quality changes are reflected both explicitly and implicitly.

    As it happens, I have actually spent quite a bit of time thinking about and examining our own personal inflation index. My motivation for doing this was similar to what you describe above.
    However, to date I have been really rather surprised by the headline outcome.
    Whilst it is verifiably true that our household weights are very different from the official weights, this has had remarkably little impact on “our CPI” or “our CPIH” vs the official figures over the last few years. This result may of course be particular to our circumstances at this time hence my plan is to continue to monitor how this develops.

  • 81 ZXSpectrum48k February 3, 2020, 11:55 am

    @far_wide. I didn’t say the SWR was 1%. I said the error bounds were probably +/- 1%. So if you think your SWR is 3%, then probably it’s more like 2%-4%. The SWR is a probability distribution, not a point forecast.

    The inflation issue is relevant because in terms of the “layer cake” that TA uses, the adjustment due to choice of inflation metric could easily be greater (up or down) than that caused by fees, taxes, asset allocation etc. Example: the UK 100% equities SWR (data from 1900, 50bp fees) is 3.10%. The UK 60/40 equity/bond SWR is 2.60%. So the difference between moving from an aggressive 100% equity portfolio to a more modest balanced portfolio is 0.5%. Note these all use RPI as the deflator. Now the difference between CPIH (1.4%) and UK RPI (2.2%) is currently 0.8%; the difference over the past decade 1.0%, over three decades 0.6% (CPIH doesn’t exist before 1989). So the choice of inflation metric is as material as the choice of asset allocation. Choose CPIH and you could argue you can add another 0.6%+ to your SWR.

    Now, nobody actually has the basket that is contained in official metrics like CPI, CPIH or RPI. Your own personal basket of goods/services may well be even more variable. I’d argue people need to focus as much on analysing the inflation characteristics of their spending than worrying whether their portfolio is 100/0, 80/20, 50/50 etc. I don’t see much of that though. Instead, inflation is treated as a defined discount rate inside the SWR calc with no uncertainty. Or just ignored.

    @TA. I have no particular issues with your approach. It’s far more balanced and refined than the MMM/TEA nonsense whose attitude is “25x expenses and you’re done”. I’m perfectly fine with not commenting further. I’ve only commented again because @far_side seemed to think I was arguing for a 1% SWR.

  • 82 never give up February 3, 2020, 6:59 pm

    I’m really enjoying the series. Thanks so much for putting it together. My set up is fairly simple probably like many of your readers. I just have a DC pension and ISA’s and that’s it.

    I had one query if that’s ok. In the first part you had 15 years to bridge and 12 years worth of expenses saved and that led to a 25% failure rate. In this third part you have 12.5 years worth of expenses to bridge 10 years. I assume this has a fairly significant positive impact on that failure rate, but by how much? You mention this ensures the ISA doesn’t run out but presumably this isn’t 100% successful?

    If following the liability matching approach to really try to guarantee success I assume £50k or so (made up number) may be needed additionally in the pension pot to help the total grow significantly to cover the lack of growth of such a low risk ISA pot? If I’m skipping ahead to a later post please ignore me. My very slow cogs are turning as I try to mull over my own cautious attitude and previous difficulties balancing my ISA and Pension contributions.

  • 83 The Accumulator February 3, 2020, 9:03 pm

    @ ZX – I love the fact that you comment and I’ve learned much from your insights over many moons. It’s just on occasion you’ll say something that leaves me thinking, “Great, on the one hand I’m buggered, and on the other I’m screwed.” I’m exaggerating for fun, but I suppose it comes down to – after accepting the imponderables and risks – we still need to find a path forward. Sometimes I think you underestimate how authoritative your voice is, and I worry that what you might consider food for thought, I might consider food for paralysis. It’s all very subjective and I’d love to see you write something longer on some of the problems you raise, but I appreciate you’ve got other things on. Anyway, your latest comment is very helpful in that I can understand the issue you’ve laid out and then decide how to incorporate it into my own plan.

  • 84 The Accumulator February 3, 2020, 9:12 pm

    @ Never give up – I’ll go into the data and assumptions I’ve used for these examples in the next post. I won’t ruin the surprise just yet 😉
    Liability matching can also be determined using a limited set of assumptions, and again, I’ll go into this a couple of posts down the line, including how to customise the calculations for your own situation.
    You’re right that no SWR guarantees success. It may have been historically successful but that doesn’t mean some future set of circumstances can’t rewrite the rules. WWIII could seriously lower our SWRs or perhaps a super Great Depression, or just choosing the wrong period of history using another country’s returns e.g. Germany post WWI.

  • 85 never give up February 3, 2020, 9:20 pm

    I feared I was jumping ahead. No probs and thanks for the reply. I’m really excited for the next post!

  • 86 Zoe February 3, 2020, 10:09 pm

    Thank you

  • 87 Zoe February 3, 2020, 10:13 pm

    Thanks for your reply. Yes I’m definitely going to have problems with the lifetime allowance. The total reward statement portal also doesn’t have any details of my pension contributions since 2015 either . It’s a bit of a minefield to sort. I’m just using Vanguard ISA to save currently and not putting any extra in pensions.

  • 88 Al Cam February 4, 2020, 10:25 am

    I would like to echo TA’s comment:
    “I’ve learned much from your insights over many moons”
    and add that it would be a great shame if that were to cease

  • 89 Chris February 5, 2020, 9:14 am

    So according to the data could I safely invest all of my SIPP into a Vanguard Life strategy 60/40 Fund and take a SWR of 4% for the next 20 years of retirement? If I could then I’m just going to open a SIPP with Vanguard and consolidate everything into the one fund and have done with it. What do you think?

  • 90 Aleph February 5, 2020, 6:46 pm

    No worries. Happy to have made a tiny contribution to this great series. Also, how awesome to have a civil conversation on the internet and actually agree something! This site rocks.

  • 91 Hare February 6, 2020, 10:43 pm

    Making a requested suggestion to add to the post.

    Pension contributions are tied to earnings. Therefore, a lot of us can only make low contributions to a SIPP/LISA (e.g. £2880 for ‘non earners’ plus £720 government top up). This massively changes the numbers and makes a pension not the golden end destiny. More like an ISA, which at the moment anyone can bung £20k pa into.

    I’m not complaining at the assumption and it’s a super good post and much appreciated. But it is an assumption and it would be good to have that basic thing recognised as income isn’t the same thing as earned income for pension contribution purposes.

    Could I also add a general comment that anyone can put money into a SIPP (if that has caveats, please add them). I discovered this on a financial press something somewhere (it may even have been here from some wise comment by ermine or similar) and did it with a family member via HL. It was great for tax planning – moving money from one family member’s taxable account into another family member’s SIPP who didn’t have the spare cash.

  • 92 W February 7, 2020, 3:05 pm

    The point made by @ZX is important in terms of very early FIRE.

    The nature of work will change dramatically over the next generations. Standard inflation measures can’t tell you whether your portfolio and SWR will generate enough to maintain your current socioeconomic position relative to the population, or over 40 years will you slip down the income scale?

    There are no easy answers, it’s the trade off for not working. But better to be aware of the “relative income” factor.

  • 93 Ecomiser February 8, 2020, 1:14 pm

    To those wondering how I live on £5k a year. I don’t know either, I just do it. I gave up trying to restrict my spending a few years ago but old habits die hard.
    It helps that I’m naturally frugal, live in a wholly-owned band A property in the North of England, don’t have a car or wife or children, or expensive hobbies, and can’t be bothered with foreign holidays. Heating only goes on if I’m feeling cold AND putting on an extra layer isn’t convenient.
    I’m fortunate that I can visit both the sea-side and some of the country’s most spectacular moorland for free with a bus pass and public service buses.
    I’m also lucky that my retirement began in 2009, so I’ve had a wonderful sequence of returns 🙂 but that’s actually irrelevant, since I’m not even spending all my SP.

  • 94 Aidan Williams February 8, 2020, 3:17 pm

    @ZX @W I appreciate this might be relevant to extreme early retirement but conversely, by normal retirement age the evidence suggests we spend less as we age so does planning for life long static spending parity (whatever your choice of parity is) make sense for most people other than the fact that it fits neatly into most retirement calculators/is easy to imagine? For instance, I plan to front load some income in the years prior to NRA and reduce further after 75. This of course complicates any guesstimate of portfolio depletion with the upfront boost very costly to long term performance.

    Things get even more complicated when earning in Pounds and spending in Euros – I use liability matching in Euro denominated savings bonds to shield me from day-to-day FX fluctuations (there’s been a few recently for some reason) but should I baseline my withdrawals in pounds or euros?

    Then of course there is tax to consider – if you are no longer UK resident then bye-bye PCLS, ISA capital gains exemptions and hello dividend tax… and oh dear, accumulation units (what was I thinking).

    The point is we can build as many complications into our retirement planning spreadsheet as we like but the bottom line is any model is still just a guess. And life will definitely throw you a few curve balls at some point. The allure of the 4% “rule” is its simplicity; it’s an easily actionable guess despite all the other factors at play. Although I prefer McClung’s Extended Mortality Updating Failure Percentage (EM/ECM) which adapts between a floor and a cap and of course expected longevity. It makes sense to spend more when there is fat and reduce down when times are lean. I might be really unlucky and live too long but it’s a risk I’m willing to take. 😉


  • 95 ZXSpectrum48k February 8, 2020, 4:22 pm

    @W. Yes. I’m trying to make people aware of the issue of relative income. Take a hypothetical example. Let’s look at 3 generations of early retirees in 1968, 1998, and 2008. Each one decides to use a 3% SWR that happens, given their respective portfolio, to produce a withdrawal amount that is equal to the average UK (pre-tax) wage in their retirement year on the basis that this should give them a decent standard living. As with any SWR prescription, they inflate it by RPI each year until 2018.

    So the retirees start by withdrawing £895, £8,853, and £22,672, in 1968, 1988 and 2008, respectively. How much are they all drawing by 2018? Well the 1968 retiree is drawing £15,242, the 1988 retiree £23,316 and the 2008 retiree £29,717. The average wage in 2018 is £27,040. So the 1968 retiree is now only drawing 56%, the 1988 retiree 86% but the 2008 retiree 110% of the UK average wage, respectively. The reason is obvious: between 1968 and 2018, earnings growth was 1.2% above RPI; between 1988 and 2018 only 0.5% above RPI; but between 2008 and 2018, earnings growth was 1% below RPI.

    So a 1968 retiree would have found that their standard of living, when compared to the working population, had fallen hugely behind that of the working population over their 50 year retirement. The RPI cost of living adjustment wasn’t anywhere near large enough. Conversely, for the 2008 retiree is was too conservative.

    Now this assumes you are targeting earnings rather than cost-of-living i.e. you care about your relative income vs. the broader population. You might not care. Many will though. In fact, most studies suggest relative prosperity is more important to wellbeing than absolute prosperity, at least beyond a certain floor. Equally, while the US tends to use CPI as it’s deflator for social security, many other countries use earnings growth. The UK state pension uses a triple lock: the higher of RPI, earnings and 2.5%.

    The use of RPI as the deflator in UK SWRs is just an assumption and not necessarily a good one. The variations caused by choosing a different deflator are substantial. In particular, FIRE optimists should never rerun the historical SWR analysis from say 1945, replacing RPI with earnings growth. They would not like the SWR at all!

  • 96 The Accumulator February 8, 2020, 7:01 pm

    @ ZX – that’s fascinating and the first time I can remember seeing this issue even mentioned, never mind confronted. Would be interesting to speculate on the future of earnings growth in light of disempowerment of trade unions, apparent squeeze on middle class earnings, especially in the US over the last 40 – 50 years, effect of globalisation and so on. Futile but interesting 😉

    This next bit comes from a highly subjective perspective. I offer it up in the spirit of debate. My take on FI isn’t purely based on calculating that I can live on, say, £25K today, hence I model how much I need to live on £25K for the rest of my life.

    I see FI as a chance to live life on new terms. I want to focus on quality of life not standard of living. I want to walk away from the hedonic treadmill. For example, I don’t want to upgrade to an 8K TV. I want to wild camp in the hills, or learn how to grow my own food, or learn carpentry skills [insert your own vision of the Good Life here].

    You can buy a TV for £20 today. You just have to accept it’s not going to be HD. I can well imagine a 1968 retiree wondering why people need half the crap that people deem ‘essential’ today. My baby-boomer parents seem quite happy without a smart phone, though I feel like my right-arm has been amputated when I leave the house without it.

    90% of the time I spend thinking about FI is on reimagining life, not the numbers. I’ve been conditioning myself to value time over possessions, overthrow status anxiety, experiment with resilience over convenience, establish a set of values based on a life swimming away from the mainstream.

    All very subjective but relevant as we’re ostensibly talking about early retirement versus traditional retirement.

    For those who’d like to model using historic cost-of-living metrics, what’s your go-to source?

  • 97 The Investor February 8, 2020, 7:43 pm

    @TA: “That’s fascinating and the first time I can remember seeing this issue even mentioned, never mind confronted.”

    I knew you were not really ‘multi-tasking’ the last time we spoke about this. 😉

    From my 2008 ‘one number’ replace-your-salary article:

    Won’t you need more than your salary in 10 years time, due to inflation? Good point. You’ll need an income that is keeping up with the inflation rate to maintain your purchasing power – or better yet, increasing with wage inflation, to keep up with the neighbors.


    The article isn’t at all focused on the point, but it is another reason why I want to target income/natural yield. But this will await my own article. 🙂

  • 98 The Accumulator February 8, 2020, 8:59 pm

    @ Aiden – thank you for the link to the ‘spending less as we age’ article. It’s an important point. There’s a certain swings and roundabouts aspect to all of this.

    @ The Investor – ‘Thanks’ to you too. The key word was: “first time I can *remember* seeing this issue even mentioned…”

    If only you wrote more memorable articles 😉

    Get on with your natural yield article. I can’t wait to troll it.

  • 99 The Accumulator February 9, 2020, 9:00 am
  • 100 ZXSpectrum48k February 9, 2020, 11:23 am

    @TA. I have huge sympathy with the idea that average wage growth will lag inflation or asset returns over the next few decades. There are two issues with that though. First, historically that just hasn’t been the case. Since 1900, earnings growth has outperformed RPI by about 1%. Second, it’s inconsistent to use historic data for asset returns, RPI and then junk it for earnings. What if asset returns are related to earnings growth? You have a few periods, such as late Gilded age (before WW1) and the last decade, where you saw a major divergence between the real economy and asset prices but that was the exception, not the norm.

    As you’ve already linked too, the ONS has data on some of these things. There is also this site https://www.measuringworth.com/datasets/ukearncpi/. I can’t vouch for the data but the timeseries look reasonable.

  • 101 Sparschwein February 9, 2020, 3:22 pm

    Another excellent article and discussion. This is such a great blog.

    @ZX is raising an important point that I too haven’t seen discussed anywhere else. Those who just rely on CPI may be caught out. Housing and healthcare come to mind; these costs can hardly be mitigated just by being frugal and ignoring the neighbours’ standard of living. Healthcare is more of a risk in the US, but it also matters in the UK. (I know people who needed expensive medication that the NHS would not cover.)

    Estimating “personal CPI” is a good idea, it just seems difficult to do in practice (perhaps another Monevator topic?)
    So, when the time comes I may use CPI and SWR-1%, or add lump sums to cover the major personal inflation risks. Better work a few more years in the chosen profession than being forced back into work at older age, at uncertain terms.

  • 102 Sparschwein February 9, 2020, 3:38 pm

    For higher-rate taxpayers who are well below LTA, I’d suggest it is a simple decision between pensions and ISAs: Make use of the maximal higher-rate tax relief as long as you can. Fund the pension generously (see previous discussions about SWRs and inflation uncertainties).
    It is not a given that the high income will persist – permanent employment is just an illusion nowadays. And the government may remove the tax advantage.

  • 103 Sparschwein February 9, 2020, 4:45 pm

    Re Liability matching – I’m curious how this can work when all safe(ish) bonds have negative real returns, and many have negative *nominal* returns.

  • 104 The Accumulator February 9, 2020, 6:41 pm

    @ ZX – thank you for the link and additional thoughts.

  • 105 Scott February 11, 2020, 2:01 pm

    I’m really confused now, by all the talk that led to changes to the article. I can no longer see the original article so don’t know what’s changed, but in the figures used, where does 8% withdrawal rate come from for the 10-yr ‘living from ISA’ period come from? The way it’s written, it looks, to me, like wishful thinking, but I presume there must be some rationale behind it?

  • 106 P February 12, 2020, 11:33 am

    So with the rumoured pension relief changes I was wondering whether we can take advantage of carry over allowance from previous years to top up and still get higher rate tax relief after the changes are introduced?

  • 107 Al Cam February 13, 2020, 1:36 am

    So, in summary, it is all a bit of a dilemma; and should we plan to age and:
    a) spend the same – simplest to model, but there are difficulties around the choice of deflator; or
    b) spend more – issue of relative income, or, if you prefer, keeping up with the Smiths; or
    c) spend less – in accordance with more recent [sometimes even longitudinal] studies

    I have spent a fair bit of time and effort over several years looking at all of these issues (and others) and have come to the following somewhat less than profound conclusion.

    Nobody knows the future, and the best we can hope for at this distance is a route map that we may just live long enough to revise along the way. Trying to predict even a few months ahead to n decimal places is pretty impossible, so 40+ years is ….

    As usual, lots of people far cleverer than me reached this conclusion years ago. Perhaps the best known is Bill Bersteins 1998 series of 5 articles about the Retirement Calculator from Hell. A punchy summary written by Wade Pfau is given at:

  • 108 Hare May 3, 2020, 2:55 pm

    @TI 97 Really looking forward to that natural yield article. It puts a name on what I’ve been doing without knowing what it was called.

    As food for thought, what happens here is that platform fees for SIPP/ISA/taxable account are all taken from cash capital in taxable account (the cash is a buffer not sitting there waiting to be spent if market drops. I am sure there is a fancy name for this). Maximum income is taken from natural yield in taxable account and used to fund expenses, along with a DB, Premium Bond wins etc. Every year enough is sold in taxable account to max out ISA and SIPP contributions (£20k plus £2,880 x 2) and capital gains used to create cash buffers or finance extra spending (the DB isn’t much). ISA and SIPP yield is retained, although ISA yield is dipped into for an occasional month.

    We prefer to keep spending down and have buffer upon buffer upon buffer, both of us having previously been in situations where we were in a bad financial place due to random life factors.

    I was curious to see what would happen now we are all in an economic ‘big thing’ and okay so far. It’s reassuring knowing there is so much room for maneeuvre if necessary.

  • 109 Igor September 23, 2020, 8:47 am

    Thanks for a really great article! I have the exactly same decision to make – ISA or SIPP.
    Please help me understand the last formula in it.
    So we establish £833,325(phase1 + phase2) by using 3%SWR, but once we enter phase1 we start spending it on 8%SWR? If we spend 10 years on 8%SWR(out of £312,500, I understand), there’s big a chance 312k will become £0 and we end up £520K which will not provide us 25K for 40+years.
    What do I miss here? Thanks you!

  • 110 The Accumulator September 27, 2020, 10:06 pm

    I’m glad it was helpful Igor. Take a look at readers Aleph, Naeclue and Oxdoc in the comments – that should help you see how it works.

    If there was no minimum pension age then you’d just save £833,325 to live on just over £25K for the rest of your life @ 3% SWR.

    But pension isn’t accessible so £312,500 needed in ISAs to live on £25K at 8% SWR for 10 years until pension arrives.

    Mathematically it’s still true that you need £833,325 in total but you don’t necessarily need that amount intact at pension age because 3% SWR has been shown to generate the £25K income in perpetuity if history is any guide.

    This is the same as if you had all £833,325 in an ISA and drew down at 3% SWR for the rest of your days. You’d still be OK (historically speaking) if you had less than £833,325 by the time you hit pension age.

  • 111 Jason November 27, 2020, 9:58 pm

    So are saying we need £833k total at FIRE age or pension age? Because at FIRE age, the 520k pension pot still can grow for 10 years. If we didn’t lose capital, we would have more money than we need at pension age. However, if aim for almost depleting the ISA, isn’t that a big risk to take? Say we manage to reach pension age, we have to expect the £520k to grow to £833k. So isn’t it more important to know the pension pot number at FIRE age?

  • 112 The Accumulator November 28, 2020, 3:10 pm

    Hi Jason – you need the £833K at FIRE age. Small risk if you buy into a 3% SWR. The risk is facing a scenario where 3% SWR proves insufficient. You don’t have to expect the £520K to grow back to £833K by pension age. Historically-speaking, retiring with that amount at retirement age sees you through the rest of your life, notwithstanding tax, investment fees, asset allocation, life expectancy, how much you actually spend etc etc. See the rest of the series to see my take on all of that.

  • 113 Peter April 27, 2021, 3:57 pm

    Here is my plan for early retirement:

    I am 39 and plan to retire at 50. When I will be 48 I will have my mortgage paid off.

    I only need £12k per year to live comfortably because I have frugal lifestyle in my veins, it’s how I was raised.

    In my ISA I need 8 years (to survive from age 50 till I’m 58) of income before I can access SIPP (I assume the worst from the government so probably be able to access it at age of 58). So, 8 years of income in my case will be £96k.

    After 8 years I expect to have exactly zero in my ISA , I will be 58 and will be switching to SIPP drawdown.

    I then need 7 years of income stored in my SIPP which in my case will be £84k. After 7 years I expect to have exactly zero in my SIPP. By then I will be 65yo and will be switching to DB pension which will also be around £1000 a month (inflation adjusted). At age of 68 (yes, I expect the worst from the government again) I will access full state pension on top of my DB pension.

    So in total I only need to save 96k + 84k = £180k Let’s round it to £200k to adjust for inflation (I know, big assumption here).

    I honestly do not care about SWR because I will be drawing down both SIPP and ISA to zero, then live of DB and state pension.

    I know it is easy said when one has DB pension available but still I do not understand why people are so much into their portfolio never running out of money. That means when you die your money are never used, which then means you need to save for longer and that then means your RE might not be so E anymore.

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