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How to choose an SWR for your ISA and your pension to hit Financial Independence fast post image

This is part four of a series on how to maximise your ISAs and SIPPs to achieve Financial Independence (FI).

*DEEP VOICE*

Previously, on How To Split Your Pot Between ISAs and Your Pension For Fun and Profit:

  • Part one set out the FI problem of retiring early using UK tax shelters.
  • Part two explained why the tax advantages of personal pensions make them superior to ISAs later in life.
  • Part three laid down a basic plan for judging how much you need in ISAs compared to SIPPs.

*CAMERA PANS DOWN TO A HUNCHED FIGURE DOING MATHS*

*THE ACCUMULATOR LOOKS UP AND BEGINS SPEAKING*

Customising the plan to your own situation relies on knowing what sustainable withdrawal rate (SWR) to use.

Before we get into that, I’ll recap the plan so far:

  • We’ll live on our personal pensions from our minimum pension age onwards.1
  • Our ISAs and General Investment Accounts (GIAs) bridge the gap between giving up work and popping the corks on our pensions.
  • We won’t bank on our ISAs and GIAs lasting longer than those gap years. That enables us to balance the need to grow our wealth as tax efficiently as possible against retiring early without taking unnecessary risks.
  • We’re not rich enough to ignore the risk of low growth or an unfortunate sequence of returns, so we’ll need a strong dose of risky assets (hello equities!) to reach our goal2 plus a buffer zone of lower risk assets (we meet again, bonds and cash).

To ensure our FI plan is based on something other than gut instinct, bum-clenching, and the sweet smile of Lady Fortuna, we’ll base our calculations on the best research we can.

As well as having a (very) rough idea of how much annual income we’ll need and how long it should last, we need to know how much wealth we must build before we can celebrate our independence day.

Cue letting off firecrackers in the office, stripping to the waist to the sound of Ride Of The Valkyries, and telling the boss we love the smell of resignation in the morning!

But I digress…

We need a credible sustainable withdrawal rate

SWRs are designed to guard against the disaster of drawing too much, too fast, too soon from our investments, and so running out of money like a gaggle of teenagers running out of gas near an axe-murderers’ convention in a spooky wood.

  • Your SWR number is a guide to how much annual income you can sustainably draw from your portfolio given certain sassy parameters (see below).

Knowing your desired income and SWR enables you to calculate how much wealth you must first build to later sustain that annual cashflow at that rate of withdrawal.

See the bonus appendix at the bottom of this post for the maths.

A credible SWR is a good planning tool because…

  • …it deals with the fact that we’ll be living off a volatile portfolio of assets that can fork out an unpredictable range of outcomes: good, bad, and indifferent. This is the root of sequence of returns risk – the danger that a bad run of market returns exhausts a deaccumulation portfolio in short order.
  • …excellent SWR research is publicly available and relevant to DIY investors relying on their own resources to plan their future.
  • …SWR strategies can cope with historically bad investment returns, but aren’t so cautious that we must postpone our financial independence for years trying to guarantee safety.
  • …SWR strategies enable you to withdraw a consistent, inflation-adjusted income for the duration of your retirement (subject to all-important caveats that you need to understand).

I understand that some readers prefer an even more cautious approach, or have already accumulated sufficient assets or income streams not to need to worry about SWRs.

That’s all well and good. But not everybody – including me – has that luxury. Safety costs money.

I’ll give you the information you need to use SWRs appropriately while understanding the limitations of the strategy.

From that vantage point, you can then decide if an SWR strategy makes sense to you. Just rest assured I’m not a 4%-rule groupie, or a lifestyle blogger with a course to sell.

For SWR parameters, caveats, terms and conditions, please read:

Choosing your SWR

I’ll base our SWR numbers on the research of Professor Wade Pfau.

Pfau is widely respected in the field of retirement research. He’s attacked the withdrawal rate conundrum from multiple angles. Also, he has researched SWR rates for time periods lasting from ten to 40 years.

That’s important because many of us will need two SWR numbers:

  • The rate at which we can withdraw from our ISA, so that we don’t run out of money before we can access our personal pension.
  • The rate at which can we withdraw from our portfolio – combined across all accounts – so we don’t run out of money for the rest of our lives.

Pfau uses historic market returns and Monte Carlo sims to scope the variety of market conditions we may face in the future.

Monte Carlo sims reshuffle returns data to generate many more scenarios than are available from the historic record. They’re alternative history generators, enabling us to stress test our plans against extreme circumstances that didn’t occur. Think Great Depression followed by Great Recession.

Pfau has also produced SWRs curtailed by the high valuation, low interest rate world we face right now.

The weakness of Pfau’s research is that it uses US historic returns that have been relatively benign in comparison to the global investment experience.

Because Monevator readers are mostly non-US investors with globally diversified portfolios, we need to cross-check US research against accessible global data to make sure we’re not unwittingly adopting an SWR that’s too sunny for grey old Blighty.

That’s where Timeline comes in.

Timeline is withdrawal rate strategy software designed for financial planners. It’s excellent, and thanks to its free trial, we can dial up global market returns data in both historic and Monte Carlo flavours. I strongly recommend you try the free Timeline trial and use it to stress test your own plan.

SWRs for ten to 50-year periods

Okay, that’s a lot of preamble to get to the money shot but here it is. Below you’ll find the SWR numbers I’m using to model our ISA / SIPP FI plan.

Because there isn’t one SWR to rule them all – and because we’re trying to get a grip on an uncertain future – I’m going to show you a range of SWRs for each time period. You can then make an informed decision about how conservative you want to be.

There’s a full explanation below of the terms used in the table.

This table could do with some explaining:

TimespanThe maximum period in years that you need your investments to last. For example you need your ISA to bridge a 15-year gap until your minimum pension age, you could choose a 5% SWR by the light of the Low Interest SWR column. If that ISA must last 20 years then choose a 4% SWR from the Low Interest SWR column.

What if you’re an in-betweeny? What if you have a 17 year gap to plug? If you’re an optimist then you’ll round 17 years down to 15 and choose a 5% SWR. If you’re cautious, then round your time horizon up, and choose the 20-year 4% SWR.

Or you could compromise with a 4.5% SWR, knowing that SWR rates are a curve and that a 4.5% SWR is supported by the historical and Monte Carlo results for the 20-year period.

For lifetime spending, most of us are best off choosing a 40-year plus timespan

For eight-year periods or less: save enough in cash to cover your spending needs plus an inflation top-up.3 The potential upside of equities isn’t worth the risk of grievous loss with so little time to bounce back.

Historic SWR – Pfau’s research for 15- to 40-year timespans using US historic asset returns (1926-2014). (See table 1 in his research paper).

Pfau provides SWRs for different asset allocations (0% – 100% US equities versus 100% – 0% US government bonds) plus success rates. Our table shows the best SWR for a particular time period and success rate. Click the table 1 link above to see Pfau’s asset allocation findings, and please also refer to our asset allocation section below. Pfau published an updated version of this research in his book How Much Can I Spend In Retirement?4

Monte Carlo SWR – Pfau’s Monte Carlo simulation of ten to 40-year timespans using US asset returns data. See table 3. Success rates are converted into failure rates in that linked research paper. Again, click the table 3 link for asset allocation info and see below. An updated version of this research is also available in Pfau’s book How Much Can I Spend In Retirement?5

Low Interest SWR – Pfau’s Monte Carlo simulation of 15 to 40-year timespans using US asset returns data anchored to low interest rates. See table 2.

Pfau’s sim is designed to reflect the low interest rate conditions that have hung over the world since the Great Recession. He allows assets to slowly rebound to their historic average returns over time.

Low interest rates reduce the expected returns of equities and bonds, and so this column is especially relevant for anyone retiring in the next ten to 15 years. You can see that the Low Interest SWRs clock in around 1% lower than the historic and Monte Carlo norms.

Global Portfolio SWR Timeline uses global asset returns data that isn’t publicly available to produce withdrawal rate strategies suitable for UK investors.

I can’t just publish their data, but I’ve used their superb app to sense check Pfau’s work. The Global Portfolio SWR shown in the table is a downbeat take on Timeline results, using both historic and Monte Carlo scenarios.

The Global Portfolio SWR generally lags the US historic and Monte Carlo SWRs but it’s a sight better than the Low Interest SWR. Unfortunately, the Low Interest SWR is only based on US asset returns, albeit crocked by low interest rates, so a Global SWR equivalent could be worse still.

My Timeline results didn’t take into account current market valuations, although it looks like their Monte Carlo sim is flexible enough to do so.

Take heart though – the Global Portfolio SWR does incorporate the drag of 0.5% investment fees6 while Pfau’s work skips that problem.

Success rate – This is the percentage of scenarios where the simulated portfolio didn’t run out of money before the end of the timespan. For example, a 6% Historic SWR left you with money in the bank in 99% of scenarios simulating a 15-year retirement. Note, the success rate may actually be 100% but I’ve adopted the Timeline convention of capping out at 99% because failure is always possible.

Any scenario that ends its run with so much as £1 left counts as a success. In reality, a retiree would almost certainly notice their balance plummeting long before and cut back on spending to prevent their portfolio going to zero.

Success rates for the Low Interest SWRs are much worse as you can see in the Success Rate Low Interest column.

Some research deals in failure rates, which are success rates for pessimists. A 95% success rate equals a 5% failure rate.

SWR patterns

The higher your SWR, the less wealth you need to have saved to deliver your desired income.

  • SWRs are generally higher for shorter timespans.
  • SWRs are lowered by higher success rates.
  • Higher equity allocations are generally needed to maintain feasible SWRs over long timespans.

You can offset the negative effect of longer timespans by lowering your success rate and upping your equity allocation to some degree.

I’ve generally erred on the side of 99% success rates for ten to 25-year periods that I think of as the ISA years. You could lower the success rate if you don’t mind going back to work if you cop a nightmare scenario. You can also trim your success rate if you’re prepared to cut your spending by 10% to 20%.

The 30-year plus periods are personal pension territory and so I’ve reduced the success rates to 95% or 90% because you’ll likely have plenty of back-up options. These could include still having money left in your ISA, cutting spending if needed, equity release, using annuities, eventually drawing a State Pension, and/or failing to set a Guinness World Record for life expectancy.

I personally think success rates below 90% are unacceptable. There’s no getting around it in the Success Rate Low Interest column though – Pfau didn’t calculate the success rate for SWRs lower than 3%. You could cut your SWR to 2.5% or even 2%, or rely on the back-up options mentioned above should the worst case materialise in your lifetime.

If your retirement is many decades away then you can console yourself with the thought that historical norms may have reestablished themselves by the time you’re ready to use your SWR for real. I suspect many of us think a ‘new normal’ has descended upon the world, though.

It’s worth dwelling on Pfau’s cautionary note:

Historical withdrawal rates are not random; they tend to be lower when stock market valuations are high and when interest rates are low.

Both of these factors are at work today in a way that has been rarely experienced in the historical record.

If you’d like to know more about how SWRs are constructed and how sensitive they are to variations in volatility, inflation, asset returns, success rates, and the sequence of returns then check out Pfau’s deep dive into the topic.

Meanwhile Timeline enables you to play with the parameters as if you’re sitting at your own financial mixing desk.

The upshot is there’s no point ceaselessly searching for the optimal SWR. It doesn’t exist. I’ve rounded the SWRs in the table to the nearest half point because precision creates a false impression of control.

Similarly there’s no point ceaselessly searching for cast-iron safety. It doesn’t exist. The point of this exercise is to provide a practical platform for planning.

Remember you also need to adjust your SWR to account for the cost of investing. We suggest you deduct 50% of your total expected annual fees from your SWR. (We only deduct half because of the mathematics of a real-world portfolio drawdown).

I’ve assumed total fees of 0.5% (0.25% platform fees and 0.25% average portfolio OCF), so I’d need to chip 0.25% off the SWRs from the table above (except the Global Portfolio SWRs which already include 0.5% in fees). For example, if I choose a Low Interest SWR of 5% then I need to pare it back to 4.75% to account for the impact of fees.

Make sure your retirement income is calculated gross of taxes and you’ll need to reduce your SWR again if you want to leave a legacy. SWRs assume you can use up all your capital in the worst case scenarios.

SWR asset allocations for FI

Hunting for the optimal asset allocation to support your SWR is another fool’s errand. Table 3 in Pfau’s research shows just how much asset allocations can vary and still come within a whisker of the same SWR result.

For example, an equity allocation of anywhere between 33% and 72% lies within 0.1% of the best SWR for a 40-year period with a 90% success rate. That’s good news if you don’t have a sky high risk tolerance.

Still, it’s worth understanding the ballpark asset allocations that supported the Global Portfolio SWRs for each timespan and success rate in our table above:

Timespan (Years) Global Portfolio SWR (%) Global Equity/UK bonds/Cash
asset allocation (%)
10 8 30/30/40
15 5.5 30/30/40
20 4.5 30/30/40
25 3.5 60/40/0
30 3.5 70/30/0
40 3 70/30/0
45 3 70/30/0
50 3 70/30/0

Surprisingly few equities are required over periods of ten to 20 years to achieve a high success rate. That’s because the volatility of risky equities needs to be balanced by low risk assets over such a short time.

Pfau’s work with US returns shows much the same thing. Equities hover around 20% for portfolios that must survive ten to 20 years with a success rate of 99%.

Cash figures heavily because historical UK government bond returns are generally long bonds that got smashed during high inflation episodes, especially from 1947 to 1974. Pfau uncovers the same pattern in the US; allocations of around 40% cash (or bills) deliver success rates of 99% for ten to 20-year timespans. Cash is an underrated asset that dampens volatility and it does better against unexpected inflation than is commonly assumed.

I found the 70:30 portfolio results could all be improved upon in Timeline by going to an 80:20 equity:bond allocation. Yet beware of torturing the data and ending up with a concentrated portfolio that’s optimised for the past. History rhymes but it doesn’t repeat. Past results can impart useful guiding principles, but shouldn’t lead us to fight the last war by banking everything on a Maginot Line of, say, 100% small cap equities.

Pfau also says that historical data is biased against bonds because the overlapping retirement periods examined by historical sims overweight the middle part of the track record. That period coincides with a savage bear market for bonds.

Monte Carlo sims don’t suffer this problem and tend to show that higher bond allocations can support higher SWRs than assumed by historic data research. Again, see Pfau’s table 3.

I wouldn’t blame anyone for cutting back their bond allocation given the current outlook but you should still hold a substantial slug because diversification is your best defence against an uncertain future.

Caution ahead

The green numbers in my table above are the SWRs I’ll employ in the upcoming and earth-shattering case studies later in the series.

I’ve picked the most conservative SWRs available from the range because they’re likely to protect us from bad outcomes – short of The Four Horsemen defecating on humanity’s doorstep.

Indeed one of the problems with SWRs is that they often leave too much money on the table if you don’t suffer a terrible sequence of returns. Don’t feel pressured to heavily discount the green SWRs in the table if it means you must spend so long building a bomb-proof level of wealth that you will never get to enjoy it.

Ultimately an SWR is our placeholder for an unknown future, and we could debate it until the future arrives.

Nobody should delude themselves that any system can bestow safety or a perfect outcome. Choose your trade-offs, understand your risks, enjoy your independence, adapt as you go. That is what this series is about. 

The plan we’re sketching is not a forecast. It’s just enough to get us off on the right foot. Prepare to take further steps along the way.

Next episode: You’ve probably noticed that choosing a suitable pre-pension SWR relies on knowing how long your ISA / GIA should last. We walk through a straightforward calculation that enables you to work that out and finally get your ISA and pension working in tandem to achieve FI.

Take it steady,

The Accumulator

Bonus appendix: SWR maths is fun!

How much wealth do you need to sustain an inflation-adjusted income?

It works like this:

Divide your required FI income by your SWR.

For example:

£25,000 / 0.05 (5% SWR) = £500,000 stash required to sustain an inflation-adjusted £25,000 for 15 years – according to the Low Interest SWR column of our table above.

How much more would you have to save to increase your income by £1,000?

£1,000 / 0.05 = £20,000

£520,000 is therefore needed to support an inflation-adjusted income of £26,000 for 15 years with a 5% SWR.

How much less could you save if you earned £5,000 part-time a year for those 15 years?

£5,000 / 0.05 = £100,000 less required in stash.

Or, £20,000 / 0.05 = £400,000 stash.

How SWR withdrawals work

Year 1 income:

Multiply your portfolio’s value by your SWR

For example, if your SWR is 5% and your portfolio is worth £500,000:

£500,000 x 0.05 = £25,000 annual income

Year 2 income:

Adjust last year’s income by year 1’s inflation rate (e.g. 3%):

£25,000 x 1.03 = £25,750

The SWR percentage only applies to your first withdrawal. Every year after, you withdraw the same income as year one, adjusted for inflation, regardless of the percentage that this removes from your portfolio.

Year 3 income:

Adjust last year’s income by year two’s inflation rate (e.g. 2%):

£25,750 x 1.02 = £26,265

And so on. Every year ye shall live, or have money left.

Like this? Enjoy more maths-for-investors fun with Monevator.

  1. The minimum pension age lies between 55 and 60, depending on when you’re born. []
  2. The exception is bridging an eight-year or smaller time gap until accessing your personal pensions. It makes sense to rely on cash for periods as short as this. []
  3. Or build an index-linked UK government bond ladder. []
  4. Exhibit 4.5 page 87. []
  5. Exhibit 4.8 page 94. []
  6. And 0.5% should easily be enough to cover platform costs and a portfolio of keenly priced index trackers. []
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Weekend reading: Armistice Day 2020

Weekend reading logo

Yeah, Brexit, then the rest of the week’s good reads.

The news is not good but it is official: at midnight 31 January 2020 an armistice is in effect between the forces of Remain and Brexit.

The four-year long war is over. Remain lost.

The terms of the armistice agreement – or ‘surrender deal’ as many will call it – will be tough to swallow for Remain’s exhausted troops.

But given the decisive victory for the Brexit Barmy Army in the climactic 12 December 2019 battle, fighting on was hopeless.

The key concessions granted from 31 January:

  • British citizens and their children give up their birthright to live in any of the EU’s 27 member countries.
  • British citizens and their children also lose their automatic right to travel and work in any of the 27 countries.
  • Britain will pay £33bn to our former ally, the EU, over the next four decades.
  • UK companies can no longer be assured of access to the EU’s ongoing market of 450 million consumers and its £13.5 trillion economy.
  • British companies can no longer assume they can recruit vital and skilled workers from the EU.
  • Britain will exclude itself forever from the trade and political deals made between the EU and its fellow superpowers the US and China, and will have to acquiesce to innumerable rules and regulations imposed by Brussels without our input.

After four years of bitter struggle, this is tough to read.

And nothing can bring back the £130 billion the Brexit War has already cost the UK.

Some who fought in key skirmishes such as The Battle of the Enemies of the People will never forget the blows to our institutions in the fighting.

Historians will dissect the conflict for generations. After all, when a million people marched for Remain compared to the barely 300 that muddled about for Brexit, it seemed the tide was turning.

But whether by winning hearts and minds or by bamboozling brains, the forces of Brexit triumphed.

Blitzed spirit

Of course an armistice – a cessation of hostilities – is not a peace treaty, let alone a Marshall Plan.

With Brexit’s leaders struggling to articulate a strategy that fits the facts on the ground, it’s difficult to be optimistic about Britain’s potential to make great gains from here.

One Brexit commander, Michael Gove, is already briefing UK business that it will indeed be impossible to secure friction-less trade with the EU, under the government’s own vision of Brexit.

But this is the same side that said we’d pay not a penny to the EU – compared to £33bn – so who knows what other reversals lie ahead.

Even more than money, one wonders about the long-term consequences of the conflict and its ramifications on the social fabric.

A campaign to raise money to have ‘Big Ben Bong for Brexit’ raised a feeble £273,000 and received only 14,000 donations (£50,000 of that from one key Brexit backer), underscoring the lack of euphoria across much of the nation.

Indeed many Brexiteers still seem incredibly angry despite their victory, frothing and waving Union Jacks as they marched out of Brussels.

This contrasted with our former allies in the EU singing Auld Lang Syne to wish us a fond farewell.

Barry Island

Set against all that, Britain is a wealthy nation.

Admittedly its economic output is but a fraction of the mighty EU perched off our shores.

But we will muddle through. Poorer, almost for sure, and more isolated by definition. But not broken, as Barry would no doubt stress.

Perhaps our leaders will look to the example of post-WW2, when the ruined nations of Europe came together – barely a decade after killing millions of each other – to form the European Union.

The formation of the EU ushered in a golden age of peace, prosperity, and cooperation the likes of which we’d never before seen.

Let’s hope we’re so lucky.

[continue reading…]

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Getting hands on with your budget with Money Dashboard

Photo of David Sawyer, author of RESET.

David Sawyer is allegedly a guest poster at Monevator, but he seems to have gotten hold of the front door keys. Having already written several articles for us since publishing his debut, RESET, he’s now back to tackle UK budgeting tool Money Dashboard – one of his nine underrated tools for seekers of financial independence.

Sitting through a two-hour-long meeting. Eczema. That strange repetitive farty-clicking sound your nine-year-old makes in the recesses of his mouth.

Chopping onions.

Giving a staff member a ‘could try harder’ in their annual appraisal.

Mild annoyances

In modern life there is a long list of things that we simply do not like. They range from mild annoyances to activities that send shivers down our spine.

When we reach the sanctuary of our homes after a tough day at the office, we don’t want to be adding to them. Instead we pass the time on social media and watching boxed sets.

Even if we do summon the strength to do something self-improving, we choose our challenges carefully. Perhaps we read, phone a friend, scan a blog post, or pick up a podcast.

What we typically don’t do is make like an accountant, crack open a spreadsheet, and track our expenditure.

Sure we may have read Robert Kiyosaki’s Rich Dad Poor Dad and imbibed the “take good care of every penny coming in going out of your pocket” mantra.

Sounds good, but he retired when he was just 47. I bet he doesn’t do it anymore?

Why not budget?

It’s funny, but among my friends I know no one who tracks their income and spending like me.

Yet most of those same people works for organisations with someone tracking all the money coming in and all the money going out.

This person is called the finance director – an important support to the CEO.

You wouldn’t run a business without someone looking at the books like this. So why then don’t we do it in our personal lives? Which is more important?

When I point this out to my friends, the usual excuses roll out:

  • I don’t know how to do spreadsheets.
  • Life is for living (take aim, FIRE!)
  • We always have enough, why do I need to know where every pound goes?
  • That’s boring.

For most of my adult life I agreed. Until a few years ago, I never realised how much my family was blowing every month on things we didn’t need or want.

Then things changed.

Over a few months in the summer of 2017 we saved £900 a month, and diverted that money to our investments.

But without the life-changing magic of Money Dashboard – assisted by Martin Lewis’ Budget Planner – my cash would still be lining Starbucks, David Lloyd, and Virgin et al’s pockets.

Budgeting

Zzzzzz. Yes, I know. It’s snore-inducing. It’s worthy. It’s not enjoyable.

On the flip side though, proper budgeting gives you a complete handle on your money – in most cases for the first time ever.

And if you use Money Dashboard it turns pain into pleasure.

David’s 13-point plan to mastering your budget with Money Dashboard

Other budgeting websites/apps exist. If you’re a fan of the US FIRE movement like me, you’ll have heard of Mint and You Need a Budget.

UK residents can use them, too. But the last time I tried, they didn’t sync with all my bank accounts. I gave up after a while.

So for the rest of this post I will explain how to get the best from Money Dashboard, a free website I use every few days.1 There’s an app, too, but my advice refers to using it as a website.

Note: Monevator founder and editor The Investor owns shares in Money Dashboard.

Never used a budgeting website before? Closest you get to tracking your money is logging in to your current account every six months?

Here’s my 13-point plan to get you started.

#1 Get Martin Lewis’s Budget Planner

Go on to Money Saving Expert and download the ‘spreadsheet version’ of Martin’s Budget Planner. It is an Excel document, but don’t let that put you off.

It’s split into 13 categories and 90 subcategories. In each of the 13 categories you can add a further three or so subcategories of your own, if you really want to break down your spending. Unfortunately, you can’t change the existing subcategories.

Download it to your computer/Dropbox/Google Drive ready for the next step.

Martin Lewis’s snazzy-coloured Budget Planner spreadsheet (Click to enlarge)

#2 Current account

Analyse your current account statements for the past year. Online or paper. Work out what you’ve been spending your money on.

Click the ‘What you spend’ tab at the bottom and fill out the subcategories in Martin’s Budget Planner (not too many or you’ll be creating work for yourself). Assign monetary values to each subcategory. Save this version.

This is ‘spendy you’.

#3 Amend and save a new version

Now have a look through every line item, chat with your partner/family and see where you can change your spending, normally to reduce expenditure but occasionally to increase it in line with what you want out of life.

This is ‘aspirant you’. Save this new version.

#4 Sign up to Money Dashboard

  • It’s free.
  • It’s fun to use.
  • Your passwords are safe. Everything’s encrypted.
  • Know that they do anonymize your data and sell it on to, for example, market research companies – but you don’t get owt for nowt as they say.

#5 Sync all your accounts

Sync all your accounts to Money Dashboard. Every current account, savings account, and mortgage account that you have.

It doesn’t take too long and they usually work first time with no hassles. (The only thing that’ll slow you down is finding all your passwords!)

#6 Set your budgets

Go back to your ‘aspirant you’ Budget Planner – that second version you saved with the more efficient spending you aspire to.

Now replicate the categories (Martin’s) and subcategories (some of Martin’s and all of the ones you added) in Money Dashboard.

To do this, click ‘add budget’ and type in the relevant category from Budget Planner. Then press ‘add tag’ and allocate the tags (subcategories) to the budgets (categories).

Repeat this multiple times.

Just name your budget category (in line with Martyn’s), set a budget for that category, and allocate the appropriate tags (Click to enlarge)

Adding your own tags in Money Dashboard enables you to replicate the pre-populated subcategories in Martin’s Budget Planner rather than finding similar-sounding Money Dashboard ones. This is crucial as you’re cross-referencing between your modified Budget Planner and Money Dashboard when you’re using the budgeting feature.

Set all these tags to be the same colour/type/icon so you can identify them.

#7 Transactions

By now you’ll notice your ‘transactions’ in the middle of the dashboard. Click on the ‘transactions’ tab at the top and they’ll go full screen. This is anything going into or coming out of your multiple accounts.

Transactions are important. By tracking all your myriad bits of moolah, Money Dashboard gives you a true ‘one pot’ look at your money (top left on the dashboard). And by money, I mean all that which is not invested.

As yet, Money Dashboard is no equivalent of the stateside Personal Capital, a truly one pot analysis of all your money.

However, more financial providers are hooking up with Money Dashboard all the time.

So, for instance, if your pensions are with PensionBee, a holistic overview of all your money in one place is possible.

For me (a Vanguard and Fidelity user) that dream will have to wait.

(Please Money Dashboard link up with these two global behemoths. Not to go all Kevin Keegan on your Edinburgh-based ass, but: “I’d love it if you did that.”)

#8 Tag your transactions

Every few days (or once a week if you like) go into your transactions, click each, and then tag them.

If you tick the box marked ‘Tag similar transactions’ it will remember for next time, so that when you log on seven days later after you’ve done another shop at Aldi, it’ll already have the transaction tagged as, for example, ‘food and household shopping’.

Of course, it’s not always as simple as that. If you buy a lot of gear from Amazon it’s unlikely to fall under the same tag every time, so un-tick the ‘Tag similar transactions’ box and tag each Amazon transaction.

#9 Splitting transactions

Whether you want to use this feature depends how anal exact you are.

Say if you were a fictional 47-year-old male from Glasgow who went to Lidl at Christmas for a mammoth shop.

On that trip, let’s say there was everyday ‘food and household shopping’, a big slug of ‘Christmas’ shopping and five January birthday cards (‘birthday cards and prezzies’).

You would go to the transaction, hover over the cost (in this case £242.34) and click ‘split transaction’. Then divide it three ways.

Splitting transactions in Money Dashboard is easy, albeit splitting £1.82 into three may be taking things too far! (Click to enlarge)

#10 ‘Offline Sources’ accounts

Aside from the obvious budgeting and one-pot benefits of Money Dashboard, for me this is where the gold lies – the ‘Offline Sources’ accounts.

These are accounts you set up and modify manually in Money Dashboard.

For instance, you could have:

  • VAT owed
  • Invoices out
  • Corporation tax owed
  • Dividend tax owed
  • Pocket money
  • Rental income
  • Cash in the house
  • Accountancy fees owed

This facility is most useful if you have different sources of income or own a business. (I used to get confused with all the tax I owed for different accounting and financial years, due at wildly different times of the year).

Most of you will be salaried but many people do have complicated financial lives, and this feature gives flexibility to bend Money Dashboard to your own ends.

Hell, it would be a bit Heath Robinson and you’d still have to track this elsewhere, but you could even now use Money Dashboard as a net worth tracker by setting up two offline sources accounts:

  • Value of investments
  • House equity

Leaving that aside, to give an example most people can relate to, say you and your partner share your money and have a pocket money system where you each get a certain amount a month in order to give you that much-needed guilt-free discretionary spending.

Here you would go to ‘accounts’, ‘add account’. Press ‘select my bank’ and scroll down to ‘offline sources’. Name it, for example, ‘David pocket money’ and add an ‘opening balance’. In this system you would assign a minus to the pocket money because it’s money that’s in your bank accounts but not available to spend.

Similarly, if you owe money, such as taxes, remember to stick a minus before the ‘opening balance’.

Plenty of money for a new pair of trail shoes…

#11 Hiding accounts

We are now entering the nether regions of Money Dashboard. Skip this bit if you’re not a power user.

Say you want to have an account in the accounts side bar on the left-hand side, but for some reason you don’t want to have the money in it showing in your overall balances because it confuses matters.

Go to ‘accounts’, ‘edit account’ then toggle-to-off the bit that says ‘include in total balances’.

This could be perhaps a mortgage account you want to monitor but don’t want to show in your overall one pot figure (‘net balance’, top left in Money Dashboard).

#12 Balance history

Not for everyday use this one, but a neat feature to use every few months. It shows the ‘trendline’ of your overall balance and each account.

Up is good. Down not so much.

#13 Back to where we started

After you’ve used Money Dashboard for a while (and note it won’t work for you if you don’t take the transaction-tagging seriously) it’s time to find out whether the ‘aspirant you’ second version of Budget Planner has become a reality or remains a pipe dream.

How frequently you want to do this is up to you. Some do it monthly. I’d suggest waiting three months before you check your spending, or only check the big varying line items such as ‘eating out’ or ‘food and household shopping’ every 30 days.

We do it yearly. Irksomely, the overall ‘budget’ figure only goes back six months, so if you click on ‘budgets’, ‘previous budgets’ you won’t get very far analysing your yearly spend versus budget.

To get around this, I (virtually) whip out Martin’s Budget Planner, open Money Dashboard and click on ‘transactions’. There’s then a bit at the top, above the transactions, where you can change the filter.

I set it for January 1 to December 31. Then I tap in the first of 65 subcategories and see if what I spent matches what I wanted to spend. Sixty five taps later I know where we are.

65 times! (Click to enlarge)

The every-12-months frequency works for us because we have a lot of one-off costs – seemingly every week.

For instance, deposits for holidays and holiday spending (we like our holidays!) exits our current account throughout the year. Unless we take a yearly look at spending in areas like this, we can’t see the wood for the trees.

Our next step is to analyse what we’ve spent in each subcategory and decrease or increase the amount allocated to each one in Martin’s Budget Planner (that colourful spreadsheet).

Our 65 subcategories (tags) form part of 12 budget categories. Make sure you go into the budget section of Money Dashboard and update the budget for each of your budget categories.

Last, there will be yearly and monthly costs that go up and down as inflation hits or you make efficiencies or change providers. Don’t wait until the yearly budgeting extravaganza.

Make sure you update both Martin’s Budget Planner and the budgeting category in Money Dashboard to reflect the modified cost.

(Note: You do not have to use Money Dashboard with Martin’s Budget Planner like I do. But having used both separately and together, I highly recommend it.)

Money Dashboard’s minor annoyances

There are minor annoyances with Money Dashboard.

I’ve already mentioned you can’t look back at the entire budget for more than six months, which is not ideal for yearly budgeting.

In addition, you can’t add transactions. I get why this is. But what it means is every time you pay for something using cash (a rarity, admittedly) you find yourself trying to find a random high-value transaction you’ve left untagged, to split and allocate a set amount to the tag category.

Also, some account transactions sync almost real-time, others (from different financial providers) take longer.

This is no-doubt due to factors beyond Money Dashboard’s control, but if you’re transferring money between two of your own accounts, it can mean your one pot figure is out of whack temporarily.

Wrapping up

They say whatever you track becomes a focus.

There’s a lot to the financial independence movement. But efficiency, making best use of your money, and developing good habits would be up there in the top 10 key pieces of the picture.

Developing the habit of tracking every pound that comes into your family and goes out is an obvious way to get a handle on your spending and grow your wealth long-term.

As I say, you do it at work. Why should home be less important?

Websites/apps like Money Dashboard (in my case coupled with Martin’s souped-up fancy-coloured Budget Planner) make this boring task less time-consuming and more fun.

The information you glean helps you spend more intentionally, relax about your money, and siphon more into growing your stash to reach FIRE a few years earlier.

Codicil

Well @TI I did it, I won the bet – I managed to go through a whole Monevator guest post without mentioning my book!

David’s Book

David wrote the UK’s first financial independence book, RESET: How to Restart Your Life and Get F.U. Money. It’s available today on Amazon at £8.17 for the paperback, £2.95 for the Kindle and, if you buy the Kindle first, £3.49 for the audiobook.

If you’d like to find out what else David has to say, he puts out a weekly newsletter. If you sign up to his email list, you can get the first 8,000 words of his book for free. You can also read his other articles on Monevator.

Coda to the Codicil

Oh damn… How much do I owe you?

Do you track your spending? With Money Dashboard? Have you tried it? What other budgeting apps do you use? Let us know in the comments below!

  1. In case you’re wondering I’ve never received a bean from the Edinburgh-based company. []
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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. []
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