The 4% rule is all well and good, but I've never really got to grips with this as a tangible model for calculating FIRE mainly because of the complications when working out the restrictions on when you can access the pots at different ages (predominantly pensions).
Instead I prefer to break down FIRE strategy and planning into two distinct sections:
- Pension provisions. Including overall pot, what this might work out to be in retirement, and what age you can access.
- Bridge Pot. This will get you from your FIRE age to your above Pension pot access (above)
What I've developed here is an Excel sheet which works out what you need between your desired FIRE age and your pension pot access age, aka your "FIRE Bridge pot". This has helped me to visualise when I could 'push the button' on FIRE, how much I could live off in the 'Bridge years' and the effects of varying returns on the pot.
If nothing else it is interesting to model out at what point your bridge is enough and you can cut the cord of work!
FIRE Bridge Calculator spreadsheet:
https://docs.google.com/spreadsheets/d/12h1iyu2IqP8jsRG6v-6SdY5v5PIcwMbf2PODSlScyC0/
How to use:
- Access this link and either make a copy or download the spreadsheet
- Input your age (C2) and your current FIRE bridge pot amount (commonly ISA/GIA/savings etc)
- Add in any contributions you plan to make up to your FIRE age in Column C
- Add in any estimated drawdown amount into Column G between your FIRE age and your pension access age indicated in Column B.
- If you want to model out different % rates of return then just overwrite them, and the model will change
- The model doesn't factor in inflation so please factor this in manually/via a formula
- 37 year old
- £200k in FIRE Bridge pot
- Outgoings roughly £35k a year
- Wants to retire early/mid 40s
- Can access pension at age 57
- Can contribute £20k a year up until FIRE date
The model shows that this Bridge pot will work out if they get returns of 7% or above. But 6% or below and they would run the risk of running out.
- Dial down their outgoings (column G)
- Increase their contributions
- Carry on working for another year or 2
Thanks for making this sheet, it's great! Seeing results from different estimated returns on the same graph is very useful.
ReplyDeleteThe bridging gap issue is very important (the earlier you retire, the more important it is, generally. I've already retired (am now 46 years old)).
Like you, I think about the two periods very differently (pre vs post pension age). It's an element of FIRE that doesn't get enough thought/coverage, imo.
It seems that the model stops once you hit pension age, which makes sense to me as we're just trying to get to a finish line here (or maybe you're just assuming drawdown will match pension income?)
Maybe for some who have a lower proportion of wealth in their SIPP this may not be the right approach, but it is for me (and I guess for you too).
I'm actually far more preoccupied with getting to private pension age than what happens after, which I'm just a a lot less worried about.
Only time will tell whether that's the right attitude or not!
Some thoughts on the sheet:
-> I guess the higher the resolution you add to it, the more useful it becomes for you personally , but maybe it becomes more complex/less useful for others who are in
a different situation. So the level of resolution you have it at is perfect for your blog/for download. I would guess you have a more personalised version that you use for yourself.
-> Contributions tab can also be used for income : I have some rental revenue which I can just put in the Contributions tab.
-> I thought SIPP access age usually gets adjusted to be = state pension access age less 10, but could be wrong. This would put the conditional formatting cells out to an age of 57 or 59 (based on change planned for 2026 & 2044). It's no issue and it's easy to change the conditional formatting and then just extend drawdown entries a year or two.
Also it's worth thinking about the potential for government to "move the goalposts". If they do that, it's only moving one way, given the pyramid-scheme nature of public pensions. Seems unfair that SIPP pensioners would have to suffer also,but that's what's likely to happen - so probably useful to stress test your plans by pushing pension age out further to see how it looks.
-> Tax is the other issue but can be incorporated by just adjusting drawdown. Unlike inflation though, probably have to give this a bit of thought before landing on a load factor. For some it'll be simple enough, others not so much (in my case, I moved to Spain - a very different tax regime!)
-> As you say, there's nothing for inflation but easy to just add a factor into drawdown column. (This is how I generally look at / model inflation).
Thanks again, and keep up the awesome blog!
Thanks for this excellent comment, and apologies for my tardy response! Some great pointers on the calculator as well as overall points, which I'll tackle one by one.
Delete-'It seems the model stops once you hit pension age'. So it does on the example I've used, but there's no reason why you can't manually continue the withdrawals past that and certainly the model allows for this. For example, take £20k out each year for your bridge, and then when your pension kicks in and you still need to supplement it (and have some of your bridge left!) then you can carry on withdrawing it.
-'The higher the resolution the more useful it becomes for you personally' - Bang on, I just wanted somethin high level that people can use from a couple of minutes entering rough figures, I've then left it open that people can build on this by adding some additional features, you mention rental revenue instead of contributions which is a perfect example.
-SIPP access age. Yes this was a tricky one to pop in there as obviously it's a moving target for people/different age groups. I'm very lucky that even though I'm mid-30s, one of my pensions has a protected access age of 55. It also allows me to transfer other pensions into this and benefit from this age of access. What complicates matters is that I also have a small DB pension which I can only access from age 60. Much like the comment above about it being high level, it would be an absolute nightmare to try and bake in different pots DC/DB schemes and different ages of access, so I've kept it simple. Good point on the conditional formatting though, and an easy fix is for me to change. There is now an additional box at the top with "Pension Access Age" and the conditional formatting changes depending on the number here - great spot!
Also good points about tax and inflation. Hopefully people can manually bake these in as I felt adding them in would take away from the simplicity of the model.
Thank you again for your feedback! Very jealous of you being out in Spain, we've got terrible weather at the minute, although I suppose it's only the middle of June and I should wait for summer to start... :D Did you move out to Spain post retirement or was it a decision earlier on? How do you find the tax difference between the two countries, both in terms of accumulation and decumulation?
Thanks for the reply and your helpful answers to my queries.
ReplyDeleteAlso - lucky you with the protected pension age! Given the uncertainty around potential future government policy changes etc, it's nice to have at least one pension stream locked in for a specific future date. Also a DB pension is nice too, you have good diversification in your future income streams! I just have a boring SIPP (and the standard UK gov pension, which will be quite modest in my case).
Be careful what you wish for when it comes to weather - I'm in Valencia and we usually get up to 40 degrees in August; with the often heavy humidity here it can be painful. I retired in 2017, left London and travelled for a couple of years, ending up in Spain in 2019. Not a planned decision (met my now wife while I was here).
The tax difference between Spain & UK is the following : UK is good, Spain is bad!
Spain doesn't have anything like the ISA, and income tax allowances here are low / few. So for accumulation it's tough (and that's ignoring the tragically low salaries).
For decumulation it is also terrible - they have a wealth tax for starters.....
But....the food is good, and prices (of almost everything) are lower than UK.
There seems to be a correlation between low prices and incompetent governance/poor economic performance, but that doesn't always stop me from complaining about the latter while enjoying the former!