Could go now but decided to hang on for attempt at Fat Fire (mainly property income)

[NorthFire]

Hi. First post.

I'm 48 and my partner is 46.

If I have my numbers correct I think I could retire early now. Would like some feedback on my calculations/approach.

We both have jobs but also have a separate income from a property portfolio.

Numbers below (numbers have been rounded down to nearest thousand for ease of reading):

All figures after expected taxes:
Current total net income while working (i.e. salary plus property income) - £80,000
Expected income if not working at 50 (i.e. just income from properties) - £31,000
Expected income if not working at 57 (i.e. add private pension income) - £43,000
Expected income if not working at 67 (i.e. add state pension income plus residential mortgage paid off) - £68,000

As you can see I do have a pension which I can access at 57 but I've focused on properties for income rather than stocks and shares.

I've worked out my expenditure for what I consider a "normal" retirement and this works out to £27,000 per annum. Based on this I think I can retire straight away (not even wait until 50). This is because £27,000 expenditure is less than the £31,000 property income (after tax).

I also have what I call a "buffer" pot that I can dip in to to cover unexpected spends should my income not cover my costs. This is currently at £85,000 and I'm happy with this amount but would like to get feedback if the buffer pot is too small or big.

Although I have a buffer pot if I am honest I would look to cut my expenditure down if the income dried up. I could go in to "lean" and drop to an expenditure of £24,000 per annum.

The property income is also insured for 12 months. If tenants didn't pay I'd get help with the eviction process and also get the rental income for a maximum of 12 months while this was being done.

So all looks good to retire now (I think). However I've also worked out what the annual expenditure would be for a more "lavish" retirement and this works out to £42,000 per annum.

Looking at the figures I can cover £42,000 at 57 already (just about as the income is £43,000 at this age)

My thoughts are to save the difference between the £31,000 I get if I retire at 50 and £42,000 for a period of 7 years. This works out to £77,000.

If I get that in the bank (plus retaining my buffer pot of £85,000) I could go fat fire.

As I can currently save approximately £50,000 a year this should mean I can retire at 50 on Fat Fire.

If my income during retirement takes a drop (e.g. property repairs) as well as the buffer pot of £85,000 I could just revert to normal fire (£27,000 spend) or lean fire (£24,000 spend).

The annual expenditure figure might seem high but please note I do have a residential mortgage which costs £11,000 a year included in this spend). This stops at 67 hence the jump in income at this age.

What do you think of the strategy?

Another option could be "normal fire" retirement at 50 for 7 years and then go "fat fire" at 57. Not sure on that but could be an option.

Also with the ability to save £50,000 per annum it will be insanely difficult to stop as once I do I won't get that income anymore.

Any advice greatly appreciated.

 

[pb4uski]

Can equity value in your income properties be accessed through a cash-out refinancing to raise money to accelerate your plan for fat FIRE? If so, then I think you're close.

If you could take £100k out of the properties as a loan then the loan payments at 2% for 30 years would only be £5k a year and that £100k could be used as a bridge until your private and state pensions start.

I think you would be better thinking of your spending as two streams.... £11k from now to 67 for the residential mortgage and £31k for fat FIRE living expenses.... and then separate incoem streams for properties income, private pension and state pension.

 

[OldShooter]

You are looking at least a 30 year planning horizon. Not sure what the Bank of England's inflation goal is, but 30 years of just 2% inflation leaves you with a £ having buying power barely more than half what it is today. US long term average inflation is 3.11. Thirty years of that leaves you with 38 pence of buying power per £. That £27,000 purchasing power will need 70,000 inflated pounds to accomplish.

I'm not commenting yea or nay on your ideas except to strongly suggest that you re-do them using realistic or even conservative inflation assumptions. Maybe both.

One flaw in may US retirement calculations is to use the past 30 years' inflation numbers, which are barely more than 2%. If we reach back to include the late 70s and early 80s in the average it balloons to over 4%.

 

[NorthFire]

Can equity value in your income properties be accessed through a cash-out refinancing to raise money to accelerate your plan for fat FIRE? If so, then I think you're close.

If you could take £100k out of the properties as a loan then the loan payments at 2% for 30 years would only be £5k a year and that £100k could be used as a bridge until your private and state pensions start.

I think you would be better thinking of your spending as two streams.... £11k from now to 67 for the residential mortgage and £31k for fat FIRE living expenses.... and then separate incoem streams for properties income, private pension and state pension.

Thanks. I didn't think of that scenario. I could access some funds by re-mortgaging on the properties. I'll run the numbers and see the impact.

 

[NorthFire]

You are looking at least a 30 year planning horizon. Not sure what the Bank of England's inflation goal is, but 30 years of just 2% inflation leaves you with a £ having buying power barely more than half what it is today. US long term average inflation is 3.11. Thirty years of that leaves you with 38 pence of buying power per £. That £27,000 purchasing power will need 70,000 inflated pounds to accomplish.

I'm not commenting yea or nay on your ideas except to strongly suggest that you re-do them using realistic or even conservative inflation assumptions. Maybe both.

One flaw in may US retirement calculations is to use the past 30 years' inflation numbers, which are barely more than 2%. If we reach back to include the late 70s and early 80s in the average it balloons to over 4%.

I would look increase the rent on properties by inflation so that should keep my income in line going forward.

 

[HI Bill]

Welcome! To me, you're too close to the wire (things would look much better in 4+ years), and have too little diversification. A local slump in the economy/housing market/rental market, major repairs, a rental house fire, inflation, etc., could devastate, or at least harm your retirement. You also don't appear to have any international diversification. At 85K buffer pot seems way too small if you own 3+ properties.

 

[NorthFire]

Welcome! To me, you're too close to the wire (things would look much better in 4+ years), and have too little diversification. A local slump in the economy/housing market/rental market, major repairs, a rental house fire, inflation, etc., could devastate, or at least harm your retirement. You also don't appear to have any international diversification. At 85K buffer pot seems way too small if you own 3+ properties.

Thanks for the reply. Really appreciate the feedback.

What buffer pot do you think is sensible? I used a method I read in a property book called binomial probability to work out the buffer. This method suggested £22,000 buffer which I thought was too low at the time so I increased it. I thought £85,000 was sensible but thinking about it further you're correct this does need increasing.

Also I agree that I'm heavily weighted to property in terms of diversification.

My net worth split is as follows. Note I've excluded my residential property from net worth as I don't see it as income generating:

Assets	% excl resi prop
Immediate - Cash in bank accounts	5.70%
Mid Term - Accessible Investments	5.43%
Long Term - BTL (Nett)	57.20%
Long Term - Pensions	31.67%

I don't want to sell any of the existing properties as they all perform well.

I could look to focus the extra savings over the next year in to my mid-term accessible investments as these seem low at 5.43%.