How important is a steady income flow to retirees?

When I was working, I got a steady income. As two decades rolled by The Firm shifted about 10% of pay towards an annual bonus predicated on a stupid bunch of metrics to reduce pensionable pay, I always treated such bonuses as windfalls for investment – primarily in reducing the mortgage or as ISA feed later on. So I lived off a steady income.

Reading Monevator’s post on investment trusts there is an assumption that retirees need a steady income flow. I’ve always made the same assumption, but on reflection I think this assumption should be challenged, because a retiree’s life is different to their working predecessor. Two things change in a big way:

No dependent children

Retirees don’t usually have dependent children under 18, though this assumption is probably more true for people coming up to retirement now that those planning it in 20 years time. In this country people tend to have children between 20 and 35, with a peak at 30 according to the ONS. People[ref]these people are women, the stats don’t track the guys[/ref] had children earlier in the past, often in their 20s in the 1960s and 70s. It surprises me quite how nonchalant some people aiming for FI are about phasing this. For all the joyful Kodak moments etc, most people don’t deny that children are a big financial cost, and the sooner you get started the sooner you’re done with it – and indeed you will enjoy their company for longer too. A 25-year old having children will be 43 when the child reaches 18, a 35-year old will be 53. For the common two kids with two or three years gap that spans 46 to 56.

people are having children later in life (Jefferies, 2008, image linked to source PDF)
people are having children later in life (Jefferies, 2008, image linked to source PDF)

There seems to be a recent tendency for children to remain financially dependent beyond 18[ref]The torygraph is pumping this up a little bit. In the 1970s many more children left school at 16 and could find decent jobs, it isn’t so surprising that more children were financially independent when they start earning at 16 rather than at 21 – 11% of school leavers went to university when I was 21 compared to about half now. It isn’t so much the dependent children at 25 that flabbergasts me, it is the late twenties to early thirties crowd[/ref]- if they are dependent through university these ages move to 46/49 and 56/59. The early starter will be more employable, while the late starter could be well finished at fifty and in trouble financially if they want to retire early. They will need more money compared to the early starters just at the start of early retirement, at a time when money is particularly short because they can’t use pension savings – the earliest call on a SIPP is drifting up to 57 from 55 now. There is of course the opposing case to be made that having children impacts one’s career early on so you might accumulate more by delaying. If you’re okay with slightly early retirement (60 and up) then this may work out well, as you are into SIPP territory then.

Lower general running costs including housing

One of the things that clobbered me in my twenties was moving so often from one rented place to another – the Guardian’s Jenn Ashworth griped about this but I also had 14 addresses between leaving home and this house. I preferred flat/house-sharing, but that gets less possible as time goes by, because your pals tend to pair up, work elsewhere and so on. The instability of young life is expensive – you can’t accumulate tools and kit and you are always having to adapt – one place has enough kitchen paraphernalia, another doesn’t, all this incidental Stuff adds up.

Then acquiring the first house – you need tools, you need to learn a modicum of DIY, everything is dear. I have all this stuff now – I don’t need new lawnmowers and saws and shit except to replace what’s worn out. With housing I’ve paid down my mortgage. The costs of running Ermine Towers is so much less than it used to be, because there’s little capital spend. Depreciation on a house is about 1% of the capital value or a bit more – if I factor in that about £2000 of utility falls off the house every year in terms of Stuff that Wants Fixing or upgrading it is about right, whereas renting it would cost £7000, though obviously the landlord would get to eat the £2000 operation and maintenance costs[ref]These costs are shockingly lumpy – you need about five years of savings to smooth the costs. Presumably this afflicts BTL landlords too, particularly amateur landlords with just one BTL property – the statistics improve as the number of owned houses rises[/ref]

When I left early I looked at what my pension was going to pay after working for 30 years for The Firm (I made nearly 24) which was half final salary and targeted that as The Number I had to make up. Half to 2/3 of salary was a typical assumption of DB pensions and presumably this came from some acknowledgement that retirees would not have some of the big costs of their working selves. Often the pension commencement lump sum was there to clear the mortgage, though along with the kids dragging on their coat-tails into what used to be considered adulthood is a knock-on trend for people to have bigger mortgages later in life.

Does all of  this income need to be steady?

Up until very recently there was a big assumption built into the UK pension system that a pension needed to be steady – hence you had to buy an annuity on retirement. In Broke, I read that this was the historical way the middle classes dealt with the income on retirement problem – the destitute poor ended up in the poorhouse.

Of my pension income I’ve lost about 25% by leaving work 8 years early. Unthinkingly, I fixated on a target income set by other people a long time ago. I lost my way in the details, and accepted two hidden assumptions, simply because that was how retirement was meant to look. One was that the amount needed to be half my final salary, and the other was that this needed to be a steady income.

And then I went on a crash course on how to eliminate unnecessary spending between 2009 and 2012 because I wanted to get out and never have to work again. Freedom was that much more valuable to me than consumer doodads and rushed experiences. It was tough, but in that experience I learned what mattered to me and what didn’t.

Discretionary spending
Discretionary spending. Nice, but not essential

I used the experience to drive waste out of my non-discretionary spending[ref]non-discretionary spending is on Needs, discretionary is on Wants[/ref], but there has been a corollary – it skews the ratio of discretionary vs non-discretionary spending upwards. The former is more than half of the total. I have no income, so I am running down some cash savings. If I knocked out some of the discretionary spend I can easily meet TFS’s £10,000 a year target – this is largely because of the reasons given earlier – my running costs are lowered by fossil savings from my working life, particularly in terms of housing. I don’t have to pay rent and I don’t have to pay 32% tax and NI on earning the money to pay for the rent.

Despite this I am going to invest in delaying my pension to secure a more fixed income, front-running it with a 5 year SIPP. The 5 year term means I can use cash for that rather than equities, which then takes me to the thorny question of my equity investments. They were designed to make up the difference, but my HYP has already reached the target amount thrown off as dividends[ref]This is because I won’t draw the pension early, so the difference to make up is less[/ref]. The surrounding globally diversified passive index shell I can’t qualify in terms of productivity – it increases my networth but it contributes little to my investment income. Theoretically you can take income either by natural yield (the principle behind a HYP) or by selling off units from a fund that is giving capgain, but the problem is ‘how much of this damned volatile capgain may I spend this year’ which is a tough call to make.

Greybeard describes one way of smoothing the income across the business cycle. This is attractive to me, but since it turns out my equity holdings are entirely aimed at the Wants and not the Needs I wonder if I need the stability. Because I am child-free I have an option not open to those who want to leave money to their children, and that is of taking a joint annuity in 20 years time. Annuities get better value when you take them older because they’ll be paid for less time. This would address the stability problem, I would be in my seventies.

On the other hand, I might want to leave money I haven’t consumed to better the world somehow. There shifting to investment trusts in 15 to 20 years may make sense – it is a low-maintenance approach, something like luniversal’s basket of eight would work. Yes, I would be paying something for the management and the income smoothing across the business cycle. But not paying  as much as for an annuity, which destroys all the capital in the interests of a steady income.

These are not decisions I have to take now. In general, in finance, I’ve come to the conclusion that it’s best to keep options open. Things change over time, unforeseen shit happens.

what I'll see as I go out of the park to reach the library. Beats wrangling Excel for a few years IMO, not everything going wrong stays wrong...
what I saw as I went out of the park to reach the library. Beats wrangling Excel for a few years IMO, not everything that goes wrong stays wrong if you keep your options open…

After all, I wrote this before wandering through the park to go to the library to pick up a copy of Nate Silver’s the Signal and the Noise precisely because shit happened but it broke me out of a rut where I could have been spending the next six years at The Firm staring at screens and every quarter having to dream up meaningless crap and lies to keep the performance management system happy because the top brass decided to manage by numbers and wouldn’t trust my boss to know if I am doing a good job or not. After leaving, had I closed off other options drawing my pension early, I would have been sore when Osborne’s changes altered the landscape giving me the front-running opportunities I can take now. Options are good, as long as they don’t depreciate the asset too much.

Or split stable and volatile incomes – and spend electively going with the flow

There’s a case to be made that a retiree should look for lower volatility income for their needs, and let the wants go with the flow. On a 100% DC pension that might favour investment trusts (and later on an annuity) for the needs part of the portfolio, with a decent amount of headroom for the unforeseen rises – after all any retiree quitting now really ought to allow for an increase of about 10 times in the real cost of the oil price across a 30-year retirement, with a corresponding knock on cost in domestic fuel.

The wants part of your income could be invested with a higher equity exposure – anything from stockpicking to a world index tracker, and here you sell off units/shares each year to cover your next year’s elective spend. If the stock market goes through a rough patch then go on fewer holidays and more staycations, if it does well then salt away a bit to live larger in future and take more exotic holidays and eat out more. A retiree is in a great position to vary their wants spending according the the volatility of the stock market – to some extent you can also manage needs by shifting running costs along the Châteauneuf-du-Pape with caviar [ref]yeah, I know you’re a barbarian if you have Châteauneuf-du-Pape with caviar, but sod it, being your own person is one of the joys of getting older – if Jenny Joseph can wear purple and red then if you want to drink red wine with caviar just do it[/ref] <-> tap water and ramen axis.

This sort of thinking probably benefits the extreme early retiree – quitting the rat-race at 40 or mid-forties. If you can live with the volatility, and let’s face it most UK extreme early retirees had some connection with the finance industry so are probably better qualified for this than the likes of me, you can probably do better spending electively with the ebb and flow of the market than going for stability across the whole income stream.

Smooth the volatility with a 3 year cash pipeline

If you don’t like the investment trust option you can soften the ‘how much of this damned volatile capgain may I spend this year’ question by pipelining it through a multi-year cash buffer. The only indicator you have is the market value – tie your elective spend to x% of that[ref]where x is your SWR of choice – typically 4 to 5%[/ref] and one year you are partying in Sydney, the next you are in a tent in North Wales.

Lovely place, Wales, but I still don't want to have to use a tent to save money ;)
Lovely place, Wales, but I still don’t want to have to use a tent to save money 😉

I could use a three-year cash buffer and drip x% of the market value in at one end and spend a third of the buffer each year – that would make a three-year boxcar average which would probably soften the worst hits (bear markets tend to fall faster than bull markets crawl out from the wreckage, but three years is a long bear market. Just don’t mention Japan, okay?). That would be a lot of dead money if this were three years of my entire income but if it’s a part of it that’s not so bad.

Using Ishares ISF as a proxy for the FTSE100 a 3 year buffer gives me an easier ride in the year on year change
Illustration of buffering using Ishares ISF as a proxy for the FTSE100 a 3 year buffer gives me an easier ride in the year on year change – a 15% variation rather than 30%. Note ISF is not a total return fund, but the dividend yield is a lot less than the YoY variations. I have deflated the ISF share price by RPI relative to 2001

Does the three-year pipeline being in cash cost on average more than the investment trust premium? Say you start with £1,000,000[ref]to make the numbers easier, for illustration. Consider paying an IFA if you start with that much – your time is worth more than mine[/ref] Your cash buffer, at three years of 4% SWR is £120,000

After all, let’s say on average equities give a real return of 5% and you lose 1% to the extra IT costs giving you a 4% p.a. real return with no cash buffer, or a 5% return on 88% of your capital, let’s be charitable to the Bank of England and say inflation is 2%, so you eat a 6% loss on the 4% going through your three-year buffer as it falls out the end. You therefore have to put 12.7% into that buffer, so in reality you’re getting 15% return on 87.3% of your capital.

Each year on average the ITs turn your £1M into 1,040,000 and you get to spend the 40,000. With the buffer, each year your index funds returning 5% p.a turn your £878,000 into £921,900, of which you now take 4.2% to top up your buffer, leaving you with £885,000. Although I confess it wasn’t the answer I expected, you’re better off using the cash buffer and keeping fees lower, as your capital slowly creeps up in real terms or you could spend a little more. Over two decades this ends up in a doubling of capital reserves taking the buffer route as opposed to the IT route.

Of course you can spend your retirement opening a bazillion current accounts and yomp the cash through the latest best paying account du jour to improve the return/lose less to inflation. Or pass the cash buffer through Zopa and a couple other P2P joints – don’t reinvest what your borrowers pay back but keep adding every year – this makes a pipeline well suited to the 3 year term and you will get your money from 3 years ago back, with interest.

Decumulation is a bastard to get my head round. Initially I am going to decumulate cash, and that isn’t particularly challenging. In the equity part I can take the natural yield of the HYP section easy enough. But working out what to do with the foreign index stuff I’ve used to diversify the HYP isn’t clear to me at all, so far the 3 year pipeline through 1/3  Zopa 1/3 some other P2P operation and 1/3 cash 3year term account is the best I can come up with for that. Fortunately I don’t have to start doing this on equity savings for another 5 years, some clarity may come out of the murk by then.


28 thoughts on “How important is a steady income flow to retirees?”

  1. A key question for me is how reliable / predictable / plannable investment income is.

    I feel like there is a wealth of data about returns and share prices and how they fare during downturns / black swan events / etc, but what I struggle to find is data about dividend/cash incomes over the cycle.

    Cognitive biases are lethal here, with loss aversion, anchoring etc all playing a massive role when you look at your monthly cashflow. If you see your income for the last 3 months is down by 5% on the same period last year, and you have 40 years ahead of you, it is downright nervewracking, no matter how sensible your investment strategy is.

    I think I could cope with unstable incomes provided they were predictably so – e.g. March is the big payout month of the year and normally accounts for X% of the year’s income, or each year’s income is +/- X% of the previous years’ income. In the absence of such data stable incomes are a useful crutch.


    1. My experience of a HYP is that dividend income varies much less year on year than market cap. The corollary is that it’s the devil’s own job to buy a yield of 5% nowadays whereas you didn’t need to break a sweat in 2009 or 2011!

      This fellow has done a good job of summarising the FTAS DY through to 2012.

      Looking at monthly income is a red herring IMO – for fees if nothing else you’re probably better off taking money out annually. For individual shares most payouts seem to be in Q1 and Q3, but if you roll it up annually you get rid of that sort of noise.

      I see Monevator advocates this with a yearly buffer – I raise him three years to smooth those bears out.

      Eaither of those would smooth the monthly cashflow. Ever since retiring I think of things much more in terms of how much is this per annum, I hardly ever thing month on month, Not only does it help put subscriptions into the right perspective, but it integrates lumpy things like car costs and gas/electricity bills over the whole year.


  2. I think I understand what you’re getting at here.

    Volatility could be accepted if you had a cash pile behind you to smooth out the volatility yourself. In other words, you mean that–say–if my expenses were £15,000 a year to have £45,000 cash in reserve passing through Zopa etc in cycles. Correct?

    Presumably that cash pile is still put together whilst you are pre-retirement and earning. If so, then this sounds a solid and conservative approach to embracing volatile earnings in your retirement.


    1. @Dividend Drive – yes, this was indeed my philosophy when I left work, and I’ve spent surprisingly little of it. I will start to commit some of this to Zopa next year to prime the pipeline. And indeed to get the cash to work, once I have a normal income – at the moment I can’t risk tying it up but once I can get hold of my SIPP the 3 year loan seems to match my needs. Hopefully some bank will offer a useful 3 year fixed term bond…


      1. Sounds solid to me. Excellent that you have hardly spent any of it!

        I still have nothing in a SIPP for two reasons: (1) I’m only 27 so locking cash away for nearly 30 years is not my preferred option; (2) I’m still not earning enough to max out my ISA consistently.

        The nice thing about Zopa (besides the interest rate) is that–even though far from perfect to do so–you can access the cash in an emergency for a little fee. I’m not sure that is the case with bank bonds.

        Have you used Zopa before? I’ve been using it for several years now. I only have a modest amount in it at the moment (a little below £2000). I have been impressed with it in general. Once they work out whether it can be put in an ISA I may think about contributing more. In the meantime, I want most of my savings/investments to sit in an ISA so equity and cash are the main areas where my capital lies. I’d also quite like to have a problem with them so I can see how they handle it (e.g. bad debt or the like) but I have not had the opportunity yet (which is both good and bad!)


      2. I’ve got small toehold of a couple k in Zopa to try and get a feel for how it works. At the moment it recirculates, but for the pipeline idea I’d have to unrecirculate it. I’m not sure at the moment if I put £1000 in at the 3 year offer, say Jan 2015 how much of this will be returned early before Jan 2018. If the ratio is too high it could stuff this idea 😦

        I took a look at ratesetter and may try them, the proposition seems a little different. And if I went this way I’d want diversification.

        What you want is other people to have a problem so you can learn 🙂 The obvious systemic risk is interest rates rising leading to loads of Brits favouring paying the mortgage as opposed to their P2P debts…


  3. Great stuff ermine. I think for those who’ve got their head around personal finance and investing, the case for smoothed income comes down to psychology and emotional needs, more than logic.

    That said, don’t discount the ‘mental infirmity’ angle too. Rejigging flows through a cash buffer — let alone selling down capital — is not something to leave to an ailing brain.

    One would need help eventually in any case in that circumstance, sure — but the ITs might buy a few years of ‘not waving but drowning’ buffer, and time for someone to notice and stage an intervention!

    Re: my one-year buffer, remember my article is talking about smoothing *income* not smoothing capital gains. Even in bear markets, well-chosen income generators tend to (/have tended to! 😉 ) suffer relatively little *income* disruption.

    If one was living off selling down volatile capital gains, I agree a multi-year buffer is more appropriate.


    1. Pah – it was you who wrote that investors live longer and with their head intact though the cynical me did suspect this may have been sample bias. But I like the story.

      Because I don’t have inheritance tax concerns I have the options of the part-annuity as well as a default of throwing the lot over the wall to Mrs Ermine which at the moment I can do tax-free, there’s an age difference what would be useful. What I may leave to charity after we are both gone is a) probably up to Mrs ermine and b) I believe charities don’t pay IHT, so tax is not my problem. Though as we both know, the dead don’t pay IHT – it’s the grabbing kids 😉

      Fair cop on the one-year buffer. I really think on retirement one should be grown-up enough to get out of the monthly paycheque-topaycheque thinking, and just think in April “how much do I have for the next year”


  4. That’s a very interesting question – the relationship between the possibility of early retirement and if/when you have kids. Delaying until your 30’s will certainly slow FI down unless you’ve got a plan in place from your 20’s; fill your pension from earnings rather than put it towards property? before the disposable income slows down when they arrive. It doesn’t seem a likely scenario for most people.

    I’m lucky enough to be of an age when it was expected to put having kids before any need to establish yourself on the career ladder, so I did just that, took 10 years out of work from age 23 on, had my two kids plus the luxury of being a stay at home Mum (which also incidentally taught us how to live on a low income and didn’t allow us to get used to a DINKy lifestyle). I did manage to get back onto the (lower rungs of) the ladder in my 30’s which wasn’t easy and needed the boost of a part-time MSc to help me compete, but all in all it worked for me. However, I don’t think this kind of path is much travelled at all these days.

    My adult kids are largely independent now but changes are afoot due to recent events. Life has a habit of messing with the best of plans …
    (btw I love that observation you make about having your kids young so that you get to enjoy their company for longer 🙂


    1. The whole when to have children is the flippin’ elephant in the FI/RE room in a lot of areas. One of the tragic things about the modern industrial economy in the UK is that while we have great TVs, a zillion flavours of coffee and you can get chicken wings delivered 24/7 it has made two things that are very dear to most humans’ hearts a lot tougher than previous generations. One is getting a roof over your head and the other is having children at a time that is favoured by human biology, along with actually getting to enjoy their company.

      People come over all surprised at the observation that if you have children late they will have you around for less time and vice versa. This is arithmetic, not higher maths. Positives of having them late is that if you do leave something in your estate it will happen at a time in your child’s lifecycle that is more likely to benefit them. The aristocracy understands this – they often skip a generation and leave to the grandchildren, although this also has to do with exposing their assets to IHT less frequently. And older parents are hopefully more mature and know themselves better, but you can’t fight the numbers.

      I don’t have a dog in the race but I’m amazed at how people ignore the phasing of this through their own life cycle, both in terms of the time with the kids and in the PF area the effect on one’s own retirement planning – it’s very highly relevant to FI, even if you are a bloke in your 20’s/30s. I’m not judging anybody’s course of action, but it’s just plain odd to ignore foreseeable consequences of such a massive lifestyle change. Even if it’s as simple as do you rely on SIPPs, ISAs or try and pay down the mortgage.

      I considered this in my 20s and 30s even though I came to the conclusion this wasn’t something I wanted to do, so it’s not a new challenge that’s newly arisen in the last 10 years!


      1. As somebody who just started my family aged nearly 40 this is something that has been on my mind a lot.

        I do think there are a lot of financial advantages to starting a family later: particularly for women, I think that already having a network of people who know you and trust you makes a huge difference to getting back into the workplace. Now that I am older I am also much more in charge of my own work-life mix, and if I decide to go home at 5.30 to put my daughter to bed and then catch up on anything outstanding once she is asleep nobody is going to question me (would have been much more of a problem when I was junior and had to keep my bosses happy as well as my clients). I have seen a lot of my school friends who had kids early give up work due to that lack of flexibility (and not yet having an income that would justify childcare costs) and then struggle to get back into the work place when the kids are in school. By comparison more of my Uni friends who generally had kids later have been able to negotiate flexible working, having already established themselves, and being in a better financial position (having paid off a good chunk of the mortgage already etc).

        On the other hand, as you point out, if my calculations are wrong and I “jump ship” too soon, then this has implications for her and not just for me. So far having children has not cost much at all beyond childcare (particularly as an older parent with friends who are desperately trying to rid themselves of baby-paraphernalia, we’ve had nearly everything second hand). This will inevitably change as she gets older though.

        In reality of course my timing had nothing to do with financial planning, and everything to do with when my partner and I finally got the guts to jump off this particular cliff together. In my view the personal ramifications of leaving family late (having less life left to spend with them, as you point out) are far larger than the financial ones. On the plus side it does mean that I will hopefully manage to give up work in time to spend more time with her while she is young!

        At the moment my plan is to jump off the “next cliff” (retirement – or at least semi-retirement to a very part-time mode of working) roughly when my daughter goes to school: avoiding the “wrap-around care” nightmare and having lots of time with her in the holidays and also time to pursue my own projects during term. But I need to get really really clear on my maths first (particularly given it is going to be very hard for me to predict how much our family expenses will be with a 16 year old versus a 5 year old, for example), and I’m sure having a family will make me even more cautious than would have been the case if I was flying solo…


  5. Hi ermine

    Agree very much with your post. As a demonstration in early retirement my income needs are only likely to be 10-15% of what I earn today let alone my “final salary”. I see the much reduced number coming from 4 big areas:
    – I can move to a much lower cost of living area whether here in the UK or on the continent – as you highlighted.
    – I no longer will need to save a large portion of my income for FIRE.
    – I should move to somebody paying high tax and NI contributions to somebody paying nigh on £0 in both tax and NI – as you highlighted.
    – I’m already pretty effective (I think) but in FIRE I’ll have more time to “forage” for each purchase thereby further lower living expenses.



    1. That’s a seriously impressive ratio! Mine is less – I figure I could support a similar lifestyle at about 1/4 for final salary.

      I found owning my time does make a massive difference to ‘foraging’ – too often I paid extra to buy time when working.


  6. However wonderful your children may be, your grandchildren are even better. My two-year-old granddaughter recently returned from a holiday. Clearly delighted to rediscover her familiar environment, she grabbed my hand and marched me around the garden exclaiming “my Grandpa!”.

    I am extremely fortunate to have a DB pension that more than covers my needs, and also have some money invested in ISAs to provide for some wants. Currently this is in income funds: advantages being (a) income likely to hold up in bear markets, (b) little action required, so good for ageing brains. I wonder about changing to the alternative strategy of holding a global tracker and selling units every month. The advantage being that I could probably set a SWR of 5% rather than the 4% that you are lucky to get on income funds at present. Disadvantages: (a) income would plummet in bear markets, (b) I should be sitting indoors confused by spreadsheets when I ought to be out in the garden with the grandchildren.

    But my limited investing experience suggests that fiddling is expensive, and that I should stick to the adage which proved so useful in my professional life: “don’t just do something, stand there!”.


    1. There’s much to be said for ‘do no harm’ with investing too. Although when I ran the simulation the effect of the 1% extra fee was quite serious over a 20 year timescale. Certainly a extreme early retiree should be wary.

      But yes, time outside with the grandchildren and easier sleep is worth paying for as time goes by – it points to lifestyling the investment approach as well as the asset class spread.


  7. Hi Ermine,

    Excellent read. 🙂

    Kids are hopefully in the future for Mrs Z and myself, but nothings guaranteed. Trying to build it into the ‘FI Plan’ is hard, really hard, but others have done it, like The Escape Artist. The cost of kids is high, stupendously high if reports are to be believed, although these will be the costs of the consumer hordes…hopefully a thrifty FI type would reduce these with no impact on a child’s life.

    I guess we will continue to invest and save as hard as we can, as we will be in a better position that if we didn’t do this. And see what happens, when it happens?

    On the income side of things, this is something I have been pondering over. Annuities will perhaps become better value again in the future and could be used to cover basic expenses, like you say. Seems a long time ago that cash ISA’s, Bonds or Annuities provided any kind of real income 😦

    Moving towards something High Yield (either of your own design or a High Yield tracker/fund) feels quite risky at a point when you want to be reducing risk?

    Eating into capital seems inevitable at some point, but scary.

    Maybe it’s all about building a big enough margin in the first place? Doesn’t seem the most efficient way though…

    Also, moving from accumulation type funds into income producing assets needs to be considered. A slow shift in your asset allocation or a one time event?

    Mr Z


    1. I offer you Mr Money Mustache as a great example of FI with kids.

      I started out with a HYP and so I have some years income history of it – I’m happy with the results and in particular the risk reduced is fiddling risk- you spend the income, which is much more stable than the capital value. It’s the index stuff that gives me a hard time – I did this to diversify geographically, and have been wrestling with the ‘how do I make this lump work for me’ bit where there’s no useful dividend.

      I’d personally make shifts from acc to income gradual – over 5 years or so

      Annuities score as you get older – I tried a calculator and a level annuity yields 5.8% at 64 and 7.6% at 74. But they’re not ideal for people with kids…


  8. My parents (of the Greatest Generation) were retired for 25 odd years and although they were not financially astute they had modest pension income coming in that kept them above water, Their wants were not particularly high and their needs were looked after.
    My mother in law is in her mid 80s now and the same scenario applies to her. So yes for most retirees a steady income really helps.
    With the benefit of 10 years of retirement myself I am grateful that both my wife and I can cover our needs and most wants with steady income.
    Our daughter is grown and our mortgage is long amortized.
    I agree that wants could be covered by more variable income, and we’ve found that as you get older these “wants” tend to decrease anyway. More stuff just complicates your life.
    That said, I just upgraded my digital camera to get more pics of the grandkids. 🙂


    1. You and I have the advantage of having DB income to address the needs – that’s certainly a large part of why I’m trying to look at the variable approach on the wants. You need the capacity for toys and holidays, or even sometimes the joy of helping people out 🙂


  9. Hee Hee! I’ve just read this after a day sorting the tent out for a trip to North Wales!
    The beauty of retirement is that you can choose to go camping when the sun is actually shining!

    Conferring with other parents, kids have cost a lot more than we all expected in their 20s – possibly because of the downturn in the economy over the past few years, or maybe the times we live in. The good news is that by the age of thirty they get sorted.

    We will be using the 3x buffer to smooth things out – it suits our psychology. And like you said, possibly use a portion to buy an annuity in mid 70s. We aim to keep things simple, selling down what is appropriate for market conditions. Don’t intend to leave kids anything (they may get lucky if we kick the bucket early, but stats say we might have another 30 years!)
    Not bothered about a steady income, as long as basics are covered, and discretionary wants vary from year to year. Sometimes we will upgrade from a tent to a caravan!
    We checked out of keeping up with the middle classes years ago, and can now do any crazy thing we want. 😉


    1. A tent in North Wales – now that is hard! I’m just too soft for that.

      The annuity providers could do well to make more of the increase in yield later on – the mid seventies looks like a sweet spot at the moment, both with the increased yield and also a reduced inflation erosion/longevity risk!


  10. Nice piece ermine, though two very different issues. On the ‘steady income’ front, this is something that vexes me, and having seen elderly parents declining, I think annuitsing in my 70s is th way to go. I also think the big experiment turning pensions into piggy banks is going to end badly for many, if personal debt levels are any indication of money management skills.
    Having children, and the timing thereof, is obviously an intensely personal issue. It’s not one that actually feels very controllable, nor (perhaps fortunately for the continuation of humanity) terribly amenable to rational decision making. I myself spent my 20s working very hard doing professional exams, which has certainly enabled my lifetime income to be far higher, and given access to the treasured DB pension which will be my foundation in retirement. When I finally decided I could make space in my life for children, I found that it is not always a question of simply deciding and they arrive to order. So I will be in my late 50s, at best, once I can expect them to be self supporting.
    The cost of children is not in what you spend on them, for most people that is dwarfed by the income hit you take if you actually want to spend any time with them. Myself and OH have both worked less than full time since they were born, which has cost us hundreds of thousands in income foregone. I also think it changes your mindset- as a parent, your investment in the next generation (time, experience, know how and material) feels so much more significant than any investment in your own financial independence or self actualisation. And of course, you don’t know when you leap off into the unknown of parenthood whether you will be lucky enough to produce offspring who are capable, in time, of standing on their own two feet. I see friends with disabled children and count my blessings in that respect.

    so yes, I’m not surprised that most people who reach financial independence do not have children, for whatever reason. Though of course, frugality and a health dose of anti consumerism in your early adult life can only be good preparation if life does take you towards parenthood.


    1. > for most people that is dwarfed by the income hit you take

      I didn’t realise this – studies like this LV one don’t show the opportunity cost, it’s normally shown as a cost of childcare. Looking at ex-colleagues the hit to FI seemed to be that parents were about 5-10 years behind, which is hard to square with the LV study.

      > I also think the big experiment turning pensions into piggy banks is going to end badly for many, if personal debt levels are any indication of money management skills.

      I wonder about that too, although the size of the average DC pension fund size is 25k which isn’t really enough in the first place. Given it’s an average, the sort of people who have built up six figure sums and up probably won’t blow it and those with a smaller sum may not actually have that much to lose.


  11. @23 May 2015, 1:36pm by The Dividend Drive:
    “The nice thing about Zopa (besides the interest rate) is that–even though far from perfect to do so–you can access the cash in an emergency for a little fee. I’m not sure that is the case with bank bonds.”

    What makes you think it’s a “little fee”? If interest rates have risen since you invested, you’ll suffer an unpleasant haircut on top of the eye watering 1% fee. Far too many Zopa investors haven’t got a clue about the capital risks they’re running.


  12. @article: “Annuities get better value when you take them older because they’ll be paid for less time.”

    That’s not really “better value” – the yield is higher precisely because they’re paid for less time.

    In fact, annuities are a better buy the younger one is, because of mortality drag. An annuity bought at a young age offers better value because it’sit’s riskier. Since one might die and lose the income, the income is higher.


    1. > That’s not really “better value”

      From my experience it will be. As a financial asset of the estate you’re right. But I stop perceiving the stored value when I’d dead. Once the yield of a joint annuity rises above the typical yield of the investment capital then it makes for a better experience – and it’s the experience I care about, rather than the value of the estate. I can’t take it with me 😉


  13. I’ve just spent a very happy 10 minutes finding the location of that wonderful burial chamber photo, as it is one we haven’t visited yet. It’s Carreg Samson in Abercastle, South Wales. Looking forward to planning a trip there. 🙂


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