Bear markets are a bastard when investing at a fixed time in life

Most of the younger folk reading this will go WTF? Bear markets are the investor’s best friend. You get more for your money. The trouble is, that a human life is not infinite. It is short, and a working human life is shorter still, unless you have a trust fund working for you until your 20s.

Reading this article brought this home to me, getting good results with financial markets is a combination of luck, being in the market a long time1 and never be a forced buyer or seller.

Never be a forced seller

The human financial life cycle – buyer at the start

There is a human financial life cycle2, and that life cycle has two big events in it where you make a big financial decision at a time which is more a function of when you were born than any financial considerations. In the first case, you are a forced buyer. In the second, you are a forced seller.

The first one I got very, very wrong, and that is the time you buy your first house, should you be earning enough to do so. Buy at a bull market high with a mortgage, and it will take you decades to recover from that error. Although it’s true that you don’t have to buy a house at any specific age, the human lifecycle is such that that becomes more of a consideration in your thirties, and it tends to be more of a consideration when breeding. The latter you need to make happen in a space of about 10 to 20 years, and you’re probably too skint or haven’t met the Right One in your early twenties, so this window is more like 10 years in practice. Unlike the financial markets, cycles in the housing market are long and slow, and you take this decision with little experience of market cycles.  And you do it with leverage.

The upside is that you take this decision early in your working life, so there is enough time to recover from errors, though if you get it very wrong it will cramp your style for a long time. Leverage is lovely when the asset you purchase rises in value over time, and it is frightful when it goes down over time. Most of the time housing goes up over time, which is why 90% of Britons regard residential property bought with a mortgage as a money tree3. But if you take a negative equity suckout early in your career you’ll be paying off a long time.

The second decision you take when you are out of ammo, and you become a forced seller, every year. It’s called retirement, and while on average a 4% ‘safe withdrawal rate’ SWR is considered acceptable (it used to be 5% a few years ago) you’re still a forced seller.

And a seller in retirement – an early bear market hurts your SWR

The early retiree, and particularly the extreme early retiree, has a tough balance to strike. What most people want to run their life is a steady income, preferably matching inflation or earnings growth, whichever is the greater4. Sure, in an ideal world you’d want to have as much as possible, but when wrangling the art of the possible, something that looked like their income when working would be nice.

Living off a capital sum and unreliable investment income is really, really hard. It leads to suboptimal outcomes, too. I will be glad when I have a base income that is defined. There’s then a clear answer to ‘how much can I spend in a year’. In the years of living off savings and investment income, the answer to ‘how much can I spend in a year’ was always ‘as little as possible’ and now in hindsight there’s a case to be made that I spent too little over the last eight years. Now that’s easy to say looking at an ISA bloated by ten years of a bull market. It could have been different, and I could have needed the money I didn’t spend had things gone differently. Most of the win I had was in the fact of not working for The Man, the stress of weaving a way through the financial jungle is far less than the stress of working was at the end.

But I never considered taking the CETV of my DB pension. Younger readers probably tap their heads and think that crazy. But I have had enough of living from an unstable income. It’s just not how I want to live. The Irrelevant Investor’s article shows the problem. If you set your income at 4% of marked-to-market investment income at the start, then a bear market at the start of your retirement will kill off your capital in 20 years.

You can fix that easily. Stick with the 4% rule and spend 4% of your capital as marked to market at the beginning of the year. Simples

Your income if you suffer an early bear market, predicated on a 40k income at a 4% SWR at the start of retirement. Swiped from The Irrelevant Investor

Our retiree didn’t get anything like 40k that his SWR promised him most of the time, and suffered 2:1 swings in income. “Can we go on holiday next year? God knows…”. Had the bear market happened at the end, then of course he’s been living high on the hog, ending up with a lot of money.

You can theorise all you like, but you have to live a particular sequence of returns trajectory rather than the Monte Carlo average. Sure, you can pool resources with other people to reduce the swings a bit. That’s called buying an annuity. It’s what you had to do until as recently as 2014, but when most people look at how much they have to pay for an annuity they run away in the opposite direction. Heck, even where people already have an annuity in the form of a defined benefit pension (which is annuity in all but name) and someone dangles a CETV in front of them to buy them out of getting that annuity many of them take the money and run.

There aren’t any good answers to this problem. There’s an argument that I have made the other mistake – fearful of the hazard of ever having to go back to work, I ended up with an ISA that is worth five times my gross salary at the high-water mark of my career, about to draw a pension that meets my needs and most of my wants. There is a case to be made that I underspent in the last seven years.

And yet it could have turned out differently. Because I started in the teeth of the financial crash, more than half of that capital came from investment rather than from savings. That investment gain might not have come. The market could have gone lower. That is the conundrum of trying to live off investment returns. There are a number of paths through the maze, as things like firecalc can show you. But you don’t know which track the hand of Fate has allotted you until you look at the path you lived, and there is much variation in the particular sequence of returns you can live through. In the early years I believed I would run out of money within five years, reaching 2017 with no fuel in the tank.

I was lucky. That early bear market never happened, and so I reached the finish line with more than I started with. It now makes sense to draw my main pension a little early, and to shift the profile of the ISA towards income, so that I smooth my income until I get my state pension.

I will give up some total return doing that, but in return I get peace of mind. I learned many things across the interregnum between taking my last pay packet and getting my first pension pay. One of those is that I am not a good judge of sell calls. Although the largest holding I have is VWRL which probably is my largest dividend paid per year, I have shifted recent purchases towards higher yielding investment trusts and of course the original HYP is still working. I should be able to make my income aim out of the ISA with the top up from my PCLS over a couple of years, while still nto having to sell.

Sure, if I wanted to optimise income, I wouldn’t start from here, particularly with all the VWRL which is a lousy dividend payer at 2%. I was led off the HYP path by the siren song of the passive investing shibboleth. But I can get what I want by a shift back towards income with future purchases. Without having to sell anything. I don’t want to shoot for the moon now. I want an easy life, and get an income uplift without making investment decisions.

  1. a long time because the real return of the market is piss poor on average, 3-5% in real terms I would guess. That means you need 100k of capital to get 4-5k of annual income 
  2. This should be prefixed “in the developed Western world” – and perhaps even more qualified “In pre-Brexit Britain”. Other European countries are more rent-friendly or have multigenerational living, and in Britain itself there have been higher levels of homeownership and more stable employment patterns, both of which are changing as a result of globalisation. 
  3. It always puzzles me why people don’t ask themselves what ground that money tree grows in. It is the hopes and dreams of their children trying to buy their houses 20 years down the line, because the parents pay politicians to water their house price money tree with tax breaks and credit pumped into the residential housing market. After perhaps too many drinks I greatly offended some berk at a party once who was mithering on about how it was so unfair that his kids couldn’t buy a house nowadays, after talking about how he’d done so well with property that he was thinking of getting into BTL. You couldn’t make it up… 
  4. Matching inflation keeps your absolute standard of living stable, but humans generally compare themselves with other humans, and if the others are working and earnings increase above inflation then workers will be able to buy the latest iPhone when you can’t, because they will be able to pay more. 

63 thoughts on “Bear markets are a bastard when investing at a fixed time in life”

  1. Government subvention of the housing market is an interesting one. Capital Gains Tax was introduced by the 60s Labour government; they exempted CGs on your personal private residence from CGT. The earlier Conservative government removed the income tax on imputed rent in the 1963 budget.

    Favourable treatment for Inheritance Tax was introduced by Cameron’s Conservative government. (It’s such a complicated nonsense that I don’t expect it to survive long.)

    The most obvious countervailing action was the removal of the tax relief on mortgage interest payments. The attack on it was started by Nigel Lawson (Conservative) in 1988; final abolition was by Gordon Brown (Labour) in 2000. A less obvious attack on the housing market is perhaps the increase in Stamp Duty Land Tax by the Conservatives.

    So it’s a mixed picture. I wouldn’t have any objection to the removal of the CGT exemption as long as (i) the CGs calculated were corrected for inflation; unfortunately Brown removed the use of index-linking in CGT calculations, and (ii) some other, worse, tax were abolished. For a start, it really ought to be accompanied by scrapping SDLT on residential property.

    I can’t imagine any government having the steel required to reintroduce income tax on imputed rent.

    Presumably the best non-tax actions open to the government would be to promote house-building by (i) releasing government-owned land onto the market, and (ii) trying to make the relevant regulations simpler and cheaper to comply with (which is not the same as “sweeping away” regulation), covering – for example – change of use from commercial to residential.

    Another, more sweeping, approach would be to introduce Land Value Tax.

    I suppose all this might be relevant to people who are considering Equity Release to generate liquid capital or pseudo-income for spending in retirement.


    1. The CGT exemption is probably the most egregious bit of meddling. After all, there’s at least a chance that your shareholdings contribute to the common good, whereas house price inflation doesn’t do anything for the common weal at all. It’s nasty, it shafts the next generation and taxing the unearned gain which is to non houseowners detriment isn’t a bad thing, though agreed it should be inflation adjusted. And that SDLT should be iced.

      However, there are other bits of meddling – the removal of credit controls in the 1980s meant lenders coudl lend more, and people look at the monthly repayments rather than the capital outlay, which is presumably how people are starting to run 30 years mortgages rather than 20 to 25 in previous generations. Then there’s Help to Buy which really should have been rechristened Help to Overborrow.

      Liked by 1 person

  2. Very good article and thanks for writing it, which goes to the heart of the Psychology of Fire in my view. From your perspective, whilst the outcome to-date has not been optimal – theoretically optimal could be seen as spending down all income for your period to now drawdown of your SIPP the outcome is infinitely preferable to not having enough money! And I guess your mental well being is much better than it might have been had markets tanked further. Is that worth x more years of having worked – your call I suppose.

    Just with respect to the charts…from the link – Michael Batnick seems to be assuming a 4% nominal growth in the portfolio. A quick glance from the Credit Suisse Global Year Book will show US equities historical nominal returns of circa 10%. I agree in the current elevated CAPE environment this feels unlikely but 4% nominal growth is currently circa 1.5% real growth vs 5% real growth historically which explains why the portfolio runs out in year 13 as he indicated. I guess what I am saying is he is showing a very pessimistic outlook on US / Global equities over a thirty year period and I query if he hasn’t confused nominal with real returns to be honest. His table says you can’t earn 8% return – he’s absolutely right for ‘real’ returns historically but the historical ‘nominal’ returns are higher. Obviously that is the long run, you have to hold through thick and thin, need to minimise frictional costs etc – we’re all dead lol.

    I say that because – if you look at the other link by Michael Batnick at the bottom of his page (fat tailed and happy), the analysis he performs looks at 4% real growth. Here the likelihood is the portfolio even if the retiree started in 2000 – terrible time to retire, would still just about limp over the line at 2030. Now if I was retiring at 35 – 45 that wouldn’t give me any comfort (hence why name is Seeking Fire and not Fired (!)) as Fat Tailed concluded but if I was 60 then it should be ok based on history. And the SWR analysis was always conducted on a 30 year period with minimal data sets as seasoned FIRE readers know. So if someone wants to extrapolate then woe betide them.

    They key though is psychology – you suddenly have a big bear market and the historic data might show you are still ok but you don’t know if the current bear market represents a bigger ‘tail’ outcome than previously recorded. So if 5 years in, your spouse is saying WTF – why’s our capital now 50% lower than we started – Saying the CAPE ratio is now 10 and it’s all going to be fine isn’t going to cut it, I suspect. Hence why I have, somewhat reluctantly, come round to the benefits of an annuity to hedge your essential spending – Liability Driven Investment for a normal aged retiree. So agree with you.

    I continue to wonder what the answer is for a 35 – 45 individual who has, on paper, enough capital to last a lifetime (I appreciate this is a wonderful privileged position to be in). On paper being the operative wording. As Mike Tyson said – everyone’s got a plan until they’re punched in the face. I hugely respect some early retirees for what they’ve achieved (RIT for ex) but I continue to wonder if the better approach is to work part time – that would likely eliminate the majority SoR risk whilst maintaining some of the benefits of work (I know your are not a big fan but some are :)). Anyway, I think that’s probably where I’ll get to myself eventually.

    Hence why even if I think Michael Batnick article is numerically not quite right – please shout if you or others disagree, the implication his words (and yours) is spot on. As is early retirement now who has recently posted a quantitative analysis of this.


    1. According to investopedia the nominal rate of return on the S&P from 1926 to date is 10%, dropping to 8% after 1957(when it incorporated 500 stocks) to date. They seem to indicate a US average inflation rate of 3% over that period, so the average real return of 5% I guess gives you the corresponding SWR of about 5%.

      I think drawdown is where the passive investing guys are going to be hosed IRL. Passive investing works a treat in the accumulation phase for a conventional-ish to slightly early retirement. You can laugh in the face of bear markets because you aren’t going to get hold of your money anyway till 55, so bring it on, ursine challengers. It doesn’t matter aught to your lifestyle.

      When you’re living it in drawdown that is tough. I lived a stock market based income for seven years and found it impossible to get my head round, so often the answer to how much should I spend was “as little as possible”. I was always fearing that bear, which is how I ended up with more than I started with.

      How do you do drawdown over more than 10 years? As you say, what’s the answer to the perfectly intelligent question “WTF – why’s our capital now 50% lower than we started”. Particularly if you are selling down some of the capital, which is the corollary of passive investing in drawdown. I can live off the natural yield, but people drawing down on the capital need to vary spending and reduce it in a down market. That’s a rough way to live. “Can we go on holiday next year? Beats me guv, no idea”. The theoretical answer to that is to carry a multi-year float. I had one of those too, NS&I index linked savings certs. The theory is great, but you try drawing down on that. I still have my ILSCs, and NS&I haven’t been selling ’em since I left work 😉


  3. Isn’t the answer to hold a lot of bonds in the run up to and just after retirement to reduce your sequence of returns risk?

    Of course that means you need to have a lot more money to retire.

    The answer to any early retirement question is always to have more money…


    1. > you need to have a lot more money to retire.

      Indeed, that will be devastating to the 4% rule…

      In the old days lifestyling shifted your asset ratio to 100% bonds just before you retired and bought an annuity. Perhaps in the new paradigm lifestyling means you should hold bonds for the next 10 years of income, so if you retire at 60 with enough capital to support a 30 year retirement then at least a third should be in bonds.

      I never really cracked how you actually trust an investment based pension. Guyton and Klinger give some hope to those who are rich enough to be able to vary their spending, which usually implies a paid-off house and children who are financially independent. But it looks a tough one for the extreme early retirees who will run something like that across 50 years.

      Natural yield seems to be the next best IMO, but it only really works if you have some steady income to put a floor on the possible suckout. Not only is natural yield usually poor compared to the SWR but although less volatile than market value dividends were still cut in the GFC.


  4. Fascinating post, very thoughtful, for which thanks from a long time reader and first time commenter. I’m curious as to how people factor in the effect of DB pensions and state pension on the future cashflow requirement from their DC pensions and ISAs, when calculating SWRs and how long the ‘pot’ will last.


    1. > how people factor in the effect of DB pensions and state pension on the future cashflow requirement from their DC pensions and ISAs, when calculating SWRs and how long the ‘pot’ will last.

      I can’t say for others, but it probably depends on the ratio of DB to DC. This is high in my case. The first consideration was to use the DC pot to defer drawing the DB pension to very near normal retirement age. This is only an issue for early retirees, but it seems a common thing since Osborne’s changes.

      Other than that, a DB pension is very like an inflation-linked annuity. It can be modelled as a bond holding of ~ 20 times the projected post-tax annual pension at NRA. It is the reason why my investment holdings are 100% equities, I can never get the ratio down to 60% bonds on that basis which is probably about the right mix for my age, financial commitments and risk tolerance. The DB pension places a floor on where my income can fall, which will rise when I get the State Pension in due course. These downside imitations raise my risk tolerance elsewhere, if my ISA goes entirely titsup and falls to zero value I still have enough to live on. Though such circumstances tend to be associated with other economic turmoil like war and insurrection – I am not young enough to have any resilience to that sort of thing.

      I do not currently expect to run down the capital or sell off shares, though a shift to income means I am sure to give up some future growth. But if Trump’s America buys the NHS then perhaps that may have to change. The investment capital is there to provide an income top-up and to give me some resilience against tail risks like that.

      If I had an entirely DC pension I would be tempted to buy an annuity with some of it, possibly over stages, to get some sort of floor to downside risk.


      1. Thanks. It is very scary thinking of living on ‘volatile’ savings held in ISA and DC funds, especially coming from a long-term (21 years!!) salaried job. I like the idea of setting an income floor, but at this stage prefer the thought of achieving this via part-time work rather than an annuity.

        Your post strikes at the core of the FIRE dilemma for me, which is the psychology of giving up a reliable and healthy income. Fear is such a strong force, and not a positive one. As FI slowly hoves into view I am finding it more and more difficult to summon enthusiasm for the job, which seems like a bad thing for me and for my employer.


      2. > at this stage prefer the thought of achieving this via part-time work rather than an annuity.

        That’s a very wise approach. I don’t have any human capital any more so this isn’t open to me, well, not at a pay rate that I am prepared ot work. For those younger it adds a lot of resilience, and unlike an annuity is a swing producer, you can put your shoulder to the wheel more for a while if your financial capital takes a big hit. Given that capacity, you probably don’t need to earn as much as a financial annuity would be, and earnigns tend to broadly track inflation.

        > Fear is such a strong force, and not a positive one.

        Amen to that. You can see that in my story – the original plan was to flatten my financial capital on the eve of reaching NRA for the pension. Some other things I am more genuinely afraid of now – the welfare state and the NHS are going to be much paler shadows of what I had expected through my life after 2016 and also after 10 years of austerity. But the argument that I should have lived a bit larger and perhaps spent more does seem persuasive, I was running largely from the fear of the bear market that never happened.


  5. Much of what you post, ermine, rings bells with me. I’m a bit older than you I’d guess, but at much the same stage in investment / drawing an income terms, I freelanced for the latter half of my working life and much of my future income is in a SIPP and ISA, pretty much the only pension I will have is the state pension (will it survive Brexit un-means-tested?).

    So in the likely teeth of an oncoming bear market, the need to have something resembling a steady income but not to lose your shirt in the process, I’ve also been trying to work out an approach. I have backed out into a more defensive investment position recently; more cash, gold, IL binds, etc, the idea is basically to preserve capital through the downturn and then get somewhat more adventurous for a year or two in the follow through (yes I know many people will be muttering about not timing the markets, etc, and if they’re right I’ll miss out on some growth, but…), then longer term it will be low-cost trackers like VWRL with a smaller %age of more adventurous stuff thrown into the mix.

    Re your main argument about the risks of having to draw capital when the markets are heading down, my feeling is maybe to keep a defensive %age of the portfolio in defensive cash or cash-like investments and draw on this while the market is down. Top this up when the markets bounce back, rinse and repeat. I suppose it could be argued that by missing out on the returns on this defensive %age while the markets are buoyant, then the net result in the long term is the same. But that’s the best I can come up with.

    Liked by 1 person

    1. > I have backed out into a more defensive investment position recently;

      Me too, too much gold, too much cash, even Premium Bonds FFS. I have to almost force myself to carry on investing. On the one hand it’s a bit like it felt in the GFC but the other way round – then it was if I buy this OMG it could be 50% tomorrow, now it’s if I buy this it could be 50% in five years time. So I’ve shifted heavily towards income, on the gorunds that it’ll buy me out, like RSA eventually bought me out of my folly of purchase with dividend income.

      > my feeling is maybe to keep a defensive %age of the portfolio in defensive cash or cash-like investments and draw on this while the market is down

      That’s the theory. It’s surprisingly hard to do compared to trying to squeeze spending. I had three years of spending in cash. Only recently did I toss most of it into the market, on the grounds that I now have a steady income. Even when trying to bridge tax years I’d rather borrow (at low or zero interest) on credit cards than dip into my precious. It meant I spent less.

      Of course, that’s obvious from hindsight, because the ursine invasion never came… It’s getting the balance right that I found hard.


  6. ” I want an easy life, and get an income uplift without making investment decisions.”

    Of course you do and no wonder. 🙂 This reality is why me and my best-bud @TA are forever arguing about income strategies for retirement (I’m a fan) and selling fixed chunk of capital (his plan) — and about why I think you should shoot for the former earlier in life if you can.

    As for your capital overshoot well *cough* you have been somewhat pessimistic over the past decade. I wouldn’t quite say perma-bearish (certainly not at the start when you wisely a buyer!) but perhaps prematurely agitated. 😉

    Of course as you say this is hindsight speaking; I wouldn’t have sold down much either in your shoes. But I might have been a shade less worried along the way. 🙂

    Going to be a good feeling when you get your hands on that State Pension that some said would never come, eh? 🙂

    Mine still seems a fair way off. For which I’m grateful. 😉

    Liked by 1 person

    1. > and selling fixed chunk of capital (his plan)

      I don’t think I could do that and sleep easy. Natural yield is the way to go, it’s the way I started and it’s the way I am returning to.

      > certainly not at the start when you wisely a buyer!

      I’ve been a buyer for the last 10 years – full ISA whack plus reinvesting dividends each year apart from when I bought the house. But more recently I have shifted towards income and a higher percentage of gold. Some of those ISA purchases were from selling out my SIPP holdings, this was to get them tax-sheltered.

      It will be a while till I get my SP, I am not yet three-score years. Logic tells me that I should run down the ISA to smooth income, but I can’t quite do that. So I will raise the natural yield, surrendering total return. And aim never to have to take an investment decision again, stick the lid on the can and bank the dividend income 😉

      Oh and one more thing. Thank you for the help in lighting the way, and for lighting that first distant lighthouse in the storm of the GFC.


  7. Great article – as far as I am concerned articles based on real lived experiences are always the most interesting!
    I am currently part way through my “Gap” and I recognise a lot of the points you have made.
    As noted previously “Mind the Gap” is sound advice!

    If you want to give yourself another “scare” (and yes I know Halloween was yesterday!) take a look at:

    Another similarly reflective article, albeit after ten years of retirement, that might interest you is at:

    What strikes me is that as the reality of being “retired” dawns, peoples desire for retirement income that looks more like “a regular pay cheque” increases. Or is that just bias on my behalf?

    Liked by 1 person

    1. > What strikes me is that as the reality of being “retired” dawns, peoples desire for retirement income that looks more like “a regular pay cheque” increases.

      Well, that’s me too 😉 Arguably I never learned how to budget against an investment portfolio, just how to keep my foot on the brake.

      There’s the other factor too. A retiree has zero or very low human capital. In my late twenties I could take a humdinger of a leveraged fail with the housing market and crawl from the wreckage. In my thirties I could take a minor hit in the dotcom bust and simply work through it. Now I could lose the ISA and be OK, but losing the pension would be tough until SP age. With no human capital I’d have nothing left to fight the fire. It’s not surprising that as this realisation dawns, one harks back to the apparent simplicity of one’s steadily employed self. Without the work part, natch 😉

      I would make a similar point as Dirk Cotton. I reached the distant safe harbour after seven years. I am not sure I understood enough of the financial risk, though I made the right call in the particular sequence of returns I lived. There were a few decent strokes of luck – the bears stayed in hibernation, Osborne allowed me to rotate a lot of my SIPP into the ISA and use the rest to defer my DB pension almost to NRA. These were not foreseeable when I retired.


      1. > Arguably I never learned how to budget against an investment portfolio, just how to keep my foot on the brake.

        I think you may be being a bit harsh on yourself. Even if you did learn that budgeting skill, my experience is that real-world spending is highly volatile (up to around 2:1 on an annual basis and >10:1 on a monthly basis) and somewhat un-predictable too. Shit happens, after all! For what it is worth, our spending trajectory over the last 20+ years smooths out somewhat when averaged over 5 or so years.

        I have read quite a lot of stuff on and about ER, and it seems that people generally fall into one of two camps: over-spenders or under-spenders. The trick, apparently, is to find the middle way and not die broke or with vast sums on their way to the taxman. Now, let me just get out my crystal ball and consult it about when I might just leave this mortal ……


  8. “if Trump’s America buys the NHS”: oh away with you. Only one government has ever cut spending on the NHS in real terms and that was the Labour government of the late 70s.

    I can remember Neil Kinnock pretty much promising that if he wasn’t elected the NHS would evaporate the next day. Yet Labour was the last – by quite some margin – of the three major parties to adopt the policy of having an NHS. The only cut/reform in the NHS that has had a big effect on my pocket was Mr Blair’s strange decision to torpedo the NHS dental service in some parts of the country. I never did understand what the logic of that was.

    Personally I’d like to see a sweeping reform of the NHS, informed by the experience of countries with better services. Like everyone else I’ve ever talked to on the subject, in all three countries I’ve lived in, I do not want anything remotely like the US system; well, not exactly “system”, more shambles. It’s just a bogeyman.

    Anyway, enough of that. I must tell you of a nice little income-booster I saw discussed on MSE once. A woman was keen to retire but would welcome a bit more income. She also wanted an occupation to engage her interest. She realised that because she hadn’t gone to university when she was young she could go in retirement, and get a student loan to live off which, at her age, she’d never have to pay back. Heh!


  9. I think people thinking about SWRs of 4% are taking a huge amount of risk. You’ve never had long-term risk free real yield (as determined by long-duration bonds) this low. In some countries, such as the UK, the 30y real rate is -2%. Risk-free long term real yields are correlated with SWRs.

    I see two scenarios: purgatory and hell. In purgatory, interest rates stay low, bond yields stay low or go lower due to deflation/low inflation, low growth and poor productivity. The secular stagnation or Japanification trade due to aging demographics and populism. A large chunk of equity returns in the last ten years were just an upfront present valuing of future gains due to lower long term bond yields. Going forward returns are thus poor with equities flat to perhaps +2% in real terms. G10 government bonds produce perhaps -2% to 1% in real terms. Probably you want to be in EM bonds and alternatives.

    The other scenario is that the G10 economies improve due to a change of economic regime. Perhaps genuine fiscal expansion or MMT or whatever. This causes better growth, higher inflation etc on a 20 year horizon but short term government bond yields rise by 2-5% causing a massive bear market for risky assets. This is short term hell in sequence of return terms.

    I think in historic terms, we in a worse place for future returns than the prior worse: the end of the Gilded age. Add to that higher taxation to pay for aging demographics, protectionism; and the likelihood of wealth taxes. Also add in the fact that you need to knock at least 1% of any SWR for the difference between cost of living and standard of living adjustments, which for early retirees is a key issue. I think probably 2% SWR is probably toppy and, personally, I think 1% is fair.

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  10. The greatest difficulty in living off capital is your own reactions to events.

    I have been living off my portfolio for a little over 12 years and still 5 years away from the state pension.

    18 months in and I was down 45%, not a promising start, I sensibly kept the spending low and ignored the SWR

    Passive investing, reinvesting all income and spending from cash/ equity sales etc has worked fine, keep a reasonable cash float, you sleep well.

    As markets improved , the capital has risen , I have 12 years less to finance and there is no need run a portfolio as a trust fund, it can decline in value eventually.

    Be optimistic, my experience is that capital is about 3x the 2007 starting figure and the annual spending is budgeted for 2020 at about 3% and this represents about 9% of the original sum, Dividends are reassuring but not the only way to retirement income.

    Liked by 1 person

    1. A very interesting and, I guess, at times rather scary journey!

      Do you have any further details/thoughts you might want to share, e.g. your overall strategy (or did it evolve); AA, size of cash buffer, account types/structures, emotions you experienced, key lessons learned, actual spending vs planned spending, other sources of income (e.g. BTL, pensions, etc)?


  11. Ermine – thanks for you response (up the page). Your link re-confirms historical equity returns and accordingly using that data set (which is narrow / too short but all we have) means running out in year 13 would not occur based on history and even in the future unless returns were truly horrible. I do think the author confused real and nominal returns in the analysis (I could be wrong as always).

    ZX Spectrum – interesting hypothesis. If correct that really suggests that the bulk of the population (in this and other countries have tougher times ahead. I suspect you are more likely nudging right than wrong. I do think governments will slowly work themselves off monetarism (i mean though after decades) – it is ridiculous that you can borrow money at negative real interest rates, invest it in productive enterprises (infrastructure) and governments will not take this route but are happy to seek foreign investment (chinese for ex), which is something I think we will regret in the future. Your hypothesis indicates early retirement doesn’t work and therefore needs to be supplemented by part time work, a business or very flexible spending. What are you going to do when the hedge fund industry says thanks but no thanks unless you have a high 7 or 8 figure balance?

    Where could you be wrong – well, I think people often look at negative long term outlooks on the basis of the current position but technological progress could continue to dramatically increase living standards – how, well eliminating fossil fuels for example would have substantial GDP benefits for the western countries (not so much the middle east) and in other ways we can’t imagine yet. So we must live in hope – after all capitalism has been a good bet so far – but plan for the worst. And on the other side of the coin – everyones remaining time available reduces every day – v important not to forget that and so easy to do.

    Ermine – I hear you on the yield shield and you are self-aware enough to know this is no panacea but can help with the psychological aspect of early retirement – i.e. if it works it’s good enough. A good example of the problems with the yield shield though is the FTSE 100, which if you invested in 1999 would have delivered circa 5% – 6% dividend growth annually but no nominal capital growth and accordingly after inflation your capital has now been cut in half. If / when i became fired instead of seeking fire, I would also carry a large cash float like you and others – but I do think this is something that feels good but rarely works in practice – once it’s used up, you need to replenish it from your risky assets. A bear market can take a decade to recover from factoring in inflation. I doubt there’s anyone reading this whose going to carry a ten year cash float and it’s hugely inefficient to do so.

    Reading all the insightful comments above, it really feels as if cold turkey FIRE is rarely a good idea if you <45 or even <50. Part time work can probably alleviate SOR, help with the psychological aspect of having a regular income to supplement investment earnings, maintain social contact (can be a major problem for lots of people) and answer the question "so what do you do" without coming up with some convoluted answer!


    1. > A good example of the problems with the yield shield though is the FTSE 100, which if you invested in 1999 would have delivered circa 5% – 6% dividend growth annually but no nominal capital growth and accordingly after inflation your capital has now been cut in half.

      Hmm, I’m a glass half full sort of guy on that. Let’s be honest, you’ve socked all your capital into the market at the high-water mark of irrational exuberance. If you’ve been spending for 20 years and have only burned half your capital, I reckon you’ll make another 10 😉

      It’s not a wise approach for extreme early retirees who are looking to bridge 50 years, and it clearly demonstrates that the higher yield is bought at the cost of less capital growth.

      > A bear market can take a decade to recover from factoring in inflation.

      I think that’s the thing that is brought out in some of these studies. A sustained bear market is far less detrimental to you in your working life than it is as a retiree. Some of that is obvious in that you’re a net buyer so you pas less, but some of it is from the hammering your capital takes in a bear market if you need to draw it down for spending. As an investor I’ve got used to bear markets being an opportunity and they are gone in a couple of years. In drawdown the hit of a bear market is much more protracted

      > it really feels as if cold turkey FIRE is rarely a good idea if you <45 or even maintain social contact (can be a major problem for lots of people)

      Trust me on this one. Choose where you live well, and there are all sorts of things in the community that would be happy to find assistance from an educated mind, or even just a willing pair of hands. Plus the social circle has a much wider range of social classes, or perhaps my workplace was exceptionally narrow in that respect.

      > and answer the question “so what do you do” without coming up with some convoluted answer!

      Sing it out loud. “I retired early”. or “I am of independent means” 😉 You are what you are, not what you do or what you have.


    2. I’m a “half glass broke” sort of person. Permabear tendencies etc. I don’t do optimism!

      I’m talking from a perspective of early retirement (mid to late 40s in my case), rather than normal retirement. The biggest issue I have with early retirement and using “SWR type” approaches, is that implicitly they assume that cost of living adjustments i.e. an inflator on their withdrawals based on CPI, will be sufficient. That is true as long as you happy with your standard of living being frozen at the point of retirement. I want my standard of living to improve with time, in line with the bulk of the population. I don’t want to drift into relative poverty. The correct inflator for that is not easy to define, but evidence suggest this rises at 1-2% over CPI and may well be linked to earnings growth. For a normal retirement of 20-30 years, that 1-2% difference is not so damaging. For a 50+ year retirement, it can be lethal. This adjustment alone is enough to take a 3-4% SWR to 1-3% SWR.

      Moreover, I’m only interested what might be termed fatFIRE so taxation and, in particular, wealth taxation is a concern. With regard to asset valuations, the last decade was so very good in terms of asset returns. Some of that was mean reversion from cheap levels, some is the impact of technology stocks, but some is almost certainly due to low and negative long-term bond yields. I can’t help but see us moving to a) a bear market or b) stagnant returns. The current run in both bonds and equities just doesn’t look sustainable without some sort of technological revolution (which is quite possible but hard to bank on).

      With regard to using hedge funds in my asset allocation. Well that’s my industry. I have some insight into who to and not to invest in. Plus I don’t pay the full fat fees. In many ways, the hedge funds I own are replacing that “10 year cash float” you refer to: they are providing the 5% return with little or no downside. Plus there is precisely zero equitiy exposure in those funds. They are uncorrelated.


      1. What is the economic explanation of the existence of an investment providing a 5% return with little or no downside, while being uncorrelated with the stock markets? Why haven’t these merits been competed away?


  12. The investment trust dividend heroes that have up to 53 years of increasing dividends offer one possible answer to the problem of bear markets and sequence of return risks. I hold some of the higher yielding heroes and aspiring heroes and have experienced steady income growth along with some volatile capital movements over nearly six years. If there is a bear market ahead, I am hopeful that my dividend income will continue to rise or at least remain stable.

    Liked by 2 people

    1. > I hold some of the higher yielding heroes and aspiring heroes

      Me too. I’ve held some of these guys for ten years now, ever since I read Monevator on the subject in 2008 back in his, er, more interesting active days* 😉

      I figured I didn’t have any HYP shares to sell, but that still didn’t stop buying ITs at a discount being a good idea. Looking at a list of 16 trusts that have increased dividends over decades I have four of these guys. I’ve tried to always buy them at a discount.

      The trouble is closed-end funds amplify market volatility of the capital value. That’s grand if you can buy them at a discount and this has served me well. It sucks if you ever need to spring any capital value out of ITs in times of trouble.

      Who knows what the future holds, for instance despite dearieme’s assertion the NHS is safe in current hands the creeping privatisation and rationing by longer waiting times shows we will trend towards at best an insurance model and at worst the US system in the end. Should I need a cataract operation in my late 70s I expect to have to pay for it privately, else I will lose a lot of sight for a significant part of my remaining life. So one cannot be sure of never needing to call on the capital. Hopefully that won’t happen, and if it does it will be in a market high 😉

      * It’s not all the passive pack drill’s fault, the days were also more interesting 10 years ago, in a Chinese proverb sort of way.


  13. I worked at a company for almost 10 years and got a final salary pension as part of the deal.
    It’ll pay us about half of what we think we’ll be able to live from 60, rises with RPI each year and my wife will get half if I die.
    Now, I’m just in charge of my own pension affairs – SIPPs like many others.
    I got the CETV recently and it’s a generous number – but I don’t see the benefit of cashing it it. I’ve another 20+ years to 60, anything can happen and if the CETV is fair value – I’ll have trouble beating it in capital growth. All that money now could easy be lost or just misinvested – I’m not talking scams here but just put in poorly performing assets over the next 20 years.
    Also, the pension pays for as long as I’m alive and in terms of risk – longevity is just as much a concern as anything else.
    Finally, the pension forms a bedrock layer to our Early Retirement plans.


    1. Whilst I generally agree with your conclusions, personal experience has taught me that you should keep a close eye on your deferred DB e.g. fundedness, and sponsors status (as this drives the strength of the schemes covenant) and the ever-evolving legislation around such schemes (inc. the PPF, etc). Also, do read very carefully any documents you receive from the scheme/trustees.
      Furthermore, I would strongly recommend that you do a deep dive into your DB scheme to discover how, in detail, it actually applies to you and your family. Not just the glossy headlines, but the real nuts and bolts stuff, preferably with formulas and calculations/worked examples too!
      Most DB schemes evolved over many years and have sometimes consequently become fiendishly complex. It is not unknown for the rules of a DB scheme to run to many 100’s of pages of torturous legal lingo.
      Things I would look deeply into include: tranche(s) of service; accrual rate(s); normal retirement age(s); early payment and late payment factors; re-valuation whilst deferred and indexation once in payment (they are not necessarily the same!); minimum pay-out guarantees (if any); how exactly death benefits are calculated during deferment and once you have drawn your pension (again they are not necessarily the same); and any other features particular to your former scheme.
      These types of calculations are usually conceptually simple and straightforward, but in reality are often bedevilled with conditionality. The associated complexity and how it applies to you is often related to your length of service, and on the upside may not be too bad for ten years.
      Then, once you have a good understanding of the detailed workings of your scheme (and, no joke, this could take years!) be aware that it can be changed by the trustees, by the law, etc. For example, innocent looking one-liners in an annual document may mean non-trivial changes to you.
      Lastly, please be aware that it is not unknown for DB administrators to provide members with incorrect and/or inconsistent information to apparently simple/straight-forward questions.

      DB pensions are IMO generally a good thing; however the last thing you want to discover is that your bedrock layer is actually compromised just as you are about to rely on it.

      Liked by 1 person

  14. I have read this with interest as I am currently look to bring retirement forward. I’m already part time with a DB pension scheme which I hope will eventually pay out! However the current annual exceedance tax on pension input amounts is gradually eroding the pot I have. In the last year my pension input tax bill was £60,000! Current CETV is running at around 1.1M. I also have an ISA investment but its relatively small and I’m still paying off a mortgage. Currently in my mid 40’s I was initially intending to retire at 55 but now want to go earlier at 50. Funding for five years may prove tricky and there’s no absolute guarantee that the DB pension will pay – who knows what could happen in the next 10 years.
    It’s all rather worrying and has me wondering which way to go. What I do know is that work has become a real chore and the company I work for is simply getting worse in terms of its treatment of staff – very sad for such a huge national firm but that seems to be the way these days.
    Anyway keep the information and opinions flowing as it’s useful and much appreciated.


    1. Sounds like the doctors’ pension trap situation. Undoubtedly the 50-55 period is the toughest, you need ISA income or to run down savings, and these savings have to come from net income. Not only that, but many people find family spending is high at that age too. For me the redundancy money helped, any sort of windfall is valuable in that particularly tough period. Post 55 you have access to the PCLS of DC savings, plus the savings although taxable.

      Holding the mortgage gives you some flexibility – if you ease back to repaying the minimum that gives you more to play with. I made a tactical error in paying mine off before 55. I have more now than I would have done carrying ir, but was poorer in the squeeze 52-55. It’s hard to beat paying your mortgage off from gross rather than net, though if you’re in the PA taper zone this may not be a route open to you.


      1. Thanks for reply ermine.
        Yes I’m in the pension trap – a very apt name for it and IMO an utterly unjust tax. However as we represent such a small minority there is no sympathy and no chance of the situation improving. The other issue is that our DB pension scheme was closed two years ago but I took an option for salary link for a further three years. The pension tax trap is however eroding some of the gain.

        In terms of family commitments we’re lucky in that it’s just the two of us (and a dog!) so no school or university fees to worry about.

        I always wanted to pay off the mortgage ASAP. I’m currently on a low five year fixed and when that ends there is sufficient funds from my ISA to pay off the remainder. I have always been cautious with debt and saved were I could and always looked to the day when I was mortgage free. Always seemed to make sense to me to have a roof over your head which a bank couldn’t take should the worst happen. I’m probably overly cautious and that’s my failing as I probably could have retired by now had I taken more bold investment risks. However I’d have been a nervous wreck watching the ups and downs of my investment! I was much more content with modest gains from an ISA tracker fund.

        I’m missing something in your last paragraph though. I’m just on the taper margin and will most probably be into it over the next couple of years. However when you say paying your mortgage off from gross rather than net I’m a bit confused – easily done! Can you explain that?


      2. > paying your mortgage off from gross rather than net

        I fear it doesn’t apply to you, but take the example of a 50 year old earning say 80k with 10k net spare. They could pay £10k off their mortgage. Or they could put enough in their pension so their net pay drops by 10k, which is the same thing in their lived experience as far as cashflow. 10k is 60% of the gross pay, so 16.7k goes into their pension. They spring their PCLS at 55, so they get to pay say 3% p.a. on the 10k mortgage until they discharge the 10k with PCLS, I will take that as 5*£300 though it’s a bit more due to compounding.

        In exchange for paying a bit more interest they have the gross amount to pay off the mortgage with, in this case doing without the 10k gives them £16.7k-£1500 = £15.5k knocked off their mortgage from the PCLS. To my eyes getting a 50% ROI is worth carrying the mortgage. Except that the fearful me, seeing my career flame out a little under a decade before I expected to finish work, paid off the mortgage while working. Having done that I got to moan about the problem of managing money in the various tax silos. So not only did I pay the entire mortgage off from net earnings rather than gross, I also gave myself a liquidity squeeze in the gap. D’oh.


      3. @AndyH > I’m currently on a low five year fixed and when that ends there is sufficient funds from my ISA to pay off the remainder.

        You are, however, then depriving your future self of the tax-free income from that ISA for the rest of your life. You will always be a taxpayer, and from the values of the DB pension you are likely to be a 40% taxpayer for the rest of your life. I was loath to surrender my ISA because I will be a 20% taxpayer for life, I would be doubly loath to surrender that tax-free income if I were a 40% taxpayer, purely for being able to pay off the mortgage a few years earlier, in a time of low interest rates. This is why I still have all my ISA, it could be expected to pay about a quarter of my DB pension tax-free.

        I can’t deny the feelgood factor of a paid-off house, but it is worth looking at the costs. It takes several years to build up an ISA that’s capable of shifting the needle on the income dial.


      4. Ermine,
        Good points on the mortgage situation and something I hadn’t fully appreciated. Let’s see what happens with interest rates over the next five years. I’ll have to carefully weigh up the pros and cons of the mortgage in five years……


  15. Some thoughts:
    a) Do you know what your annual spending needs/wants are – and how confident are you with these values. Incidentally, I completely concur with ERMINE about the age band where peak spending tends to occur and this seems to be fairly independent of household composition.
    b) Does your household have other reliable sources of income?
    c) at what age can you access your DB scheme and do you know what it will pay pre-tax PA (in todays £’s) then? Do you know the schemes normal retirement age and the annual pre-tax payment (in todays £’s) at that age too? You can actually learn a fair amount about your DB scheme from this type of data – see my earlier post to GFF above – albeit it is a better strategy to request this data roughly annually for a few years to see how it accumulates/changes. In fact, your scheme may have a website (or similar) where you can get these estimates for yourself.
    d) you mentioned a CETV, is a partial CETV a possibility?
    e) are you committed to continue paying into your DB scheme, or does your employer offer any alternative – inc possibly a salary uplift in return for forfeiting the employers pension contributions
    f) what happens after the 3 year “salary link” you mentioned
    g) as mentioned in previous discussions on this topic “Mind the Gap”, and one key issue over and above just funding the gap is retaining sufficient liquidity throughout the Gap so you are able to deal with the inevitable curved balls during this period.
    h) As ermine has hinted you should definitely explore what, if any, redundancy opportunities may arise
    i) I seem to recall reading this last weekend that there are some new super low (c 1%) fixed term mortgage deals around that may be worth looking into and be particularly careful about the length (in years) of these products


    1. Hi and thanks for the input. Answers below:
      1. Yes to the last penny! I’ve run a spreadsheet of our spending for the last 22 years – I know it’s sad but I am meticulous in knowing exactly where every penny goes! I am 100% confident on my spending both now and in future – obviously unexpected events can and probably will happen but you can’t really account for these. I have placed a figure of £4000 net per month which covers all our spending plus a £1000 buffer. I would also have to disagree with spending increasing between 50 & 55 as I expect my spending to actually fall during this period. Our spending now has steadily decreased over recent years as we’ve realised the folly in chasing consumerism. With no kids or family around it really is just the two of us so predicting our spending going forward is much easier. We also built our own house 10 years ago and have continually improved it since then. This has increased it’s value considerably (yes I know this is just on paper) so that we have massive amounts of equity currently and once the mortgage is paid off we will have the option to downsize should we wish to. However we cannot see a time in the near to middle future where we’d want to leave here.
      2. No other reliable sources of income at present but my wife has just published two books and there’s hope her income may increase. However by how much is anyone’s guess. My wife is also a retired teacher with a small DB pension but it all counts. She continues to do some small admin work for the school so is still active in the pension scheme. The teacher pension scheme has changed though from a Final Salary scheme to a Career Average scheme.
      3. I can access my DB scheme at 55 but my NRA is 60. At 55 it would be £38950 and at 60 £49210. However with the salary link I have in place this will increase substantially over the next three years but I do not know by how much at present. There is a dedicated website for the DB scheme which I monitor regularly. We also get an annual statement of benefits which outlines both the pension at NRA and if I took it early at 55.
      4. Yes partial CETV is possible as that has been recently allowed within the scheme.
      5. No more payments go into the DB scheme – it’s closed. Part of the closure was an agreement to allow certain employees a salary link to benefit from promotions. However no further payments from me actually go into the scheme. A new scheme has been established which is a DC scheme through Aviva. It’s a poor cousin to the DB scheme but that’s expected. I can opt out but at present I have set the maximum amount of PIA at £10,000 as I’m in tapering territory. The rest of the contributions which would normally go into the pension are paid temporarily into a GIA (General Investment Account) as cash which is then automatically transferred into my bank account each month. My current ISA contributions are on the yearly limit so I cannot increase these any further.
      6. After the three year link the DB scheme crystallises the pension and you are a deferred pensioner. The pension at that point is then fixed but does increase with RPI and you can then start to draw it at 55.
      7. Yes funding the gap is the tricky part which might mean I have to continue working to 55 unless the wife makes a fortune – I wish!! However I have a possible opportunity to increase my part time further from my current 75% to 50%. This would help me bear the last five years from 50 to 55 and provide for further savings.
      8. No redundancy options available at my company. They dictate if and when redundancy is offered. In my 22 years with the company, they’ve never offered redundancy to our group of employees.
      9. My current five year deal is good and when it was taken out in February this year was the lowest five year around. I wanted peace of mind in terms of payments and also the full flexibility to overpay if required. By the time this fixed rate is up in 2024 I will have the option to settle the final balance or take a remortgage on a much smaller mortgage. I’ll assess finances at the time and see which seems best – who knows what will happen in financial markets between now and then……..

      Hope that answers some of your queries…


      1. Thanks for the detailed response. Re 1, I misread ERMINES statement as implying peak spend would occur in your 40’s – which is what I meant. I think on reflection Ermines statement meant in your 50’s. My bad!

        Looks to me like you have a few options to consider in three key areas, namely:

        a) “secure” income streams – your floor if you prefer:
        Exactly how does your salary link impact your DB pension payout at 55 and/or 60, and would this provide enough uplift to cover all of your foreseen higher expenses (48k PA net). Currently at 60 your DB alone would give you about 116%/87% coverage of your lower/higher annual needs. In due course, add in state pension and your wife’s pensions (school & state) and I cannot imagine you would be <100% covered at the higher needs level.
        This is clearly a nice place to be.
        BTW, Ermine has written at length elsewhere on this blog about how to efficiently build up your state pension if you have/will have missing NI years.
        If you can choose to take your DB at ages between 55 and 60 too – this would give you some other options to work with.
        Also, watch out for being a 40% tax payer on pensions income alone.

        b) Funding the Gap with accessible means:
        Things to consider might include: stopping your DC ctrbns; and/or taking a partial CETV (but only available from 55/57) or continue DC ctrbns and use this Pot to back fill partial CETV carve out of your DB scheme; delay clearing your mortgage; further cut back your lifestyle for a few years; or even move jobs depending on just how bad it has all got. You may have to consider trading potential tax efficiency to obtain sufficient liquidity in the Gap.
        Probably would be a worthwhile getting a good handle on what a partial CETV offers/entails.

        Overall, you might be closer than you think – detailed cash flow analysis in terms of spending needs covered per year should help you uncover this – but, based on the above, I suspect it probably comes down to finding enough accessible funds to cover the Gap from quitting to taking your DB pension.

        Then, once you have achieved all of that, there is the thorny and very personal issue of risk management to consider.

        c) Risk Mgmt
        It may be a good idea to check out the precise PPF rules – as their is an upper limit to the coverage provided before a DB schemes normal retirement age.

        Lastly, as usual DYOR.


      2. Al Cam,

        Many thanks for your comments.
        The salary link was a negotiated “give” to soften the blow when the DB scheme was closed. Basically as my pay increases each year (we are on a pay point scale which increases incrementally each year until you reach paypoint 24), my Retiring Pay is increased and this increase is compared to the start of the scheme year. This percentage increase is then applied to my deferred pension in addition to the normal scheme increases (governed by the Pensions Increase Review Orders). How this will ultimately increase my final retiring pay is very tricky to calculate as we don’t know what my final pay for the purposes of pension calculation will be. The scheme takes the best two years from the last five to calculate the final salary pension.
        I haven’t any missed NI years as have been in employment constantly since starting in this job 22 years ago after leaving university.

        The use of the DC pot may be a good option for partly funding the gap. The issue will be how much that’s actually worth in the next 5-10 years. If the first year of the DC scheme is anything to go by I doubt it will be worth more than £100,000 in five years. In fact it could be significantly less than that – all depends on investment returns within the scheme.
        I shall also look into the possibility and implications of a partial CETV.

        Your last comment is one that worries me the most. I have been worried about the state of the scheme for many years and it’s financial health has not been good. The company is in good financial health at the minute but the scheme has a huge deficit of around £2.4 billion. Scheme’s liabilities sit at around £19.33 billion with assets of £16.93 billion. Current funding level is 87.3%. Not sure how this compares with other DB schemes but it’s not great in my book. If the scheme collapsed I’d be much worse off as the protection under the PPF is capped and wouldn’t pay out anything near what my current DB pension is promising.

        Lots of things to think about and plan for…..


      3. “obviously unexpected events can and probably will happen but you can’t really account for these.”

        Is there any merit in putting aside each year a fixed %age of the value of your house for assumed future repairs and improvements?


  16. To Ermine

    > paying your mortgage off from gross rather than net

    In your example, is it not the case that only 25% of the 10k is returned tax free.
    In which case 10k returned as 11.6k minus interest paid of 1.5 k gives a net gain of £100, ie, using your terminology, a ROI of 1%.
    There may, of course, be a further net tax saving due to tax differentials too.


    1. There is the assumption that the PCLS is used to discharge the mortgage, plus the combination with a DB pension. In my own case I targeted the AVCs to make up the entire PCLS (ie not to commute any of the main pension for that, over an above the existing lump sum). The 25% is computed on the total of the AVCs + nominal capital value of the DB pension (20 x annual pension at NRA). Thus my aim was to save up a third of the nominal DB pension capital in three years. It is remarkable what a bit of desperation, and paid off house (so no mortgage to pay), not paying 40% tax, and a fair tailwind from the stock market coming off its knees can do. I reached about 90% of my target.

      As it happened, I transferred the AVCs to a SIPP, took 25% of the AVCs as a PCLS and ran most of the remainder out over time under the personal allowance. Effectively advancing getting hold of the AVCs, tax-free, before I draw the main pension because Osborne changed the rules after that plan was devised.

      I can see your logic inasmuch as presumably I will pay more tax on the main pension over time than if commuting the DB pension to make up the PCLS, but I looked at this as getting the AVCs out tax-free, less about 7k tax when i had to speed up the drawdown to buy a house.

      Even now, where I will be a basic rate taxpayer for the rest of my life, I will put £2880 into the SIPP, take out £3600, get £900 tax-free and pay 20% marginal tax on 2700 (£540) and bank the £180 profit each year, although a simplistic logic would indicate it’s pointless to pay 20% tax and save 20% tax in a pension. A ROI of £180 on £2880 for two months is 6%, it’ll get us a couple of meals out on the taxman’s shilling.


      1. As far as I understand it, the only legitimate ways you can liberate money from a pension tax free are:

        1) from a DB scheme, or using drawdown from a DC scheme:
        a) via the PCLS (maxed at 25% of the Pot); and
        b) having a pension (from a DB scheme) or by repeatedly, over the years, making annual withdrawals (from a DC scheme) that is/are no greater than your “unused” personal tax free allowance

        2) using UFPLS from a DC scheme:
        c) where the first 25% of each withdrawal is tax free and the tax on the balance depends on your circumstances (so could be zero if conditions specified at b) above apply

        I understand the SIPP wheeze around low earners – and I believe that this is fundamentally driven by the fact that pension payments do not count as qualifying earnings.


      2. > the only legitimate ways you can liberate money from a pension tax free are:

        I would go along with your summary, but the devil is in the detail. Firstly, early retirees (50 and up) with a DB pension benefit from burning up a DC pension if that means they can defer their DB pension till they actually retire. Even if they can’t have it out tax free, the existence of a personal allowance means a DC pension should be drawn over as long a period after stopping work as possible – if you don’t need all the money shove it into an ISA. It also means some opportunities exist once you have stopped work. I converted my AVCs into a SIPP precisely to get hold of them earlier, and largely tax-free. Even if you are paying 20% tax on your pension that is good if you saved 40% going in.

        Osborne’s 2014 changes were transformational for early retirees with a DB pension because DB pensions are usually best taken at normal retirement age. There is a longer form of that in this post, basically burning up the DC pot makes the 55-60 (or 65) period easier to fund.

        Your situation is complex, to be honest I would consider taking independent financial advice because of the complexity and the amounts. For instance, while you are rammed up against the pension limit, is the same true of your wife? Would you be able to make better use of the savings directing all spare cash into her DC pension? Is she also maxing her ISA contributions, if necessary with your money? You will be a high tax-paying pensioner in your case, but if she has more room then switch resources there, and ISA income is exceptionally valuable to people paying 40% tax. It’s not yet clear to me that you are taking a 360 degree view of your situation, and your wife may have opportunities you don’t, as you say she has a small DB pension. If she isn’t drawing it then ramming her DC savings and drawing them out across the years between 55 and NRA is a possible help, 5 year’s personal allowance is still ~£60k of tax-free allowance.

        You say you want to retire early, because:

        What I do know is that work has become a real chore and the company I work for is simply getting worse in terms of its treatment of staff

        Would it help you to reduce your hours? Are you working longer to try and max your pension in the runout before the closure gate? It looks pretty good to me already, you have to ask yourself when is the time to let if go because the years you work in a stressful work environment are years you won’t live again, and observation in my workplace suggested to me that stress is detrimental to cardiovascular health as people get into their 50s*. You do not appear to have inheritance concerns, in which case remember that you can’t take it with you when you go. Other things you can look at are drawing the pension early. Yes, you eat an actuarial reduction, but you both pay less tax over time and at the moment have enough time to build up an ISA which can make up some of the difference.

        I left a lot of money on the table because I retired 8 years shy of normal retirement age – not only did I have to fund myself but I lost the money I would have earned. I have absolutely no regrets, because I bought my freedom and my time. If there are regrets it’s that I didn’t do this earlier, in a more controlled manner. Retirement is not purely a financial consideration. It is also a psychological and emotional consideration. If work is a real chore then buying your time back off The Man is important too, because the years spent at the office aren’t years you get to live again.

        So my suggestions would be do the computation on a household basis using your wife’s allowances/resources, really ask yourself how important paying off that mortgage early is to you given the opportunity cost of a decent ISA income helping you out as opposed to the 40% less income from that, bearing in mind the ISA income can also be your wife’s – 40k p.a. allowance in total. And think about the big picture of how you want to spend the years of your life. If the financial ramifications look too complex then paying an IFA 10-20k may give you insights that over time could pay off.

        *While acknowledging anecdote is not data, I saw two colleagues die in their fifties, one was fit as hell but deeply unhappy, another had been overweight but was getting on top of it. Another fellow’s doctor told him on his second TIA that his third one would probably make the clockwork stop. He heeded the advice, took redundancy, and is still with us over 10 years after the second TIA. The NHS indicates the risks of CVD increase over 50 but I would still like to know why out of a departmental group of about 50 people over 45 the two that cashed in their chips and the TIA fellow who was quite slim came from the more stressed end of the workforce.


  17. To AndyH,

    Some further thoughts, in no particular order, based on your last response:
    1) Are you clear on the difference between revaluation and indexation as applied to a DB scheme?
    2) You mention Pensions Increase Review Orders. These are based on CPI and not RPI. So are you sure your DB pension revaluation and/or indexation is based on RPI?
    3) For some feel of your scheme vs other schemes, I would suggest you take a look at an annual publication produced by the PPF called the Purple Book. It is, IMO, a rather comprehensive annual review of what the PPF refer to as the UK “DB universe risk profile”. Other publications are available, e.g. from the Pensions Regulator, etc.
    4) It may not have occurred to you but a partial CETV could potentially mitigate the PPF pre-NRA cap.
    5) There are probably a few more risks for you to consider. IMO a good starter list, which has been curated from various attributed sources, can be found at
    6) Whilst to date you may have no NI “missing years” you will need 35 qualifying years to get a full state pension; this also applies to your wife.
    7) Are you able to take your DB at ages between 55 and 60 – or are these the only two possible options?
    8) DC Pot will not be available before 55 (at the earliest), so how would you tackle 50 to 55?
    9) And again, as usual, DYOR


    1. Firstly, yes your interpretation is correct £36k PA/£48K PA.

      With regards to your other points:
      1. Simply put – no not exactly! More research required.
      2. My mistake on mentioning RPI. The pension is revalued on CPI not RPI. Apologies.
      3. I’ll have a look at that, many thanks for the pointer.
      4. Yes I’m actively looking at partial CETV.
      5. Thanks again, will have a good read at that.
      6. Yes I hadn’t factored in I won’t have completed 35 qualifying years. I will look into how to top that up.
      7. I can draw my DB pension at any time between 55 and 60. I’ve done the calculations for each year from 55 to 60.
      8. The gap would be filled by my ISA pot if I decided to take that option. It all depends on whether I can stand another 5 years after 50 working or take the hit on the ISA pot.


      1. Agree entirely with Ermine that you should adopt a 360 degree household view – and, in due course, this should also apply to your risk analysis too. Your wife’s age (relative to yours) may also offer some opportunities. I only raise this point as you mentioned above that she is “retired”, so could she, for example, access a DC scheme before you could?

        As I said before, I reckon you could be in a good/possibly over-funded place once all the household pensions are turned on. Your challenge therefore seems to be to fund the Gap prior to this.
        It might be that you need to:
        a) possibly pull forward some of this pension funding (either by taking your DB prior to NRA and/or looking at a partial CETV) to help and/or;
        b) trade current tax efficiency to obtain sufficient liquidity in the Gap and/or;
        c) defer clearing your mortgage;
        d) etc

        In any case, it seems you do have quite some options to work through.

        revaluation is a measure of inflation protection applied to deferred pensions such that the
        pension earned up to the point the member left the scheme is increased, to reflect some or all
        the movement in prices in the period up to retirement;

        indexation is a measure of inflation protection of pensions in payment by increasing pensions
        each year, to reflect some or all of the movement in prices over the past year. It can also be at
        a fixed rate set out in the rules of the scheme.

        “some or all” is a key phrase; both revaluation and indexation are often capped in some manner

        Revaluation usually uses a compounding algorithm. That is, if your revaluation is stated as something like XPI with a cap of y.z% compound, this means that bad years (where, usually Sep – Sep, XPI inflation exceeds y.z%) can be offset by good years (where XPI inflation <y.z%). Revaluation, unless stated otherwise, could be negative.

        Indexation is usually one off, rarely <0%, and may be made up of several different tranches depending on your exact periods of service. Table 5 from the 2017 DWP Green Paper "Security and Sustainability in Defined Benefit Pension Schemes" gives a good summary of the types of indexation algorithms in use around the patch. See:

        Click to access security-and-sustainability-in-defined-benefit-pension-schemes.pdf

        Your scheme administrator (or website) should be able to tell you the rules for your DB scheme.


      2. Thanks for all the comments.

        When I said my wife was retired, I should have said she’s living off my income as she packed in the teaching job but kept a small admin role she does from home. So she’s actually younger than me! By keeping the admin role she has, she keeps the DB pension going. Yes I definitely could pass more money to her to invest in her ISA. That’s something I should have done years ago :(. I’m not utilising the full tax status she has.

        There’s lots to think about and I’m seeing my IFA later this month to discuss options. Getting input from all sources is vital in making the right choices.

        Thanks for the information on indexation and revaluation. I’ll try and find more information on my own DB scheme.

        Yes I’ve already reduced my hours from 100% to 75%. That was about 3 years ago. I’m in a very unique industry which is not healthy long term. I have seen many die early after retiring late or at NRA. So not only do I want to retire as I’ve had enough of the job and company but I’m very aware of the health implications. I also have the possibility of reducing my hours further to 50%. I do a stressful job and one which involves a huge amount of responsibility. Like all jobs, it’s changed beyond recognition over the years I’ve been there. Leaving for another company isn’t an option as I’d be starting at the bottom again were conditions are even worse. So yes I fully appreciate that work you don’t enjoy is bad for your physical and mental health hence my desire to leave earlier rather than later. A colleague of mine retired ten years ago at 57 and was on a full DB pension. Hasn’t missed it at all. His pension is well over 100k PA and that’s after he took the maximum tax free lump sum. He also sold his long term residence, purchased another, and banked around 2M! No kids and no family so him and his wife simply have no financial worries at all as their lifestyle and spending can never touch the amount they have. Anyway I digress.


      3. > It all depends on whether I can stand another 5 years after 50 working or take the hit on the ISA pot.

        sits ill with

        > I’m in a very unique industry which is not healthy long term. I have seen many die early after retiring late or at NRA. So not only do I want to retire as I’ve had enough of the job and company but I’m very aware of the health implications.

        Your health is unreplaceable, and losing it early seems to greatly impair people’s quality of life. While I’d question using the ISA to discharge the mortgage, using it to buy years of health is a very different matter IMO. I’d rather be poorer and healthier than richer and ill. Watching some of those guys go down certainly changed my perspective. Plus of course there’s the time/lived experience aspect. Done right, early retirement is good for your health, though done wrong it isn’t. Monevator, f’rinstance, doesn’t really approve

        I’ve seen people get hung up on a particular number, and I’ve seen people fall into the One More Year trap. This tradeoff isn’t strictly financial – it’s something else to have a heart-to-heart with your wife over. How do you both see your next 10,20 years unfolding?

        There is more to life than earning money. It’s very easy to focus on the numbers, because they are measurable, and sort of concrete. But there is a bigger picture. What is life for, and how to you adapt across the stages of life? Let’s hear it from Jung:

        Wholly unprepared, we embark upon the second half of life. Or are there perhaps colleges for forty-year-olds which prepare them for their coming life and its demands as the ordinary colleges introduce our young people to a knowledge of the world?

        No, thoroughly unprepared we take the step into the afternoon of life; worse still, we take this step with the false assumption that our truths and ideals will serve us as hitherto.

        But we cannot live the afternoon of life according to the programme of life’s morning; for what was great in the morning will be little at evening, and what in the morning was true will at evening have become a lie.

        ~Carl Jung, CW 8, Para 78


    1. No those figures don’t include mortgage as I expected to pay that off before retirement. That would significantly change the needs figure!


      1. Wondered if that might be the case?!!

        One further, and potentially rather important, thought follows:
        You and your wife have both cut your hours significantly which I guess means you are both now on lower salaries than previously. Will this not adversely impact both of your final salary DB pensions in approximately a proportionate manner?
        Please bear in mind it is not unknown for DB schemes websites, etc to be using somewhat stale data – like last years salary, etc.

        P.S. wise words from Ermine above in his response to your “It all depends ….” sentence!


      2. No, part time had no effect on the DB pension for me. The DB pension is worked out on equivalent full time pensionable pay. This is different again to normal full time pay! Just the way our scheme works. Going part time has absolutely no effect on final pension calculation.
        Different for my wife but we’ve taken that into account.


  18. Your line ” The scheme takes the best two years from the last five to calculate the final salary pension” could be particularly relevant to my last comment, especially as you go on to say you “reduced my hours from 100% to 75%. That was about 3 years ago”


  19. What causes a bear market? This question led me to prohibition and asset forfeiture which in a fractional reserve banking system cause withdrawals and hoarding–the reverse of what increases M1. This I published as “Prohibition and The Crash–Cause and Effect in 1929.” The same leverage is discernible in 1987, 2008, and in the Flash Crashes of 2010 and 2015. Eliminating this danger will keep our retirements viable.


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