As someone on “the other side” of the FIRE journey, I’ve been meaning to write about retirement drawdown for a while. Making the leap from saver to spender.
So when Sovereign Quest threw down the challenge in March to write about decumulation (inspired by Monevator’s great 3-parter) – it seemed about time to get on with it. Never was good at turning down a challenge yet after all.
But what can I offer above and beyond the many, many words of wisdom already shared on this? Especially with Indeedably doing his usual fine job of eloquently expressing much of how I think about it.
Well, the one thing I do have is actual experience. I’ve done it. I’m doing it. And if all goes well, I’ll be doing it for a long time yet, hopefully.
For me, there’s two distinct parts to making the transition from planner to do-er. First up, there’s the financial side, the logical side if you like. Questions to be answered about risk, reward. Getting the balance right. What is ‘enough’.
The second part though is far less clear cut, the emotional side. At some point all the planning becomes a question of belief. Of desire vs security. Do I really want to make the jump? Will it be worth it? This side of pulling the trigger is much harder for some than others.
I’ve been through both sides when making my own transition. I’ve made the jump. Committed to the plan. What have I learned and what can I share that may help others looking to do the same at some point? How does the reality compare to the theory?
Let’s take a look!
Retirement Drawdown - The Financial Side
Maybe it’s because I’ve always been comfortable around numbers. A background story including a maths degree and a career in energy trading means I know my way around a spreadsheet for sure.
However, the financial side of FIRE has never been the most interesting one to me. Any regular readers will know I write way more about living life than actual numbers. I like grey, ambiguity. Happiest in the land of possibilities, opportunities.
But I’m also a big believer in that dreams happen way more often when you have a plan and a strategy to deliver them. And so we built ours – basing it on our best view of our proposed ‘life scope‘. Using our existing known cash-flows and then working out the gap needed to fund an early retirement.
Finally, we balanced it up the way we hoped would work best for us.
Compromising between time and money. Working longer for extra padding – but not so long we couldn’t physically do what we wanted to do.
Numerous assumptions, tested out. Coming up with a plan
The Grand Retirement Drawdown Plan
So – what was the grand drawdown plan then? First – clearly I am not a financial adviser in any shape or form. I’m sharing this in the spirit of answering the challenge set, not as advice.
Our plan was not that complicated. It doesn’t have a fancy name or a long string of supporting analytical evidence. Sorry guys.
It basically boiled down to three things;
1. Save & invest enough in ISA/other to provide my required cash-flow between FIRE’ing and 60
2. Invest in work and personal pensions so that they meet cash-flow from 60
3. Have a decent amount of flex in plans plus back-ups
Not that exciting eh? I could and probably will go into more detail at some point about each. The how, what, where and why. The assumptions and testing behind each simple statement.
But that’s not what I want to write about now else this post will go on forever. What I want to write about is accepting the ambiguity in any plan, however good (or bad 😉 )
“Planning for early retirement is an educated leap of faith”
It’s not an exact science. Pretending it is may give you a sense of comfort. If that helps you, great. I prefer to acknowledge it for what it is.
A huge set of assumptions about pretty much every aspect. Historical data is great and it obviously helps to improve your best guess. But I’ve worked in risk management too long to ever see data as more than a guide to decision making.
And if I could share one thing that’s what it would be.
That there is no right or wrong answer. What matters is that you understand your own assumptions. Your own plan.
This isn’t a “do it once and you’re done” activity. As things change, as you learn more – you adapt. You reflect. You update.
That’s why I consider the emotional side of making the jump the tougher side to figure out. It’s not a black or white question like a maths exam – it’s grey and muddy.
I find that empowering but I realise to a lot of people it can be scary to embrace the uncertainty. Moving to the drawdown side of retirement is a big change, even when it’s something you’ve been planning and dreaming about for a while.
Emotional Swings: From Saver To Spender
Talking of changes – I don’t think you get a much bigger one than switching mentality from saver to spender.
It’s very different – especially when habits are well-ingrained after years of planning and saving. A Purple Life did a great job recently blogging about her evolution of spending money. Everybody reacts differently.
I read a lot of financial independence stories whose motivation for FIRE is security. This may not be popular to say but I think those folk will struggle in particular to make the jump.
There’s a big difference between saying you are saving for financial freedom – to actually then using your investments to do so.
It’s not wrong to change your mind when you get there. Obviously. This is all about doing what you believe is best for your life. But being honest with yourself earlier on about whether FIRE really is the dream for you could help a lot of people make their current struggle easier.
I think the switch is harder still for those like us who don’t plan on leaving an inheritance. Purposely looking to run the investments down slowly. No longer watching numbers increase month on month.
It’s another big emotional change once that monthly salary stops coming in. Beforehand, no thought required beyond continuing with the routine. Earn, save, invest, repeat.
Now, the need to think about how to generate cash each year. Using a mix of growth investments, interest earned, dividends paid. Looking to take advantage of all the different kinds of tax allowances and maximise the financial value of our choices.
Sometimes I still find it really odd to generate cash without actually really “doing anything”. I’m so used to working hard and earning money – be it through my career, our house-building or our rentals.
It feels strange to ‘get paid’ simply for investing our cash.
Intellectually I understand it, emotionally I’m still catching up on the idea. So some old habits die hard for sure.
Another example is that even though I don’t need to, I still like to ensure I get good value for my money. One of my natural secret FIRE powers was always being pretty much immune to the lure of shiny objects. Apparently that hasn’t changed much with the switch.
It’s more the challenge and delight in getting a perceived bargain than anything else I think. Certainly we haven’t restricted ourselves from doing anything since we pulled the trigger. It just seems that what we want to do easily fits in our budget.
And that’s the biggest test of all of any financial plan – does it let you do what you wanted it to?
Does reality match up to expectation?
Testing Out The Theory - Reality Bites
It’s now coming up for three years since I left the world of work. That’s a pretty good test for how well or not our plans have faired I think. Especially since that was through the covid ‘dip’ and everything else since.
So how has reality stacked up against theory when actually living off investments in retirement? Turns out the answer is a real mixed bag!
Some things we were surprisingly accurate on, some we were a mile off
I guess it’s not that surprising when you consider that 50% of our ‘retirement time’ so far has been through a global pandemic.
You plan for the average and test against realistic extremes
Our approach has always been a little different to most that I read about. It might shock you to know we don’t have any kind of significant bond allocation, for example.
Reason being by the time we were seriously investing, bond returns were already really low, below our view on inflation. I’m not a fan of locking in a loss. So we planned to ride out the additional volatility in our portfolio instead.
As such, our investment portfolio basically comes down to a ‘growth’ element and an ‘income’ element. Growth is our share market investments, a mix of ETF’s in the large. Some fun/speculative growth views but largely global. The ‘Income’ side is largely a mix of dividend shares and P2P investments.
As mentioned earlier, this has helped us make the most of all the different tax allowances the UK government have. Which between the two of us is already a pretty generous £55k/yr. Combine that with the knowledge that about 45% of our investments are in ISA sheltered accounts.
That ability to entirely legally reduce your tax bill makes a big difference to your real rate of return
But the proof is in the pudding they say. Or something like that. How did our plan work out in reality?
Have we been able to do what we wanted to do? How have our investments actually done?
So - How Did It Work Out?
To cut the suspense that’s clearly been building – it turns out that the first year was great. And the second year has worked out fine despite everything.
Year one the income portion chugged along nicely. Depositing regular income into the cash accounts. In the background the growth investments continued to, well, grow.
A charmed start to the first year. Year two started much the same.
Then March ’20 arrived. Ouch. It’s not much fun watching your hard work slip away.
Even when you are on a sunny balcony in Vietnam.
‘Fortunately’ the drama associated with finding a way home as the world shut down kept us busy during the worst of it. I did actually sneakily invest some spare cash I had in my SIPP though.
So I guess I pass the whole “don’t panic sell but buy” test with flying colours?!?
Whilst we waited it out back home in lockdown, the dip undoubtedly made for uncomfortable updates to the investment spreadsheet.
Interestingly though – it didn’t make that much difference to us in real life. What really hit us was the following impact on the income portfolio. Dividends cut by many and a real mixed bag across different P2P investments.
As a result we saw a substantial hit on the regular income front which was a far bigger concern by far
So what happened? Where we forced into selling out our growth portfolio exactly when we didn’t want to? The nightmare scenario for early retirees only a few years in?
Hopefully you’ll be pleased to hear the answer was a resounding ‘no’.
But what exactly did we do then? And how did our planning help us?
What Really Makes A Successful Retirement Plan?
What do I think really makes a successful retirement plan? One word.
If there is one thing I can guarantee you – it’s that the future will not turn out exactly how you think. You need to expect change. Both financially & emotionally.
I firmly believe that there is no ‘right’ answer to what the ideal retirement drawdown strategy is.
Sure, with the power of hindsight you can test out what strategies would have maximised your investments.
That still doesn’t necessarily mean it would have been the best strategy for you.
If we could leap into the future and look back, it may well turn out that being all in on Bitcoin really was the way to go after all. Do I want to ride that volatility train whilst trying to enjoy my life? Not really.
I don’t need my investments to make as much as they possible can.
I do need them to reliably meet my spending needs over the years.
That’s a totally different question to answer. In today’s low interest world, taking risk in pretty much a necessity to make a decent return above inflation.
So you need to know ahead of time how you will ride that out if/when you need to.
Building in adaptability to your plans is the ultimate snuggly comfort blanket.
Planning ahead as to how you will adapt when needed is probably the most useful thing you can do. And that means knowing what financial levers you have available to pull.
Knowing Your Financial Levers
When we put our retirement drawdown plan together, we included a pretty generous amount of flexibility. Some was on purpose and some was just how things worked out.
Two key things ended up seeing us through the tough period. They were;
- Budget Flexibility
- Cash Holding
Diving into the first, budget flexibility – for those really interested, I wrote a whole post on how the different budget elements worked out. But for our purposes here, what you need to know is we planned for an income ~2.5 times what we could exist on. Probably 3 times if we really pushed it.
We knew we wanted to spend a large part of our retirement actually doing all the things we never had time for. Travel was a big part for sure. Eating out, entertaining friends and family. All the stuff we enjoy. So we budgeted way over what we spent on them whilst working, given we would have more time to indulge.
It turns out that so far we haven’t got close to spending that much. Even in the pre-covid year when we travelled for pretty much six months.
So when our income portfolio took a temporary nose dive, we never actually reached the point where we would need to cut back.
Yes, that obviously means with hindsight we could have pulled the trigger and retired earlier. But I have to say, having that large comfort zone did make riding it out a whole lot easier. Worth it to us for sure.
But just needing less than expected is not going to save you if you have no income at all. And so moving on to the second reason we didn’t need to sell out during the drop – having enough cash in our portfolio mix.
We tend to hold about 3-5% worth of our pre-pension investments in cash. That gives us about one year of spending at our maximum rate, two years at what we actually seem to spend so far.
Yeah, it’s painful with the interest rates so low and you do what you can but holding cash isn’t about creating wealth. It’s about being able to preserve it when needed.
Having that relatively large cash reserve meant that even if we had been spending to our budget, we still wouldn’t have needed to sell out at a loss.
Not having to lock in a large drop in value is well worth missing out on some small additional potential growth in wealth
So all has worked out fine so far. Clearly it’s still a bumpy road ahead for a while yet. But living through something like that and still seeing your plans let you adapt as needed is a good confidence boost for dealing with the future.
Since then, as everyone knows, things have recovered remarkably. Our growth portfolio can now easily provide our income as and when we need it. Especially those investments I made at the bottom of the fall 😉
Which is good since we’re still waiting on some of the income side to sort itself out. A few lessons learned there about yet more diversification needed. A broader set of income shoulders.
And if anyone is still with me at this point – I hope that’s what sharing this has helped you with too. Some lessons learned about how plans stack up against reality.
Expect change, plan for it. Adapt and thrive as the saying goes.
But above all, remember, there is no right answer – just the answer that works best for you.
Love to know what you think & your own plans below…let me have ’em!