One of the efficient ways to take an income in retirement is to utilise your PA. Not your Personal Assistant, but your Personal Allowance. Each year the government lets the minions of the UK earn some level of income completely tax free, your income could be your wage or a pension for example.
For the 2015/16 tax year in the UK, the individual personal allowance is £10,600 a year, or £883.33 a month. Sounds pretty measly.
Ignoring the implications of any state benefits (as that is a long way off and looks to be diminishing each year given the financial and demographic state of the UK) and the tax free implications of an ISA, if we took income of £10,600 in Early Retirement we would pay no tax. Let’s also ignore any moral implications of this for now.
For each £1 above that limit we would start paying income tax, effectively reducing the income by 20% or increasing the capital we need to hold by 25%. These are pretty chunky percentages, and reducing our exposure would decrease the amount of capital we need to build.
This isn’t to say that you shouldn’t aim for a higher income in Early Retirement or Financial Independence, but you should recognise that the amount of capital required increases by a factor related to the tax that would need to be paid on the income.
With a Withdrawal Rate of somewhere between 4% and 2.5% we would need capital of £265k and £424k to support £10,600 of annual income.
Let’s assume that I have enough capital, I am confident with my Withdrawal Rate, I declare Financial Independence Day and starting taking an income of £10,600 a year. Happy days.
But what would living off £10,600 actually be like? The FIREstarter has an article over here discussing if this would be possible and Huw over at FFB40 is actually living off £10k a year. It is possible my friends, it is possible.
I thought it would be a good idea to have a look at my current monthly expenditure and see how realistic living off the PA would be, for me, at the moment.
It’s all about me
I’ve gone through our joint account and my ‘discretionary’ spending account to see what I have been spending since the start of December,
The Joint spending is my half of;
– the mortgage
– all household bills
– eating out
– £200 saving
I’ve left the £200 savings in there as it could be used to provide a buffer account or go towards a holiday. It gives a bit of flexibility.
The discretionary spending account is the cash I give myself each month to spend. I don’t spend all of it every month, but I’ll include in full here for now.
Spending for the last few months, from just these accounts has been;
So even with a chunky discretionary spend and £200 a month saving, I’m only just over the £883 I was looking for.
I do have an admission. My mortgage is pretty small, on a great rate and over a very long term. I figured that I should make more in the long run from savings than I pay on my mortgage, which so far has paid off. It’s a risk, but hopefully a calculated one. It would be harder to achieve low numbers with a larger mortgage, but we’d hope to be mortgage free by the time we are actually living off our investments any way. All it will do is inflate my spending for the moment.
The glaring omissions
I haven’t included any car expenses explicitly in the above. I don’t see this as a necessity.
Admittedly I run a car and a motorbike at the moment, hardly the most frugal approach. I will take MOT/Taxes/Insurance out of my own discretionary account going forwards. That hasn’t always happened in the past, I freely admit. This can be a huge expense though, and removing it completely would be the ideal. I do less than 2,000 miles a year on the two combined, so I don’t think I would actually miss them too much.
It has also been a cheap few months at the start of the year with no council tax and not many other large one off expenses.
Looking at my running averages since December;
It would seem like a good time for an experiment. It’s payday next week and the start of a new month of income, saving and expenses. Let’s see if for April/May/June if I can start to bring my average expenditure down towards £883.33 per month.
It seems doable, let’s see if I can hit these numbers over the next few months and if I haven’t perished from malnutrition I will post an update. If my numbers are right, this does mean that I am and will be living off less than the minimum wage (£6.50 x 37.5 x 52 = £12,675). I am such a martyr.
[As an aside. This article suggests I would be happy in retirement on this amount and this suggests I would be miserable and would need 75% more. From the same newspaper, although different sources, only 6 months apart. Another indicator that there is a lot of noise out there? We would do pretty well just figuring things out for ourselves a lot of the time.]
Spend Less, Save More & Escape the Horde