How stable does your Financial Independence bridge need to be?

After posting some thoughts on what my (or your) allocation should be between an ISA and a Pension there was bunch of constructive and thoughtful comments.  They kept me wondering about this Bridge to Financial Independence.

While passers by were checking out a good looking lady or guy, while colleagues were discussing the latest sports results or while people were numbing there minds to the shite that is “I’m a Celebrity….” my mind was awash with thoughts of getting my ISA:Pension allocation just right.  I spent time muttering to myself about withdrawal rates, growth rates, time horizons and simulations whilst staring at numbers on a backlit screen.

You got to have priorities, right?

I redid the projections using my own current assets as the starting point, with the portfolio value on the y-axis and age along the x-axis;

A simple projection of my ISA and my Pension, with very excellent axis labelling

The blue line is my ISA and the kink would be when in 10 years I start drawing down £1,000 per month in today’s money.  If the mortgage was paid off, I truly believe this would be plenty.

As Ermine put it, it’s about learning what enough looks like.  Hopefully a decade gives me enough time to figure that out.

I’m still pulling together my spending information to come up with an average monthly spend, but it’s not far off £1,000 per month at the moment.  And that includes all my bills, a bit socked away for holidays and car repairs/insurance etc.  All in.

The Orange line is a small amount of cash I’d hold and the ever increasing grey line is the Pension balance.

Perhaps this chart suggests that I am being a little too cautious.  Afterall, by the age of 58 when the shackles to my Pension might have been released, my total New Worth would be creeping towards £650k and the ISA is far from depleted.

There’s no denying that there is something enticing about the graph.  If I sit and stare at it I flit between;

All I have to do is carry on with what I’m doing now and Financial Independence is possible” 


“Shit, ten years is a long way away, a lot could happen in that time…it’s too long to wait…is this whole FI thing really a great big joke that the internet is playing on just me”  

 *Hears distant evil laugher*

Rattling the cage
Whilst the graph above is certainly encouraging, it does has it’s limitations.  With the withdrawal rate less than the assumed growth rate the experiment is destined to be a success.  Oh, if were only that simple.

Let’s run things through FIREcalc and see what happens.  Whilst I could whittle away days on FIREcalc let’s restrict this to a few simple scenarios;

1 – FI at 43 in ten years time, then living off what ever accumulated for 15 years to age 58 when I get my grubby paws on my pension

2 – Contribrutions to my pension for 10 years, then leaving it for another 15 years to grow, so what kind of size might it be by the time I’m 58 and granted access to it

3 – An extreme example, FI at 43 in ten years time, then living off what ever accumulated for 23 years to age 65 when I get my grubby paws on my pension.  Regulations could change…

FIREcalc is a great tool by the way, while the interface might be a little clunky, it is quite powerful.  An hour or two spent playing about with it, trying to understand what it’s doing and what the results mean, is time well spent in my opinion.  So go forth an tinker.

Starting fund – My current cash and equity balance (ignoring my pension)
Investments – Constantly at an 80:20 equity:cash split.
Investment costs – constantly 0.3%
Contributions – Continue for 10 years at the current rate, so to the age of 43.
Withdrawals – Start in 10 years time and continue for another 15 years to the age of 58 when I can access my Pension.  Also assumed to grow at CPI, approximately 3%.

Here’s the basic chart from FIREcalc, ponder over it a while if you will;

There’s no denying that it is a splendid looking graph, but what is it telling us?

First of all, not one simulation, not a single one, has dropped below zero.  So based on the historic data FIREcalc uses, I would be fine and dandy living off my portfolio from the age of 43 to 58 while waiting for my Pension to be accessible, spending £1,000 a month.  That’s even under the most dire of circumstances that FIREcalc had to offer.

Secondly, the spread of balances at the end is immense.  The lowest balance at the end was £32k and the highest was £1.1million, with the average at £420k.

There are undoubtedly some simulations that have a near perfect sequence of returns which are skewing the average skywards.  It would be good to get hold of the actual data and remove a few of these higher balances to see the impact this has on the average, or better yet build a distribution of final balances.  Oh to have the time.

Pretty comforting to think that there was a sequence of actual historic returns that would have led to my ISA growing to £1.1million despite 15 years of withdrawals.

Lastly, while historic data is not a guarantee for the future it does provide a useful way to test things, a pretty good proxy for what might happen.  The graph above is far more useful than assuming a constant, historic average, rate of return.  It shows, to me at least, that this could be quite a robust strategy.

History repeats itself
I’ve also run my pension account through FireCalc separately.  This way I can see what the potential outcome for my pension account would be.

Contributions have been assumed to continue for ten years whilst working, and then to stop for the next 15.  But there are no withdrawals in that time, as I’m only looking to see how big my pension might grow.  This should give me an idea of what my pension would be worth at 58.

Starting fund – My current Pension account value
Investments – Constantly at an 100:0 equity:cash split.
Investment costs – constantly 0.3%
Contributions – Continue for 10 years at the current rate, so to the age of 43.
Withdrawals – Set to 0 for another 15 years to the age of 58 when I can access my Pension.

This will model my pension to have contributions for the next 10 years, and then be left just to grow for 15 years until access is granted…

No failures as we’d expect, as withdrawals have been set to 0.  A failure would be terribly worrying, a complete collapse of the financial system.

But again, there is a hell of spread in potential values after 25 years.  It’s staggering.  The simulation showed an average value of £662k and a maximum of £1.7million at the end of 25 years.  That be some tasty numbers.  The minimum value wasn’t coming through in the Firecalc blurb properly, but reading off the graph it looks somewhere around 60% of the way up the first label…maybe around £200k.

Which means in the worst case for both the ISA and the Pension I’d be left with around  £230k…not a substantial amount, but not a failure either.  At the top end it would be £2.8million.  Shit a pig!  A spread of £2.5million for essentially letting the market do it’s thing, just with a different starting point.  Sequence of return risk can be a bitch or your best pal, it seems.

The average case would leave a smidgeon over £1million at the age of 58.  Remember that expenses would have increased along with the devil that is inflation, meaning the £12k of out-goings increased to £25k.  A withdrawal rate of 2.5%.  Just like index investing, I’d be happy with average performance.

If you were only spending £25k a year (the equivalent of £1,000 per month, in todays terms) what the holy hell would you do with £2.8million?  Even if you just left it in cash it would take you centuries to get through.

Careful careful

FIREcalc obviously guarantees nothing, so we need to be a little careful when interpreting the results.  It runs historic American stock market data on the parameters that you input.  Here’s some of my thoughts on it.

The good
– It assumes no other income other than investments after the age of 43, which is very unlikely.  Even pulling in £200 a month would reduce the strain tremendously.  I don’t plan on stopping working forever, to spend my days carrying gravel about in Tesco plastic bags and shouting obscenities at passing traffic.  I suspect (hope) that during our FI years we’d find something productive that we enjoy and start doing it purely for the joy, not for some arbitrary number on a payslip.

– It assumes constant savings.  I plan on getting a few payrises above inflation and maybe a promotion or two, so increasing my savings rate.  That should help to grow my investments further, even if the market isn’t playing ball.

– It doesn’t include any potential bonuses, which would be slung into the fund.  Again, this will only help my savings to grow.

– It assumes constant spending, there would be room to cut back in darker economic times.  I don’t plan on having a budget that only has pennies of tolerance built into it.  Us Financial Independence seekers aren’t martyrs, destined to live in a single crumbling wooden dwelling, all huddling together to stay warm while feebly shaking our mal-nutritioned fists at rampant consumerism.  We plan on having a comfortable lifestyle, just without all the decadent shit you don’t need to be happy.  There will be room to trim the expense fat in leaner times.

The bad
– There’s no ‘shocks’ to my savings.  A period of unemployment for example, meaning I can’t gleefully pile money that others are using on new shoes into savings.  Honing useful skills, being proactive at work, getting a side income or taking on the shitty tasks that others don’t want all provide useful connections and skills that can be drawn on in times like this.

– There’s no shocks to my spending.  or for a particularly huge house repair.  In reality, this is life, suck it up Mr Z.  And all it is doing is very slightly delaying things, the struggle only makes victory sweeter.

The ugly
– It’s based on historic American returns, during which the economy was absolutely fucking humming along at some points.  We might not see growth like this in our investing horizon.

– I’ve assumed my mortgage is completely paid off in 10 years.  (I’m actually not overly worried about this as my running expenses at the moment include mortgage payments, so either I carry on paying it or it’s paid off and I need less to live on.)

Ahhh gaawwddd what if they move the age I can access my pension

As the article that RIT pointed to suggested that the access age to our pensions could be raised to 65, why not run another set of numbers through FIREcalc?  Ideally I think we should plan to be robust enough to withstand any changes like this, rather than changes delaying our plans.  Or worse, the change smashing our humble motivation into submission and completely derailing our plans.  Don’t be the sucker sat there saying ‘I didn’t see that coming’.

Starting fund value – My current cash and equity balance (ignoring my pension)
Investments – Constantly at an 80:20 equity:cash split.
Investment costs – constantly 0.3%
Contributions – Continue for 10 years at the current rate, so to the age of 43.
Withdrawals – Start in 10 years time and continue for another 22 years to the age of 65 when I can access my Pension.

Now now Monsieur FIREcalc, things just got interesting…

6 failures out of a 113 cycles, or a success rate of 94.7%.  I could be a bit precious, after the previous 100%’ers, but even this seems acceptable.

You’d think after 5-10 years if things weren’t going great you would take some positive action rather than just watch it all come crashing down.  Us FIRE types would make damn sure that 94.7% was closer to 100% by taking action.  Cranking up savings rates further, getting a job (or another job), getting that promotion, cutting back on expenses etc.

Even with the horizon extended, the relatively modest savings to remarkably well in some scenarios.

It does raise some questions, let’s say in 10 years time you are at the bottom of the spread, with less in investments than expected.  Do you carry on working for a few more years to build those funds up.  What if you are all burnt out, a crispy wee husk of an office drone, yearning for that freedom and can’t work on.  I’m sure you’d work it out, but it’s worth thinking about now.  Unleash your inner pessimist.  Only briefly, otherwise the little rascal will convince you that the whole thing is futile and a pile of new underpants is a better use for your money than all this silly saving.  It’s remarkably unlikely that we will be where we are planning to be next year, let alone in 10 years time.  I’m going to carry on saving like a beast and living the simple life, pushing the odds in my favour as much as I can.

Play, play & play
I could go on, and tweak investment allocations and time frames until my hearts content.  Truth be told, it’s tempting.  (Another truth…I did play around with it for far too long).

As wonderfully complicated and huge as FIREcalc is, it is still infinitely simpler and more limited than real life.

It is human nature to run things like this and get focused on the failures, on the negative and get locked into a mindset that says

“I’m not going to do this until the chance of success is 100%, or more if possible”

The reason that Financial Independence isn’t more widespread is because people want absolute certainty that it will work.  A stamp of 100% guarantee.

Sorry people, Mr Z just can’t offer that guarantee

Without this guarantee it’s easy for the less stoic to shy away from the commitment.  And then turn to little boosts in the here and now.  Jump on the consumer treadmill and simply follow the Herd through the shopping centre of life like the undead.  We are programmed to follow the majority, a trait that worked when we were cave people.  If the majority of your tribe told you poking a bear was a bad idea, it probably was.  To test the theory would end up with you losing your head to a real live bear.  This programming is a little out of date in modern life, it’s so much safer than it was before, there are so many more opportunities to be taken.  Just because the majority will tell you that saving for early retirement is impossible it doesn’t mean it’s true.  Saving for early retirement whilst burning money like your common consumer drone is indeed impossible.  A small side step off that treadmill and it suddenly looks like an imminent destination, rather than an impossibility.

How much is enough?
We need to be a little careful, is 100% success rate really what we are aiming for?  It’s not a race or a competition.  A competition to see who can design the perfectly efficient strategy and anticipate exactly what they will need and the markets will do.  What is the overall goal?  Wealth generation or Freedom?

If it’s just wealth generation then the answer is to work for the greatest return you can find until you drop dead, investing everything you can and spending a little as humanly possible.

That’s not what this blog is about.  It’s not what I’m trying to achieve.  A huge stash of money would be great, but only because of the potential freedom energy it contains.  If it’s freedom you are looking for, then some of the larger numbers that FIREcalc spat out look dangerously like failure, just of a different kind.

Cast your imagination to the future for a moment.  There you are, with enough gold in your savings to satisfy the 4% Rule.  A few more years working would build in more prudence, yet Financial Independence is yours for the taking right now.  What to do?

Depends on your motivation.  If you already hate work then make the jump to Financial Independence there and then.  Having £2million in investments isn’t going to make you any happier than £500k if that’s enough for the Freedom you crave.  If you still enjoy your job, then carry on working, with that sweet knowledge that you are no longer working for the salary alone.  You’ll work much freer and probably do far better as a result.  With your mind free from the constraints and worries of working for the salary alone.

Guide!  I’ve gone off piste a bit, throw me a rescue line.

I will take a sage like overview, my investigations have shown me that this FI thing is a very real possibility and not just some pipe dream.  I have no doubt that it will not play out like any of the simulations above, life is far too complicated for there to only be 113 various outputs.  It’s going to be tough and it’s going against common convention but that’s part of the challenge, tough it out.

Mr Z

11 thoughts on “How stable does your Financial Independence bridge need to be?

  1. Under The Money Tree

    I aim to avoid drawing down my ISA where possible. The main reason is I have property rental income which will be a significant chunk of my FI income. The more income I can keep coming (tax free) from my ISAs the better!

  2. Rob

    I love a good projection and this is fascinating as an intellectual exercise…but if you’re truly worrying about the “bridge”, I’d encourage you to go easier on yourself.

    As you allude to yourself, it’s highly unlikely that when you reach FI you’ll want to lead a life of complete leisure. So all you need to do is find something you love enough that you’d do it for free, but get someone to pay you £1,000 per month for it. That could be a couple of hours per day or a couple of days per month. Alternatively, the royalties from one modestly successful self-published book would do it.

    You know this already, of course. I just know from personal experience that there’s a point at which diligent planning becomes unhelpful worry, so wanted to tap this out on the off-chance that it’s a helpful reminder!

  3. SkyDustGold

    "Cast your imagination to the future for a moment. There you are, with enough gold in your savings to satisfy the 4% Rule. A few more years working would build in more prudence, yet Financial Independence is yours for the taking right now. What to do?"

    The future of your imagination is my present; I'm pretty much in the position you describe (depending on how you value a long deferred final salary pension). What did I do? I pulled the trigger and, as of 31st Dec aged 45, am unemployed/retired/gap-yearing/whatever.

    I've spent a decade modelling, spreadsheeting, and forecasting but even now I don't actually know what the future holds. Too many variables and, even if the future does turn out to be the same as the past (it won't), success or failure can still turn on the decimal point of some starting value or assumption used.

    I concluded that there's no such thing as safety in this life and, as I have a big enough stash that I'm not being actively reckless, I might as well give it a try.

    Mrs SDG did point out that while the internet may be littered with FIRE success stories, the failures probably don't have wifi in cardboard city.

    Anyway, here's hoping!

  4. ThirdIncome

    Definitely a hard balancing act between adding as much safety / conservative modelling as possible against falling foul of the "one more year" issue.

    I think you're right in your point about the FI community though – a lot of what you see from people post FI is that they continue to earn to a greater or lesser extent, and probably still spend less than they get in income, so that surplus reinvested helps to smooth the path too.

    Whether it's work on the side, ISA's, pensions (drawdown or annuities), P2P lending or BTL's there are a few ways to skin a cat and diversify potential income streams – the main thing as always is to have the cash to put to work in the first place by following The Rules!

  5. Mr Zombie

    That would be ideal. Things change, but I'd love to keep our current 2 bed and rent it, and move into something that needs a bit of work doing to it.
    The Pension seems more and more like poisoned chalice, with the reducing lifetime limits and hints towards reducing the tax savings on the way in…

  6. Mr Zombie

    Hi Rob,
    Thanks for the comment.

    A couple of flexible hours a day would be spot on, preferably doing projections for someone 🙂

    I agree, but sometimes it's easy to get into a planning whirlwind. As long as it's not too often (or too rigid and completely dominating your life) then I'm not too bothered.

    When I start turning off the lights as my plan shows it speeds up my progress by a few days then things will be getting worrying.

  7. Mr Zombie

    Hi SDG.
    Amazing! Was it a hard decision when it actually came to it?

    Haha, Mrs SDG might well be right. But I think a decade of modelling and spreadsheeting puts you at the top of the pile.

    Any plans to earn any income after 31 Dec? Or kick back for a bit and see where it takes you?

  8. Mr Zombie

    Agreed that the OMY issue seems like an easy one to fall foul of.

    I'm hoping that as those of us in the FI community have slowly built up our funds, normally around a simple lifestyle, that we are a pretty adaptive bunch. The riches haven't been thrust on us, so we should (!) have the skills (to pay the bills).

    First rule of FI club? Follow The Rules 🙂


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