Yep, it’s one of the greatest fears of super early retirement. You leave work with a hefty pot of funds, but what if it doesn’t last through your (hopefully) many decades of Dosserdom? This week’s shock discovery is that yes, the money is slowly running out….
Regular readers will know that we’re back at home in the UK at the moment. Our one week turnaround has been extended due to a wait for parts from Ford (I’ll tell you all about this next time), which left me with the time and the unlimited internet connection to sort out my escalating laptop issues. Whilst creating some physical backups, I came across a folder of old financial planning spreadsheets….
Normally, these wouldn’t have caught my attention, but I recently happened across this chart in an old post on EarlyRetirementNow.com (The Ultimate Guide to Safe Withdrawal Rates – Part 6: A 2000-2016 case study (or: Welcome to the Potemkin Retirement Village):
This basically shows that if you retired in January 2000, invested in a combination of stocks and bonds, and stuck with that approach, you’re now completely and utterly stuffed (it’s based on US data, but I can’t imagine that the UK picture would look much rosier). Is that really showing a portfolio 100% invested in the stock market potentially going bust in 2025? Blimey…. I left the workforce a bit later than January 2000, but this chart still gave me food for thought. I’ve never even considered what my net worth has done in real (inflation-adjusted) terms. Should I be worried?
A more recent post on EarlyRetirementNow.com points out that once your retirement pot has gone down the tubes, the fact that you’re now in the withdrawal phase, i.e. taking money out and spending it each year, means that a straightforward stock market recovery doesn’t make the problem magically go away (Why is Retirement Harder than Saving for Retirement? SWR Series Part 27):
The blue line shows the portfolio recovering with the stock market assuming no withdrawals (i.e. this is what happens following a market downturn whilst you’re still saving for retirement). The red line shows what happens to the same portfolio with ongoing withdrawals. Ooooh errrrrr…..
So on discovering my old spreadsheets this week, and with time on my hands whilst my backups chugged away in the background, I decided to delve further. The figures on EarlyRetirementNow are all real values (i.e. after adjusting for inflation). The big question: has my retirement pot behaved like the lines on those charts?
The Background Story
The oldest spreadsheet I found dates back to late 1999. I was still working at that stage but my retirement plans were well advanced. Here’s the thing that most struck me in retrospect: I had no idea of, or interest in, my net worth at that point. I didn’t even bother to calculate it.
Nowadays, from what I read online at least, preparing for early retirement (or FIRE, as it’s referred to: “Financial Independence – Retire Early”) seems to be all about Net Worth and the Safe Withdrawal Rate – how much money do you need to be able to retire and what percentage of it can you afford to spend each year without running a serious risk of a poverty-stricken old age? Back in 1999, I recall conversation around the coffee machine at work being all about how many flats you needed to buy on a 60% mortgage to be able to retire.
My retirement plan was all about stable income: buying the right properties for the long term. I seem to have planned pretty conservatively, subtracting generous allowances for repairs and running costs from rents. That left me with an expected monthly income of £2400 and estimated monthly outgoings of £1500, which seemed doable back then.
There’s then a big gap in spreadsheets until December 2005. I guess you don’t need to keep planning when the plan’s been executed and is working…..
What changed in 2005? Ah yes, in late 2004 / early 2005 I sold most of my property investments. Why? Well, the prices had gone seriously nuts. By this point, property investment had become fashionable, and people were piling into the local market. I can only imagine that most of them were looking at the gross rental income and not fully evaluating the costs. Everything is for sale at a price, so I took the money and ran.
The trouble with a sudden cash influx is that you have to decide what to do with it…. so it was back to the planning spreadsheets. I had a tendency to start a new spreadsheet in January each year, which leaves me with annual spreadsheets stuck in time at the end of each year from 2007 through 2013. Net worth had by now moved to centre stage……
I seem to have become a lot more chilled out about spreadsheet longevity from 2014 as I stopped bothering to create a new spreadsheet each year…. Having gone through this exercise, I’m determined that from now on I’ll save regular snapshots so that in a few more years’ time I’ll have something to look at on a rainy afternoon…
Net Worth over Time
So here it is – my Net Worth at nine points in time (December of 2005 and 2007-2013 inclusive, plus August 2018) in nominal and real terms (calculated using UK CPI), rebased to £100 in December 2005:
As I mentioned above, I have no idea what my net worth was before 2005, but I can safely say that it grew significantly between 2000 and 2005. Expenditure grew to match; £1500 per month went out of the window with the property sales in 2004-2005. So I’d look at 2005 as the start of retirement phase 2, a much “fatter FIRE” (to use the current online terminology) than the one I’d originally embarked on.
Between December 2005 and August 2018 (12+ years), net worth grew 23% in nominal terms but shrank 8% in real terms. In real terms, net worth peaked in 2007 and is still 12% below that high point. Hmmmm. Initially I was a bit disappointed by these figures, but then my thoughts turned to one of my favourite financial planning charts, courtesy of the UK’s Office for National Statistics:
The thing I like about this chart is that it brings home the message that no-one has the foggiest idea how long I might live for (least of all me!). An 80% confidence interval gives me an age at death between 71 and 103. That’s really narrowing things down (not!). On the basis of this, there’s just no point getting bogged down in ever more complex calculations and planning: I try to stick to the big picture.
Based on a life expectancy of 71 to 103, back in 2005 I’d have had between 38 and 70 years of retirement ahead of me. Scrolling forward 12+ years to 2018, I’ve now had between approximately 19% (13/70) and 34% (13/38) of my estimated retirement.
An 8% drop in my real net worth over the period 2005-2018 is no longer something that’ll keep me awake at night. I’d be quite happy to spend the lot by the time I shuffle off this mortal coil, so I probably should have slowly declining real net worth at this point. 8% down over 19%-34% of retirement looks fine. A new worry has replaced it though:
BL***Y HELL! 34% OF RETIREMENT GONE ALREADY?!? QUICK! PASS THE BUCKET LIST!
Oh, hang on, I don’t have a bucket list. That 34% is a big kick up the bum though to pack a lot more into the next few years……