32 year old, hopes to semi retire by 40

Discussion in 'Money makeover' started by peterpanics, Jul 5, 2009.

  1. peterpanics

    peterpanics Registered User

    Posts:
    17
    Age: 32
    Spouse’s/Partner's age: 34

    Annual gross income from employment or profession: 75000
    Type of employment: Private sector, IT

    Annual gross income of spouse: 35000
    Type of employment: Self-employed (mostly flexible hours)

    In general are you:
    (a) spending more than you earn, No
    or
    (b) saving? Yes

    Rough estimate of value of home: None (Renting €1300 a month between us)
    Amount outstanding on your mortgage: N/A

    Other borrowings – car loans/personal loans etc None (Mostly use public transport and will keep current car for as long as possible)

    Do you pay off your full credit card balance each month: Yes

    Savings and investments:

    €95,000 in savings accounts
    €65,000 in unit funds
    €8,000 in company shares

    Plan to start buying shares (mostly ETFs) from now on through broker rather than increasing unit funds. All of above in just over 6 years of saving, before that was paying off college loans.

    Do you have a pension scheme: Yes (
    €45,000 total, maxing out with 20% of income AVC in DC pension this year, plan same for next years depending on tax changes upcoming)

    Ages of children: None (planning for 2)

    Life insurance: None

    What specific question do you have or what issues are of concern to you?

    We work and rent in Dublin currently with jobs secure hopefully for next couple of years and beyond. My own expenses are currently below €25,000 per year and my spouse about the same. I am saving, investing and adding to my pension with the rest each month.

    My dream is we buy somewhere in the countryside with a few acres about 2 or 3 years from now (nothing too fancy) and I try to become more and more self sufficient in our spare time. For as long as needed I would continue to work and save hard, increasing investments and paying down the hopefully small mortage with big deposit ready between us.

    If I continued to save and invest around €35,000 per year, do you think it is realistic that I could be semi-retired by 40? My spouse would continue to work because she loves it whereas I would hope to become a hobby farmer/gardener/child-minder and also do some part-time work to bring in a small income. I don't share the details of how much I save each year with my friends but they generally laugh when I say I plan to semi-retire at 40, talking about expenses such as children ahead of me that will make it impossible. I am pretty frugal and very happy with the standard of living my current spendings allows me.

    I plan to see an independent financial advisor in New Year, waiting until then to see what changes in tax and pensions are there after budget. Do anyone see a big flaw in this plan? It is the pension contribution gap in between 40 and 60 that I think might be the weak point. I started working when I was 15 and paid my own way through college with work and loans. Things have changed in the meantime so maybe I am underestimating the costs of bringing up 2 children being compatible.

    Thanks in advance for any feedback.
     
  2. Purple

    Purple Frequent Poster

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    7,293
    It really depends on the standard of living you wish to have for you and your children over the next 20 years. You are spending €50k a year and saving €60k. That is impressive but children are expensive and if you want them to have nice holidays etc then you will find it hard to keep your costs down.
    I do think your timing is great; property should start to hit the bottom of the curve over the next 3-5 years and international markets should start to bottom out… soon(?)... so your investments should show good returns over the next 10 years (your home should not be counted as one of them).
    If I was you I would be looking for a situation where I was living off income from investments rather than eating the core amount but the whole thing is really down to your own expectations for the future.
     
  3. Gervan

    Gervan Frequent Poster

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    940
    Don't be deterred. Costs of children can be anything, but if you are self-sufficient in veg, chickens etc, and they have entertainment / occupation on the smallholding and don't demand overseas holidays, you can do it. It's a much better life than 9 to 5.
    I expect state pension to fall, and don't think private pensions will give big returns for some time to come, so wouldn't worry about that side of things.
     
  4. peterpanics

    peterpanics Registered User

    Posts:
    17
    Thanks for the responses.

    My guess about expected standard of living is equivalent of €60k in today's money for family spendings each year. This would take into account additional expenses of 2 children and also being nearly self-sufficient (nothing too extreme) and paying less in remaining mortage at that stage plus property taxes than rent currently. We now have 2+ foreign holidays per year and in future would plan maybe 1 family holiday plus there would be some school trips.

    I would hope to earn about €20k working part-time doing something I enjoy without as much stresss and for my wife to continue making around €35k. The rest of life's one-off costs and shortfall in expenses versus income, I would hope to take gradually from investment returns without depleting the pot too much before full retirement (still would plan to work on smallholding after 60+).

    By 40 we would hope for the following (had to edit downwards as my first attempt too optimistic!)

    €160,000 in private pensions (hope financial advisor will tell me if this makes sense or not)
    €200,000+ in investments
    €50,000 emergency cash fund
    €150,000 paid into house (that is still the big unknown, what you will have to pay in 2 or 3 years for a modest 3 bedroom house with ~3 acres from which you can drive to Dublin in less than an hour)
     
  5. Complainer

    Complainer Frequent Poster

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    4,947
    I'd have to say that it doesn't seem like a realistic objective to me, unless you are going to be effectively dropping out of society all together. Think about kids education costs, college costs, clothes costs, entertainment costs. If you are living in the sticks, you'll certainly need a car.
     
  6. cancan

    cancan Frequent Poster

    Posts:
    171
    Hmm - a next egg of 410,000 at 40. (will leave out money in house as it technically is not useable and ignore tax for simplicity)
    Lets say you live till 80 - ignoring further gains, you are looking at being able withdraw an average of 10K per year if you live until 80, while depleting the principal which would probably erode possible gains.

    It's very dependent on your lifestyle, but I am not sure if an amount of that size would be very useful in the long run.

    While it could be done, you'd have to realise that it would mean a very frugal lifestyle for you and yours.

    Personally, I would think it would be tough.

    For comparison, a garda pension would be worth and eyewatering 1 million euro on the open market - at the earliest a guard can retire is 50. Know any retired guards and their lifestyles for comparison sake?

    You are hoping to do that 10 years earlier with half the amount of money.

    I really do think that retirement costs are much underestimated by many, but admire what you have done to date.
     
  7. peterpanics

    peterpanics Registered User

    Posts:
    17
    Thanks Complainer, I do welcome you adding doubts as I have a few myself. It is the cost of kids that I am most unsure about.

    I come from a small family and there didn't seem to be very big expenses when we grew up (I am sure my parents felt differently at times that I cannot remember). As mentioned earlier, I started working when I young (weekends and summers) and from then on helped cover myself while still at home, paying 1/4 of wages to parents for my upkeep. At 18, I left home and paid for myself through college and everything else. I don't plan to be as strict with my own children but I think I learned some good lessons for later in life and I was happy.

    We don't plan to drop out of society, in a way I plan to join it a bit more when I don't have to work so hard. We have pretty good standard of living with current spendings of just under €50k a year. Current car was paid for with cash and would plan same in future. We would still plan to cover most of the expenses in wages each year. My wife especially would continue on as she has been with just a different commute than now for the days she had to work outside of home.
     
  8. peterpanics

    peterpanics Registered User

    Posts:
    17
    Thanks cancan. I guess the answer is that it is possible to do this but tough and would of course not suit everybody. Maybe I will play around with the numbers and see how working for a few more years as now past 40 looks. I know I would be happy with the lifestyle but wouldn't want rest of family to be cursing the starting of my experiment too early later on. Plenty of time in between for pulse checks with hopeful assumption there is job security that far into future. I don't know any retired guards myself.
     
  9. Yaffle

    Yaffle Registered User

    Posts:
    40
    I have 2 young kids, a third on the way and we live on a farm. So far they are very cheap, I have no childcare costs, they wear second hand clothes (new shoes is the only extravagence), they are/were breastfed, we use washable nappies, no tv and on a farm there is no need for other entertainment costs (even when I plan to go places they want to stay and help on the farm instead). I am saving for education, college expenses and any medical treatment any of us might need as I have heard that children get a lot more expensive as they get older (I do expect them to eat a lot due to all the fresh air and work).

    But if your wife can still earn E35k and you E20k part time that's a lot more than some people will ever earn and you'll still be able to save into a pension.

    Aim for it and if you don't get there or decide it's not for you, you won't have lost anything but at least you'll have the choice. I think the quality of life is priceless (most of the time).
     
  10. peterpanics

    peterpanics Registered User

    Posts:
    17
    Thanks Yaffle, I used to spend parts of summer on a farm when I was young and very good memories.

    I will continue to aim for next stage anyway and buy somewhere with a bit of land in a few years and gradually explore what is possible with the growing nest egg as back-up.
     
  11. deadlyduck

    deadlyduck Frequent Poster

    Posts:
    370
    I am having some difficulty reconciling your figures but may be misunderstanding something:

    Your combined gross income 110000
    Less:
    Pension [net cost] ( 8000)
    Tax (27000) [Note 1]
    Net post tax income 75000
    Less:
    Annual expenses 2 @ €25K (50000) [Note 2]
    Net disposable income 25000


    Note 1:

    • I have deducted a pension of €15000 off your gross and calculated PAYE etc on the net combined income of €95000.
    • I assumed €72800 SRCOP and approx €6000 in combined tax credits.
    • If you were both Class A for PRSI (which you're not as your wife is self employed) you'd be paying PAYE/PRSI/Health contribution/Income levy of c. €27000
    Note 2:

    It wasn't clear if the annual expenses include/ exclude the mortgage. I'm assuming that they do in fact include the mortgage. I'm also assuming that they include the cost of holidays, food, clothes, car running costs/ public transport, any health/income protection insurance premia, entertainment, utilities etc that you could reasonbably expect to incur in a year.


    The upshot of all this is that it 'only' leaves you scope for saving €25000 per annum so I am unclear as to whether you can realistically anticipate saving €35000 pa unless the income values are scheduled to rise or expenses drop.
     
  12. peterpanics

    peterpanics Registered User

    Posts:
    17
    deadlyduck: I will try and give a simple overview later in week about current savings over a year. There are some other factors that boost things further for me:

    - I can add around 10% of pay to pension plus 20% AVC each year, maxing this out for 2008 and 2009.
    - Certain percentage of pay can be used to buy company shares in tax efficient way as long as I don't sell for 3 years, I have been doing this for long time now and selling when time is up.
    - Certain percentage of gross pay can be used to buy company shares each month with a 15% top-up on that, I sell these off usually at regular intervals.
    - Some other perks to job

    We use 'Separate Assessment' option.

    The current annual expenses of <€50000 I mention includes the €1300 per month rent and everything else. Our projected future expenses would include a hopefully small mortgage. I think scope for some reductions on current spending if needed.

    Thanks
     
  13. lmipwis

    lmipwis Registered User

    Posts:
    10
    Hi,

    A good book to read on this is 'Trading Paces' by Michael Kelly. He and his wife swapped to the same sort of lifestyle you are considering.

    Re. finding a property / land in your price bracket, I think you will find what you are looking for, without a mortgage. As an example, here's a decent house on 17 acres of land, with an asking price of €200k. It went for auction in N. Ireland about 2 weeks ago for GBP140k (approx Euro164k) and failed to sell. www.daft.ie/1398995 Its probably too far from Dublin for commuting, but just as an example of what you can get now for that kind of money....

    I think there are 3 key issues for you:
    1. Generating enough income from investments you make with your savings - strong financial advice needed.
    2. You are planning a family. Will your wife be happy to go back to work, with potentially 2 hours commute, leaving small children at home? This is not an easy thing to do when you're in the situation - hormones and the mothering instinct kick in! Could you manage without her income for a few years, for example?
    3. Banks don't generally lend mortgages for less than €150k; i.e. you can't get a €50k mortgage. So you are either going to have to buy outright with cash, get a personal loan over a shorter timeframe, go for a more expensive property, keep your savings and take out mortgage for higher amount (using savings to pay it each month) etc

    I wish you both all the best of luck!
     
  14. Steve D

    Steve D Frequent Poster

    Posts:
    189
    You have done well to save so much in such a short time.

    You need to take proper advice because there are so many variables in this that will affect the outcome, such as mix of assets, investment returns will vary from asset to asset, inflation, income tax, capital gains tax, and how much risk you are willing to take. You will not be able to draw your pension until you reach retirement age.

    To give you a rough idea of how much you need, as a general rule of thumb, I would expect to make a gross real return of approx 4.5% as an average in the long term so, for example, in order to have a gross income from investments of €45,000 you would need to have capital of €1m, excluding your home.
     
  15. peterpanics

    peterpanics Registered User

    Posts:
    17
    Thanks Imipwis for the tip about 'Trading Places', got it from the library now and enjoying so far. Also interesting daft.ie link and details about the auction. My wife insists she would want to keep working and has some flexabilty about times and tele-working options for parts of week, I agree though she could change her mind later and want to take a few years out when we see the reality of being parents. The option of buying with no mortgage is an interesting one, I had avoided saving just into cash and pension and I've increased my euro cost averaging into unit funds since last late Autumn and plan to buy ETFs mainly from now on through broker. I have done some reading about asset allocation but my multi-stage plan makes it more complicated.

    I agree Steve D I do need proper professional advice, was going to go late this year or early next but maybe should go sooner. I have this imaginary finishing line of 40 but by that time I probably won't have enough invested to cover the shortfall in my guess of expenses versus income. I will take it one year at a time anyway saving towards part 1 in next 3 years of a house in the countryside. I do hope we can still save into private pensions at slower rate during the semi-retirement stage but maybe for that I need to push out the plan to 45 and increase the pot.
     
  16. mtk

    mtk Frequent Poster

    Posts:
    317
    firstly well done on saving so well
    just some food for thought
    1) re downshifting wil it be that easy to downshift- some employers at senior level only want full time employees etc. you may have this all thought out but just asking!
    2)woud your wife be happy to keep wokring as normal if you downshift
    3) I think 410k by 40 is realistic ( dont count the house as some one else said). I did it myself.
    4) Not sure i would touch ETF unless you have great confidence which after the last year.....well obviously up to you
    5) To me the key is whether you can obtain post down size income . if you can happy days with the 400k buffer
     
  17. lmipwis

    lmipwis Registered User

    Posts:
    10
    Just an idea - if you found a place with more than 2 acres, say go for circa 15 acres, you could set up allotments and rent them to people. It would also be very sociable and could give an 'audience' to sell any excess eggs, produce, fruit, jams etc that you have. More info at http://www.allotments.ie/ I guess location would be key and you'd also need to crunch some numbers to see if this is viable!!
     
  18. Firehead

    Firehead Frequent Poster

    Posts:
    86
    Peter, I know where you're coming from, we're thinking along the same lines as yourself, we're already living in the ideal place with enough space to go the whole self-sufficient route, we've actually started already on the veg growing, living quite frugely etc.

    We're both working full-time at the moment but hope to start a family within the next year to two years, we're at the stage in life now to know our priorites and we are in the position of having a relatively small mortage on a large house in a beautiful rural location. The decreases in both our salaries in recent months have really spurned us on in our ambitions to opt out of the rat race. Best of luck, you go for it.
     
  19. peterpanics

    peterpanics Registered User

    Posts:
    17
    mtk, I have a plan after downshift for ~€20k income with part-time work but all could change in the next 8 years. My wife would like to continue working as now if possible, about two days a week in the office and rest at home, she enjoys it a lot.

    Imipwis, the idea of allotments is a nice one.

    Firehead, good to hear your story about being closer to the finish line than us.

    Thanks for all the replies, I might update about the numbers and progress in 2010. Always possible that one or both of us could be out of work in next years or other events conspire to delay the plan.
     
  20. bananas

    bananas Frequent Poster

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    66
    Just a comment on the previous posts, I think you've done marvellous work to be so financially secure so far, I admire your ability to plan for the future.
    I think what I want to say is to not be too rigid, don't want to be pessimistic either, but build a bit of flexibility in because it can be a difficult fall if something goes wrong in your plan.
    Best wishes