living intentionally personal finance: early retirement
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The birds are singing in the air, the sun is shining and the blackthorn is in bloom before the leaves come out.
Birds recorded in the cemetery on the way into town. I love the sonorous resonance of Woody Woodpecker
About three times a year The Firm invites staff to apply for voluntary redundancy. There’s usually an incentive of up to a year’s salary redundancy money, and I’ve put my hand up enough times in the last couple of years.
This time the stars are in alignment, it seems, and I have clearance to begin the final approach for the exit. HR spent a lot of time spitting bricks about that everybody has to be out by the 31st of March. However, I have a unique skillset for the Olympics work, and local management found a way to extend my leaving date to the end of June.
Which I’m absolutely cool with, though it confused the hell out of me when I received the confirmation with a leaving date contradicting everything else HR had said. Where there’s a will there’s a way, eh, guys 😉 Not only do I get the opportunity to finish the job, I get the opportunity of getting the year bonus just as I leave, I will only have earned half a tax year’s money so I have less tax exposure and I get to benefit from another load of Employee share schemes and Sharesave. Thank you Mr HR and line management.
Oh and I don’t exactly have to sweat the infernal performance management system because there’s nothing to play for. It gets back to how working used to be before a bunch of American HR twunts got a hold of the system. I didn’t realise that the punk Peter Drucker who is responisble for an awful lot of things that enable Digital Taylorism was the architect of Management By Objectives. The Firm seems to have explored pretty much all the avenues listed as Limitations in the Wikipedia article on this.
It seems W Edward Deming identified the thing that The Firm did wrong – in my area, which originally had a scientific and technical skill base, management was along Deming’s lines of leadership, which worked well. Only in the last seven years did they switch to MBO, which ended up destroying the esprit de corps. Indeed, the undesired outcomes of MBO seem to be rife in capitalism at the moment, with objectives causing our CEOs and bankers to run amok chasing short-term gains and hypercomplexity at the expense of the rest of us muppets.
Oh well. This isn’t my fight any more, though it does deeply hack me off that this damned performance management system and its abuse caused me to have the longest period off sick that I ever had in my working life.
Most people who take voluntary redundancy only get a window of about two weeks between when they hear if they’ve got it and getting to clear their desk, and to be honest that’s all I expected to have. The luxury of the extra time means I have more opportunity to set my financial affairs in order and take opportunities.
Joining the rentier class is a huge change from being an employee.
Living off capital is a massive change from living off a wage. I have always got the vast majority of my income from being an employee. This will change; my work pension is deferred pay of a little bit more than the NMW because I am a very early retiree, which fits conveniently with the aims for an increase in personal allowances from the Budget yesterday. Nevertheless, it is enough that I will probably always be a basic rate taxpayer as a result, which eliminates many otherwise useful ways of avoiding tax.
As far as the capital is concerned, to my employee-income-attuned eyes the numbers are enormous – and this often leads people into temptation. The AVC lump sums and redundancy money plus the savings I already have add up to the largest sum of money I have ever seen in my whole life, I could easily buy my house again, cash, and furnish it better than it is 😉 A friend of ours asked if I am going to blow the redundancy money on something nice.
No. That sort of thinking is madness. For a while I am not going to change any spending in any significant way, with one exception, I may go on holiday, but along the lines of The Accumulator’s staycation rather than a permanent Gap Yah. Other than one special occasion, I haven’t been on holiday since 2008, and this was one of the harder things about locking down spending while working. I came to this conclusion myself, however, the rationale is delivered with more vim and vigour by this writer
The one thing everyone must do the moment they get fired or quit is…
Don’t do a damn thing. Nothing at all. Got that?
So why no change? After all, though my total income will be less than half of my gross salary, that’s actually a hell of a lot more than what I have been living on these last three years, because I have been saving most of my salary. I could increase my lifestyle and not touch the capital
No change for several reasons. I only gained control of my spending after I had accumulated a lot of data on what it was. My spending will inevitably change – I lose the modest work-related costs, I will probably pick up some other costs. I need to know what these are before making any strategic changes. I have no experience, only a theoretical and intellectual understanding of what it is like to live off capital. This is eased in my case by having deferred income which is significantly more than my outgoings, so there really is no rush, and I have much to learn.
A signal received at the eleventh hour…
Just over three years ago I took the initial hit that started me on this path. So I decided I wanted out, and started making the calculations. This was in February 2009, and after loading a Cash ISA I started to look at more sustainable returns from saving, splitting between financial and non-financial investments. I read this on Monevator. These were among the darker days of the financial crisis.
Points of crisis magnify the power of small actions. It was clear that I was a long way away from financial independence, and I have a very dark view of the future of Western economies. And yet, I saw that combined with the power of a 41% tax saving on going into pension contributions, there was an opportunity highlighted in that article. It was time to take a chance like a Stagecoach bus driver, but with far better odds. At the time it did look to me like there was a very real risk of the entire financial system going titsup. I did know the ‘be greedy when everyone around you is fearful’ theory before but it took that article and some desperation to stiffen the spine to actually execute it then. I continued to invest in AVCs ever since, and have just issued the sell stock market funds to convert to cash fund command, at a 20% uplift (less about 5% inflation).
The echo of the initial hit still stayed with me, and so I saw these last three years as trying to manage the slow decline of energy as I fail to live my values for the sake of money. It is not necessarily the most motivational image, but it allowed focus. Sometimes it isn’t necessary to win, it is enough to lose less quickly.
I was ready to quit of my own without a redundancy package after August, by which time I will have run out of space to save 40% tax in my pension contributions to be able to take out as a pension commencement lump sum without having to take out an annuity, for which I am far too young. However, it was always good to roll the dice of voluntary redundancy if there’s an opportunity of a free win, and this time my number came up at the eleventh hour.
Retirement isn’t all about money, of course. I will probably not want for things to do, and the work, community and people at the Oak Tree will mean I won’t get to see too much of the attractions of daytime TV or the Jeremy Kyle show.
Though I chose a similar aviation metaphor to Salis Grano, I reversed the direction, I see the journey to early retirement as being on the final approach, where his is one of taking off. SG probably did the planning in the way you should do it, saving over many years. I started late, already from a weakened position and anticipated the three years would be the point where I was all out of energy from the enervating performance management system.
I’ve never had any actual trouble with it after the first hit, but I associate the whole procedure with a time when I felt I was within months of being run out of The Firm, and since it happens every quarter that is a lot of stress. I did wonder if I paid for psychotherapy then it might be possible to break the power of this association. However, in my view modern performance management systems are deeply screwed up. Some things should not be equalised or accommodated, they should be destroyed or eliminated from my life.
The Tribulations of Holding Lots of Cash
While I did a pretty good job of working out how to save the most while minimising my tax exposure, what is becoming patently clear is that I didn’t really pay enough attention to working out what to do afterwards. It transpires that the total sum of my AVC savings, redundancy and existing savings is far and away my largest asset, with the possible exception of my pension itself.
And it will appear as cash, and immediately start to decay in real terms in that unappealing way that only cash does. As soon as National Savings and Investments open their doors again for index-linked savings certificates I will double up my existing 15k holding with them. That I can leave as emergency fund. Unlike that cheeky pup Monevator who would like to make a profit on his cash holdings, I don’t have any aim to make money on cash. It’s quite enough for me to find all of it still there in real terms when I come back for it, I just don’t want to have it die away quietly into the night in order to pay for some Government largesse like Tarquin and Jemima’s school fees. And I don’t want to pay tax on it, either. However, in the grand scheme of things NS&I can’t really help me very much to stave off the rust of inflation for most of the capital, because of their savings limits.
The high-level aim is to invest most of the money, somewhat along the principles described here, and carry on on the general HYP lines my existing ISA operates on. I was also planning to hold a big wodge of The Firm’s shares unwrapped. The old principles of not holding shares in my employer kind of go away when The Firm is no longer my employer. It has a decent yield, reasonable prospects and I have totally avoided the sector in my shareholdings. However, this comment implies this will cause me problems with tax again. I had hoped to avoid paying tax as a retired Ermine by using ISAs but it will take me well over a decade to finish shovelling cash into ISAs.
The general issues of how to turn savings and a pension commencement lump sum into an income don’t seem to be addressed in any UK PF blog that I’ve found so far so this is a pathless land as far as I can see. The general principles of living off investment income are dealt with well, but migrating a large lump sum into tax-sheltered funds while avoiding the cash rotting away over time is a specialised requirement. The best source of information around the topic is MSE’s forum, however it needs sifting heavily. There are some people on there who believe it is reasonable to take out a loan of £4000 to have some pictures taken of themselves…
It appears I made a mistake paying down my mortgage early rather than investing using the mortgage as a low-cost loan, which would have given me many more years of ISA allowances, discharging the mrotgage at the end with the cash lump sum. However, I didn’t really have the brass neck for that sort of thing, so I have to eat the consequences of being risk-averse. My asset allocation and global diversification is now skewed horrendously to cash and to the UK, and it will take some time to fix that.
Retirement is about quality of life, that means hearing more of this sort of thing
and less of the incessant babble of densely packed open plan offices and people talking loudly on their mobile phones in buzzword bingo phrases or the roar of datacentre cooling fans.