OP is back!
I wanted to confirm that the
intent behind the initial post was indeed to determine under which reasonable assumptions one could reach the current SFT by age 50 - with the intent then being the
option of early retirement, if not early retirement itself.
That could mean picking other careers/travelling full time/picking a (different) hobby to do full time for a couple of years at a time without monetary rewards / financial pressure factoring in those decisions.
I essentially equate reaching the SFT as not
needing to work anymore (if I still wanted to, that's a different question). A variant of FYIFV, if you wish.
We would be looking at a 500k lump sum mostly tax free (or tax reduced) amount of money that can be withdrawn plus a 4% annual SWR (which I understand from sequence of returns analysis that would work in over 90% of cases from historical data) on the remaining 1,650,000 - that works out to 84k a year (let's say that's worth 60k a year in today's money after inflation adjusments, which might not be conservative enough given recent inflation).
I could also always adjust the withdrawal rate down for a few years if needed since I would have the lump sum buffer available.
The amount above, 60k/year (3500 a month after taxes), assuming a fully paid off mortgage by that time, would be more than enough to meet one's needs (and pending one's family isn't too large).
Certainly the goal wouldn't be to leave the money sitting there not earning anything for another 10-15 years - that would really make no sense to me either.
You're using the SFT as a benchmark for Amount Needed to Comfortably Fund a Retirement at Fifty.
That may or may not be the case for you. I wouldn't let the threshold wholly guide your thinking and decisons on this.
Great point! I'm coming at this from the angle of a pension vehicle being the most effective means of getting there (and assuming a paid of mortgage by that point as well). Happy to hear of other avenues and approaches though!
A final consideration on the ER side is that traditional pension fund advice typically wind risk down as you approach retirement. That might make sense at 65, but is arguably not so sensible at 50 (or at least you may want to keep a high equity %). It's an interesting area with not all that much I can find written in Ireland about it, much of what is online is from the US.
I'm not a gambling type, have always stayed away from crypto and stock picking (mostly), however winding risk down in terms of moving between asset classes never made much sense to me. That's a discussion for a different thread, however I wouldn't see myself switching from equities as I reach retirement age - and continuing to own a (small) piece of a profitable business (of many businesses, in practice), through the stock market would certainly be my preferred approach.
How unlikely is it actually?
The situation to avoid is leaving 40% tax relief on the table for the 10 years before retirement because you have reached/will reach the SFT + 150k at retirement age.
If you end up in that situation, you have made your younger life less secure/comfortable unnecessarily.
I concur that is it very unlikely, unless assuming some very high, consistent returns (
10% CAGR at the very least in my case) and continued contributions at the relief limit + employer matching. I would also not expect the SFT to get adjusted up for inflation.
Shiller's CAPE ratios aren't giving me great hope for future inflation-adjusted returns either so there's that too.
For the sake of this thought exercise, let's assume that there is excess capital to be used - that wouldn't affect security/comfort unnecessarily at a younger age.
The alternative is leaving 40% tax relief on the table now. I'd rather max out my relief now and potentially make no contributions later in life, than spread out that relief over longer and contribute more over the lifetime of the pension accumulation.
I'm thinking exactly the same - as I would always pick a higher compounding rate between two otherwise equal options and given a long enough period of time.
While I acknowledge risk profiles are
very different, I do believe investing early in something that has a chance to yield 6% CAGR over paying off debt that's fixed at 2% (and further reduced in practice by inflation) is the better option, for me.
That is, I try to allocate the largest amount of capital to where the highest compounding rate can be achieved.
That really should say: risk-adjusted compounding rate - but I'm not as qualified in assessing risk, which is where Brendan tries to bring us back to reality usually.
Maybe the 50 is a typo and RMGC meant 60?
Not a typo, picking 50 is an incredible aggressive target - and certainly not one that is attainable for me - pending a sustained miracle in the equity markets and very favourable circumstances in all other areas, from employment, to family, health, housing, elections and inflation.
This is why this is a thought exercise and should be treated as such.
To re-iterate - reaching the SFT for me would mean instant retirement.
Certainly, I don't think anyone should be aiming to have €2.15m in their fund by age 50. Unless they are in their late 40s and determined to retire at 50.
What if I'm in my 30s and want to retire at 50? It's worth attempting to plot a course - even if just to understand what the gap is and what it would take to close it.
If one is already maximizing pension contributions, has the mortgage down to a comfortable amount and an ability to invest more - the above is an exercise in maths and probability as to what growth curves are possible, and which ones would result in a very comfortable retirement at different points in time/at different ages. It's certainly out of my hands at this point.
@Brendan Burgess - would you call it a
failure in financial planning
if I reach SFT at 50 and then change my mind and decide not to retire at that point?
Losing the ability to continue to contribute to a pension in a tax advantageous manner would certainly be a moot point at that stage for me (as would be a lot of other financial concerns). If that were to happen - that would have been due to very high compounding - and that meant I reached that sum with a much lower contribution in net terms that would have been required at a later age - that is still very much a win in my book.
Wouldn't this give one the same financial stability that fully owning one's house is? Guaranteed future income certainly feels to me safer financially than just owning one's PDH.