Credit deflation and the reflation cycle to come (part 2)

[JMD]

11 hours ago, Starsend said:

My target is £250k to retire at 55, although I'm kind of retired now (early fifties) but still take some work from time to time.

I'm fortunate enough to be mortgage and debt free and my kids are all grown.

I've been tracking every penny I spend for about three years in a spreadsheet which has been a very worthwhile exercise as I now know exactly what I spend and on what. It's surprising when you smooth things out over years; what you discover, for example I spend almost exactly £100 per month on food, it rarely varies more than a fiver either way. I don't include alcohol, eating out or toiletries etc in that. I average about £1100 a month, run a car and have a holiday every year. Fairly frugal in many ways but I live a good life.

I did some detailed spreadsheets a while ago to work out what sort of return rate I need to achieve and when I'll run out of money. I've based my assumptions on achieving 3% above inflation which I think is achievable for me (5 or 6% dividend stocks assuming the share price keeps up with inflation will do the trick easily but I would like a good margin of safety).

£250,000 starting point. Drawing down at £13,200 a year, state pension kicking in at 67, 3% real return on average, you will never run out of money. Once you start drawing the state pension, your remaining capital will start to increase. At 100 you will have well over £200,000. 

If you can achieve 4 or even 5% real returns then the results start to get pretty spectacular.

The dangers are:

1. Not achieving an average 3% real return.

2. Catastrophic stock market crashes early on meaning you start compounding from a much lower base.

3. Government going on the rampage.

I'm fairly confident I can achieve the 3% return. I'm sure I'll make a bit of money from time to time as well to top things up further. My biggest risk is the Government (so no change there ) In fact £200,000 would be perfectly adequate. You'd still not run out by 100 and most people are dead by 85.

I've also started keeping a simple personal inflation spreadsheet. Specific food staples, travel, household bills, diesel, MOT, tyres, mobile phone etc. All the things I actually spend money on regularly. I need reliable figures so I can see if I'm achieving the rate of return I need.

Most important thing is to get your expenditure down. Do that and it's much easier to retire earlier.

I know you have created your own personal spreadsheet, but i found this online calculator useful, eg it has a 'do you want to have any money left' question... perhaps the site looks a bit old-school (prob. because it is - 1995?!), but well worth a visit as there are also plenty of other good investment calculators there.

Retirement Withdrawal Calculator |- MyCalculators.com

 

[Starsend]

2 hours ago, feed said:

Also need to consider that managing a portfolio in your 50’s or 60’s is one thing, 70’s another.  Any physical or neurological decline and you could have a real problem at those figures.

But, then there is retiring and retiring.  I’m about 18months from FIRE and walking anyway from the PAYE. But I’ll still keep my side hustles as long as I’m able and earn under the tax threshold.  I'll still consider myself retired. 
 

This is the big one for me. There is a world of difference between having to go and work for the man in some shitty office with the Government taxing you up the arse and pottering around doing a bit of work when you feel like it and making sure you pay no tax.

The majority of people out there will be working until they drop dead. Many are really stressed about it but unable to understand how to take control of their lives so they can live free from being a rat on a wheel. Many of course are just stupid and spend all their money on bling and too lazy to save. I just don't understand how people can live with so little control over their lives.

My biggest fear has always been having to work and not being able to because there is no work. The way the world is going that's a big risk for a lot of people. Image the stress of £3k per month fixed outgoings and being in and out of work, fuck that.

 

[TMM]

2 minutes ago, Starsend said:

This is the big one for me. There is a world of difference between having to go and work for the man in some shitty office with the Government taxing you up the arse and pottering around doing a bit of work when you feel like it and making sure you pay no tax.

The majority of people out there will be working until they drop dead. Many are really stressed about it but unable to understand how to take control of their lives so they can live free from being a rat on a wheel. Many of course are just stupid and spend all their money on bling and too lazy to save. I just don't understand how people can live with so little control over their lives.

My biggest fear has always been having to work and not being able to because there is no work. The way the world is going that's a big risk for a lot of people. Image the stress of £3k per month fixed outgoings and being in and out of work, fuck that.

 

Abso-fucking-lutely!

[Starsend]

2 hours ago, Democorruptcy said:

Part of the problem is that your personal inflation could be a lot more than official inflation figures, as they are continually getting better at under reporting it. I dread to think how much council tax will be in 20 years. Could be hearing a lot of "It used to take me all year to earn that much when I was younger"

 

 

Council tax is getting to be a real problem. It's my single biggest expense. I live in a smaller house now than I did 15 years ago and yet my council tax is roughly 3 times greater. That's bloody lightyears over the Government inflation figures and certainly way way more than most people's earnings have increased by. At some point the greedy buggers are going to have to be stopped.

[Starsend]

2 hours ago, TMM said:

As mentioned before I’ve been following for a considerable amount of time. I love your frugal posts - living a simple life myself. 

I wondered if anyone has any thoughts/know if it would be possible to use all your tax free allowances, once you’ve maxed your ISA? I think using the the following could boost your funds considerably possibly by up to £35.3K? 

 

£2k Dividend Allowance

£12.5 Income Tax

£7.5 Rent a Room

£1k Trading Allowance (eBay selling etc)

£12.3k Capital Gains

 

Also, if you were to use the above fully, does anyone know how the £1k interest on savings up to £5k (Starting rate for savings) would work, or not work alongside these?

Surprising how much money you can make without paying tax. It's PAYE that's the real trap.

[Starsend]

1 hour ago, CVG said:

Get a wife and double them!

 

And double your expenditure at the same time!

[Agent ZigZag]

2 minutes ago, Starsend said:

Council tax is getting to be a real problem. It's my single biggest expense. I live in a smaller house now than I did 15 years ago and yet my council tax is roughly 3 times greater. That's bloody lightyears over the Government inflation figures and certainly way way more than most people's earnings have increased by. At some point the greedy buggers are going to have to be stopped.

In my opinion Council Tax wont be stopped and there is nothing we can do about it unless we riot like the Poll Tax. Another tax increase I am expecting is a carbon tax on meat, all for our own good and to save the planet

[JMD]

6 hours ago, DurhamBorn said:

That 60/40 that has almost become a cult really worries me for people.Its not that there is massive risk of a wipe out,its the fact it could simply flatline for 20 years,or drift lower for a decade and then people getting whacked with 2% fees and 5% drawdown are stuffed very quickly.

Yep, finance and banking need massive reform, they've become totally dislocated from the 'real economy'... the Tower of Babel metaphor is so apt, hubris, then confusion, leading eventually to all crashing down (circa 2028 according to DB!!).

[Starsend]

1 hour ago, nomadic said:

I have followed this thread for years and just like to thank DB and all contributors to this highly valuable thread!

I also plan to have at least £250k retirement pot by 55 (49 now) but have a number of additional challenges. I now live in Portugal and trying to figure out all the implications of taxes here. There is no 12k personal allowance for a kick off and 28% CGT! ISAs are not recognised here and there is no equivalent.

Cost of living can be very cheap though and should help me towards my goal. I plan to buy a home for around €50k once the housing market collapses. My current monthly spend total is less than €700. I may live in a cheap motorhome for a couple of years before this as I have been nomadic for 15 years now, and love it! Have ran online businesses since 2005.

Extremely worried about the way the UK is going now as a surveillance state. There is hardly any CCTV here and no silly time limits when you park in supermarket. Life still feels free here.

Anyway, I don't want to derail this thread and hope I can add some value too. I am submerging myself financially in the classic reflation  investments of oil, gas, telecoms, mining and PMs, with an eye on big pharma and agriculture too.

Thank you again!

This is one of my options, moving to a cheaper country. I could rent my house out in this country and it would probably be enough for me to rent a place and cover all my living expenses in a cheaper country meaning not having to draw down my capital at all. All sorts of options out there. Love travel so will most likely do this at some point.

Share your concerns about how the UK is going. Getting a more unpleasant place to live every year.

[Democorruptcy]

18 minutes ago, Starsend said:

I think a lot of the FIRE stuff uses a lower draw down rate, 4% seems to ring a bell, but they work on the premise on keeping the starting capital intact if I recall correctly. I'm not bothered if my pot shrinks down over the years as long as I have a big enough margin of safety.

Yes, there are a lot of risks. Government reneging on the state pension is a biggy. In the example I illustrated you would start drawing at 55 and run out of money at 82 with no state pension kicking in at 67. The state pension makes a huge difference. Might still be ok as I think the average age of death is early eighties for a male but you have no safety margin at all. I personally don't think they'll get rid of it completely as whoever does will lose so many votes but we're likely to see a lot of change and maybe collapse between now and then so it's entirely possible. One solution is to have a good chunk of your money 'invisible' so you can claim means tested benefits if need be.

I've easily made way over 3% real returns over the years but the world is changing and perhaps it won't be so easy going forward. Risk factors here are:

1. Out of control inflation. Your own personal inflation rate is highly relevant here. This can vary drastically from person to person depending on how you live, what you spend your money on etc. This is why I've started my own inflation tracking based on personal expenditure. No other way to get accurate figures in my opinion.

2. A world without much growth where it's very hard to beat inflation. Shares have done fantastically well in my lifetime as Western economies have grown. Bonds have done well dues to interest rates going lower and lower for decades thanks partly to China exporting deflation for so long. Reckon if you've got the time to spend researching though there's always a bull market going on somewhere in the world.

3. Governments are openly planning on a world of financial repression where they'll forcibly steal slowly from savers. God knows what rules they'll bring in to fuck over savers. Biggest risk.

I'm planning on trying to build a business side-line to keep some other money rolling in - the bigger your safety margin the better and besides, got to do something with my time.

Could also rent a room if need be. Adding £400 per month into my spreadsheet makes a staggering difference.

If all that fails then my plan is to rob a bank - this is a f*cking stickup, where's the f*cking money 

It was your 5.28% that reminded me of WICAO's website because I know he uses 2.5%.

It's a good idea to have some other income streams up your sleeve.

They don't have to get rid of the pension completely, it's a carrot on an extending stick. In the next budget, if they say there is going to be another review of the pension age to help pay for covid, won't it get cross party support? Raising the pension age seems a no brainer to me. Demographically less young people vote but those are the ones who will be paying the most. Instead of paying people money via the pension, they make them work longer and take tax from them. While they are out working they are spending on commuting costs etc etc. Wealthier people will still be retiring earlier so the puppet politicians they control will all vote for it.

[reformed nice guy]

2 hours ago, Democorruptcy said:

The current inflation target is supposed to be 2%. If you use that and 5% income to make 3% real return @Starsendpot and drawdown is no problem at all. However if returns (tax free) only match inflation, it lasts about 20 years:

 

I think that you have posted this before because I copied someones spreadsheet as the basis of the one that I run. Thank you for the inspiration @Democorruptcy

To add my own experience, it pretty much matches what has been posted above.

I have been monitoring my outgoings for the past 3 years, but more precisely for the past 18 months. I now have an idea of where the money goes. Rows are:

Quote

Hobbies, mobile, internet, landline, electricity, kerosene/gas, diesel, car maintainence, pets, food + household, clothes, council tax, insurances, dental/health, gifts, holiday saving, professional services, house repair/maintenance, mortgage, misc.

I havent tracked my personal inflation like @Starsendbut its a good idea.

Knowing my outgoings, I have made a sheet drawing down my current portfolio with a bunch of different scenarios for 40 years, increasing the drawdown annually for inflation. I have done 0% dividends, current average yield and current + 5% yield. Inflation I have done 2.5%, 5%, 10% and 15%. Capital growth 0%, 2.5%, 5%.

I also tried a random setup which is completely artificial. It randomly chooses inflation within a range and capital returns within a range, then runs it 10 times and I take an average. Probably overkill but why not.

[feed]

29 minutes ago, Starsend said:

3. Governments are openly planning on a world of financial repression where they'll forcibly steal slowly from savers. God knows what rules they'll bring in to fuck over savers. Biggest risk.

indeed.

The problem with inflation isn’t necessarily insurmountable.  Even if we fall behind 1% or 2%, if we a start with enough contingency.  (I stress test mine to growth 2% behind real inflation)

Taxation isn’t necessarily a problem, if you can optimize the tax thresholds and work within in them

What keeps me up at night, is taxation on the inflation.  Dressed up a wealth tax, the country would cheer it on and there is almost nowhere to hide.   
 

[Chewing Grass]

This is a good drawdown calculator as it draws a graph and you can enter a return % for the pot.

Still thing just dividing the pot left after extracting 25% by 240 is a good rule of thumb.

https://www.hl.co.uk/retirement/drawdown/calculator

[geordie_lurch]

BoE have released the following... info via zerohedge here

Quote

The BOE also said that CPI inflation was expected to rise quite sharply towards the 2% target in the spring, as the reduction in VAT for certain services comes to an end and given developments in energy prices. In the MPC’s central projection, conditioned on the market path for interest rates, CPI inflation is projected to be close to 2% over the second and third years of the forecast period.

More notably, the Bank of England told banks to start preparing for negative interest rates, while saying that message shouldn’t be seen as a signal that the policy is imminent. Officials had been reviewing the case for negative rates for almost a year as they examine their options to help to pull the U.K. out of its worst slump in three centuries. Consultations with banks found that implementing negative rates within six months would pose increased operational risks.

“While the Committee was clear that it did not wish to send any signal that it intended to set a negative Bank Rate at some point in the future, on balance, it concluded overall that it would be appropriate to start the preparations to provide the capability to do so if necessary in the future,” officials said in minutes of its February meeting. The controversial policy has already been implemented in the European

 

[JMD]

4 hours ago, Noallegiance said:

Yeah I'm only building a list of companies I don't have in case of a bust.

Same here. Do you have a planned 'buy price' figure? i.e. A personal fair-value for each stock if/when BK strikes? I'm thinking keep it simple so can act/buy fast, at of course a price you already know you are happy to pay. So maybe something along the lines of buying a 1st ladder, then if further falls happen a 2nd ladder. However, i'm finding that deciding how much to buy at each ladder, while leaving some cash back in case of further falls, makes this 'planning'(?!) more complicated than i first anticipated. How are others approaching this, if at all?

   

[Starsend]

10 minutes ago, Democorruptcy said:

It was your 5.28% that reminded me of WICAO's website because I know he uses 2.5%.

It's a good idea to have some other income streams up your sleeve.

They don't have to get rid of the pension completely, it's a carrot on an extending stick. In the next budget, if they say there is going to be another review of the pension age to help pay for covid, won't it get cross party support? Raising the pension age seems a no brainer to me. Demographically less young people vote but those are the ones who will be paying the most. Instead of paying people money via the pension, they make them work longer and take tax from them. While they are out working they are spending on commuting costs etc etc. Wealthier people will still be retiring earlier so the puppet politicians they control will all vote for it.

2.5% sounds very conservative to me and I'd imagine you won't slowly draw down your pot at all on that, perhaps even grow it. I'm ok if I don't have much of a pot left to hand down to my kids as they'll get my house anyway.

Agree on the pension. If I was 25 right now then I wouldn't be counting on getting it all or certainly much later than 67. It may get pushed out a couple more years for me but I reckon not too much. It's something they're likely use the boiling frog approach for rather than big increases in one go.

I'm semi-retired now and one of the biggest problems after 30+ years of getting up every day and going to an office is having something meaningful to do, a routine. A sideline is good not just for the bank balance but also for your mental health.

[AWW]

I must be missing something here - I don't see how you can have negative interest rates, a currency that is still worth something.

Surely, as soon as rates turn negative, everyone gets out of cash ASAP?

[geordie_lurch]

2 minutes ago, AWW said:

I must be missing something here - I don't see how you can have negative interest rates, a currency that is still worth something.

Surely, as soon as rates turn negative, everyone gets out of cash ASAP?

Maybe you can't get out of cash when you want as they 'reset' things and freeze everyone's accounts via a long Bank Holiday

[Starsend]

17 minutes ago, feed said:

indeed.

The problem with inflation isn’t necessarily insurmountable.  Even if we fall behind 1% or 2%, if we a start with enough contingency.  (I stress test mine to growth 2% behind real inflation)

Taxation isn’t necessarily a problem, if you can optimize the tax thresholds and work within in them

What keeps me up at night, is taxation on the inflation.  Dressed up a wealth tax, the country would cheer it on and there is almost nowhere to hide.   
 

I can imagine a scenario where new taxes, tax increases could get so draconian that it completely derails all my retirement plans. You can only plan for so much though. If they go full retard I'll look at options like renting my house out and moving to a cheaper country.

[feed]

3 minutes ago, AWW said:

Surely, as soon as rates turn negative, everyone gets out of cash ASAP?

Which drives velocity

[Loki]

2 minutes ago, geordie_lurch said:

Maybe you can't get out of cash when you want as they 'reset' things and freeze everyone's accounts via a long Bank Holiday

A nice false flag is an option too

[moneyscam]

11 hours ago, Starsend said:

My target is £250k to retire at 55, although I'm kind of retired now (early fifties) but still take some work from time to time.

I'm fortunate enough to be mortgage and debt free and my kids are all grown.

I've been tracking every penny I spend for about three years in a spreadsheet which has been a very worthwhile exercise as I now know exactly what I spend and on what. It's surprising when you smooth things out over years; what you discover, for example I spend almost exactly £100 per month on food, it rarely varies more than a fiver either way. I don't include alcohol, eating out or toiletries etc in that. I average about £1100 a month, run a car and have a holiday every year. Fairly frugal in many ways but I live a good life.

I did some detailed spreadsheets a while ago to work out what sort of return rate I need to achieve and when I'll run out of money. I've based my assumptions on achieving 3% above inflation which I think is achievable for me (5 or 6% dividend stocks assuming the share price keeps up with inflation will do the trick easily but I would like a good margin of safety).

£250,000 starting point. Drawing down at £13,200 a year, state pension kicking in at 67, 3% real return on average, you will never run out of money. Once you start drawing the state pension, your remaining capital will start to increase. At 100 you will have well over £200,000. 

If you can achieve 4 or even 5% real returns then the results start to get pretty spectacular.

The dangers are:

1. Not achieving an average 3% real return.

2. Catastrophic stock market crashes early on meaning you start compounding from a much lower base.

3. Government going on the rampage.

I'm fairly confident I can achieve the 3% return. I'm sure I'll make a bit of money from time to time as well to top things up further. My biggest risk is the Government (so no change there ) In fact £200,000 would be perfectly adequate. You'd still not run out by 100 and most people are dead by 85.

I've also started keeping a simple personal inflation spreadsheet. Specific food staples, travel, household bills, diesel, MOT, tyres, mobile phone etc. All the things I actually spend money on regularly. I need reliable figures so I can see if I'm achieving the rate of return I need.

Most important thing is to get your expenditure down. Do that and it's much easier to retire earlier.

 

 

I'm in a similar position although I retired at 44 and am now 50. I'm fortunate in that I own the current home I'm living in outright whilst still trying to sell my previous home which will release a significant amount of cash to be added to the retirement pot. I live a frugal life living on about £700-800 a month so a starting pot of around £250K is I think a minimum and that is without assuming any investment income or counting future inheritances.

As you say the biggest risk to these assumptions is the government but I have planned with my parents who are resident abroad for this scenario at least in relation to IHT such that their assets held here are below the IHT threshold. The country they live in doesn't have IHT and those assets will be kept offshore permanently excepting a few drawdowns on that capital if absolutely necessary.

It's good to see many others on here thinking or planning the same way, it certainly is a blessing and relief to be out of the rat race and mindless consumerist culture which has done wonders for my peace of mind.

 

[Starsend]

5 minutes ago, AWW said:

I must be missing something here - I don't see how you can have negative interest rates, a currency that is still worth something.

Surely, as soon as rates turn negative, everyone gets out of cash ASAP?

Negative rates are clearly a nonsense and yet I believe there are already quite a few Government bonds with negative yields - although not the US yet.

It's a crystal clear sign that the entire monetary system is massively stressed, on the brink of collapse. How long they can keep it teetering for is the big question.

[moneyscam]

5 minutes ago, Starsend said:

I can imagine a scenario where new taxes, tax increases could get so draconian that it completely derails all my retirement plans. You can only plan for so much though. If they go full retard I'll look at options like renting my house out and moving to a cheaper country.

This is a valid fear to take into account especially as the costs of responding to the pandemic might be considered an 'opportunity' to introduce taxes that would never have been tolerated before. As you said, you can only plan for the current reality until it changes and then react accordingly.

[Democorruptcy]

34 minutes ago, reformed nice guy said:

I think that you have posted this before because I copied someones spreadsheet as the basis of the one that I run. Thank you for the inspiration @Democorruptcy

To add my own experience, it pretty much matches what has been posted above.

I have been monitoring my outgoings for the past 3 years, but more precisely for the past 18 months. I now have an idea of where the money goes. Rows are:

I havent tracked my personal inflation like @Starsendbut its a good idea.

Knowing my outgoings, I have made a sheet drawing down my current portfolio with a bunch of different scenarios for 40 years, increasing the drawdown annually for inflation. I have done 0% dividends, current average yield and current + 5% yield. Inflation I have done 2.5%, 5%, 10% and 15%. Capital growth 0%, 2.5%, 5%.

I also tried a random setup which is completely artificial. It randomly chooses inflation within a range and capital returns within a range, then runs it 10 times and I take an average. Probably overkill but why not.

You could have had a copy of mine.

Don't forget to add a column for tax! The option of a variable inflation rate for different years shows how bad that affects it. It's also interesting to see the impact of one-off income or spending and when a regular income comes in like IF you get a pension, lodger, part time job etc.