Speech Synthesis
When I finally stopped messing about with my personal finances and got my head around planning for my future, specifically my retirement, I set myself a goal. I wanted to retire on £25,000 a year…please don’t judge me on that!
I then had a chat with an IFA and honestly, I nearly cried when he told me that I needed to set aside around £800 a month or 25% of my take home pay into a pension fund to hit that number. Don’t judge me on that either!
Today, I shall tell what I did next and how that meant I could effectively fix my retirement problem with a single BTL that I won’t even need to fully pay for…and you CAN judge me on that!
The answer to the universe is not 42, it is in fact 4% as you are about to discover…
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Resources mentioned
Link to the Podcast feedback survey
The Property Voice Live on 7th October – Workshop Event Details
The Trinity Study & The 4% Rule or Safe Withdrawal Rate
Mr Money Moustache How Much Do I Need to Save for Retirement article
Today’s must do’s
Join me at The Property Voice Live!
Use the 4% Rule or Safe Withdrawal Rate to work out your net investment assets to achieve your retirement or financial independence target. Example: annual income target of £25,000, so £25,000 x 25 (or divided by 4% x 100%) = £625,000 net investment assets (i.e. total assets minus debt).
Then, use the Getting Started Fund, also the 4% Rule to work out how much of a deposit on a BTL you would need to grow the net investment assets in this property over 25 years, assuming re-investing your net cashflow along the way. Example: target net investment assets is £625,000 (from above, so 4% of this is £25,000 deposit on a BTL costing £100,000 generating a net cashflow of £200 per month. After 25 years the net investment assets would be £659,556 capable of producing an annual income of 26,382 using the Safe Withdrawal Rate above. This is calculated as property equity of £572,542 (house value assuming average growth at 7% per year as history has shown us) less the mortgage of £75,000 is £497,542. Plus £162,014 saved from the net rental income over this period also at 7% per annum (e.g. into a stocks and shares ISA).
Note: these are approximations for illustration purposes only and do NOT constitute financial advice. You should always make your own inquiries and seek personalised financial advice....but it's pretty neat all the same isnt it?
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Transcription of the show
Hello and welcome to another episode of The Property Voice podcast. My name is Richard Brown and, as always, it’s a pleasure to have you join me on the show again today.
When I finally stopped messing about with my personal finances and got my head around planning for my future, specifically my retirement, I set myself a goal. I wanted to retire on £25,000 a year…please don’t judge me on that!
I then had a chat with an IFA and honestly, I nearly cried when he told me that I needed to set aside around £800 a month or 25% of my take home pay into a pension fund to hit that number. Don’t judge me on that either!
Today, I shall tell what I did next and how that meant I could effectively fix my retirement problem with a single BTL that I won’t even need to pay for…and you can judge me on that!
The answer to the universe is not 42, it is in fact 4% as you are about to discover…
Property Chatter
Today, I will share with you some of a thought process resulting from a some idle scribbling in a beer garden around 10 years ago. I often refer to as my 'Eureka moment' as it literally changed my financial destiny from that moment on.
A lot of ground was covered that summer’s eve with various napkin doodles, one of which was my retirement plan.
Picture the scene.
40 years old, employed in a good job and my wife also worked part-time. We had a very nice house…which came with a nice mortgage payment. We had two nice cars…which came with nice monthly lease payments. We had a nice overseas family holiday every summer, along with a traditional Spring Break escape with our close extended family…which often came with an ouch when the next credit card statement arrived!
From the outside, everything looked great. We were the classic middle-class, suburban family that many people aspire to. Granted, we weren’t filthy rich but we were well above average in terms of our home value (ignoring the mortgage) and annual salary (ignoring the consumer debt).
But, if I am brutally honest with you, it was fake.
My net worth statement around that time was close to zero and that included a measly pension pot that I could not access for another 15 years at the earliest.
I would have been embarrassed to admit this to you back then, but now I am almost proud of this situation, as it allowed me to radically rethink priorities and plans and turn them around.
One thing that I did realise I needed to fix was my pension. When you reach certain age milestones, you do start to look both backwards and forwards at your life. Trust me, as those years start rolling by, the memories of childhood, those wild college or university years and the work hard / play hard time that dominates your twenties seem such a long way away.
Instead, as a forty-year old with a young family, I suddenly had an immense realisation of my responsibility to our family. Up to that point, whilst we had lived a good life, it was not built on solid foundations. It was in fact built on the shaky foundations of bad consumer debt, poor budgeting and no real future financial planning discipline.
However, a decision was made - I was going to fix this! Here’s the rough plan from back then:
- No more consumer debt.
- No more living beyond our means, so budget properly.
- Start to save…without dipping into the pot.
- And sort out my pension to avoid a close to destitute retirement with just the state pension to live on.
Today, I shall discuss the retirement part of the story, which kind of goes like this.
I went to see an IFA.
He did the usual fact find…it didn’t take long and I could see that he was thinking ‘how am I going to fix this guy’s pension…and more to the point, how will I get paid?’.
Long-story short – he said:
“If you want to retire on around £25,000 a year, then you will need to put £800 a month into a pension for 25 years.”
Let that sink in…£800 a month for 25 years to retire at age 65. That’s £240,000 in total contributions and £800 represented around 25% of my take home pay at the time!
I was shocked initially and then utterly depressed.
I could not set aside £800 a month at the time…or at least I believed that I could not. As someone that currently saves at least this percentage level of earnings each year; I now understand how this can be achieved. But, I was somewhat ignorant back then.
After sulking for several weeks and avoiding the call backs from the IFA (sorry about that sir), I wandered into a pub after work one summer’s eve and ordered a lovely pint of Timothy Taylor’s Landlord, and proceeded to sip it in the beer garden with the setting sun.
I took out a pen and started scribbling some concepts and numbers that had been spinning around inside my head on napkins. I now know what I did was to project the compound growth of owning a property portfolio, although at the time it started as some intangible thoughts picked up from different places. I mean, I used to work in business-to-business financial services for goodness sake, so I really should have understood all of this better than I did!
Then, I had my Eureka moment.
Wow – this can’t be right, can it?
If I buy a property and rent it out, not only will I get a rising income from it, but it will also increase in value most years and the tenant will pay my mortgage for me as well.
Buy more properties and the whole thing goes mental in all honesty. Better have another pint and check my workings!
Anyway, most of you are probably laughing at me at this point as now it’s all so obvious, isn’t it?
But, here’s what I did next.
I resolved to invest in property to plug that hole in my pension instead of putting it into a formal pension plan.
It took me another 4 years to save up enough money to put the plan I committed to into action that day, but I managed it.
I bought a property that cost me £120,000 with a 75% LTV interest-only mortgage, which meat I raised £30,000 over this period. It was tough and it meant some sacrifices needed to be made. We didn’t renew our cars and we didn’t have the expensive overseas holidays either. We also cut out a lot of unnecessary expenditure and I knuckled down at work and made a few bonuses along the way.
The property rented out for £650 a month and the net cashflow was around £200 a month give or take after all costs.
I worked out that if property prices would do what they had in the past for the next 25 years, that it would be worth £687,000 by the time the mortgage needed to be repaid. The net equity would then be around £600,000. Based on a calculation I will share with you in a moment, this would give me an annual income in retirement of £24,000.
That’s before the £6,000 or so maximum state pension and also excludes any reinvestment of the net rental income along the way.
As an aside, on one of those napkins, I realised that the net rental income in year 25 was a lot higher than in year one. The reason is that the mortgage payments would remain constant, barring interest rate changes, whilst the rents would rise as they would track inflation. That was a powerful revelation as well!
That was it, I had fixed my retirement problem. The one that would have cost me 25 years putting aside £800 a month or £240,000 was fixed within just 4 years at a personal cost to that point of £30,000 instead. My tenants would then pay the mortgage for the following 25 years. Meanwhile, the value would go up and that £200 a month would grow nicely too.
So, what was this formula that I referred to just now you might be wondering?
Well, it is something known as the Safe Withdrawal Rate or the 4% Rule. I like rules like this one as it keeps things simple.
There was a big piece of research, known as The Trinity Study that calculated how much of your capital you could safely withdraw each year to live on without running out of money before you die. The worst-case scenario was 4%, which is why it became known as the Safe Withdrawal Rate. In good times, it could be higher, but during the worst 30-year period of the study, the lowest rate of withdrawal was shown to be 4%.
I won’t go into the full argument around this nor the detailed maths, but I will link to an excellent blog post on the Mr Money Moustache website if you want to see more on that.
So, the 4% Rule is quite a powerful one. Here’s why…
You will notice that 4% is the equivalent of dividing 100% by 25.
Or put another way:
If you know what your annual income goal is and then multiply that by 25, you will have calculated your target ‘investment pot’. It doesn’t have to be your pension for when you reach 65 either, it can be your financial independence pot at any age, within reason.
The Safe Withdrawal Rate or 4% Rule can be used over longer periods than the 30 years mentioned in the Study. Granted, the longer you need to live on the proceeds, the more risk there is of the pot running out, so that’s why it should be viewed as a minimum guideline to be improved upon if possible.
The next rule to share is what I shall call the ‘Getting Started Rule’.
You will have noticed that in my case, I needed an investment pot of £600,000 to produce an annual income of close to £25,000 using the 4% Rule. It actually resulted in £24,000, but I am working on having at least some state pension to top up the missing £1,000!
I needed a deposit of £30,000 if you remember and that’s 5% of £600,000.
So, we could say that our Getting Started Rule is 5% of the total pot we need to generate based on the 4% Rule or Safe Withdrawal Rate.
However, given that I prefer simple rules, we can say that the Getting Started Fund is also 4% IF we can also set aside the approximate £200 of net monthly cashflow from the property I outlined earlier.
So, the magic number really is 4% then…
- 4% is the Safe Withdrawal Rate, which determines the size of our investment pot.
- 4% is also the Getting Started Rule, when we can also set aside the net cashflow from our rental property.
This last adaptation of the 4% Rule is also the reason why we should definitely invest in a positive cash flowing property in a area with reasonable prospects for capital growth, but that’s a whole other topic.
This 4% Rule is exactly how I managed to fix my retirement problem with just one BTL.
Those first 4 years were hard, but it can be done. So what if it actually takes you 6 or even 10 years to get started instead of 4? Your retirement or financial independence would be fixed and put to bed once you acquire your first BTL, just as I did.
Before you all write in and challenge some of the logic. I will say this. These are general principles, not a guarantee…and certainly not financial advice, so please don’t rely on it to the letter. Use the rules as guides and flex according to your own circumstances.
You might need longer or shorter to save. You may have more or less time before you need the income. You may have larger or smaller income goals in retirement. It matters not, use the rules to set a minimum position and work up from there.
This is exactly what I realised, as I had effectively plugged a 25 year, £800 a month or £240,000 personal contribution hole with a fraction of those numbers. In fact, I realised that I had to reset my goals upwards given that I had achieved my pension goal when I bought my very first investment property.
I have revised my goals upwards several times since then and I don’t have to work another day in my life if I don’t want to, some 7 years after buying that first property.
The point here is this…it’s not about me and what I did. I am using my own experience and the 4% Rule to illustrate what you can achieve too. One property can literally fix your pension. Imagine if you had 3, 5 or 10 properties…what could that mean to you?
I have learnt a few more ‘rules’ and tricks along the way that help me to grow the snowball more quickly…but it would be better to save that for another time I think.
Speaking of which, another time might be the upcoming The Property Voice Live Workshop on Saturday 7th October in London. I can share a few of the rules, tricks and property investment hacks that I have picked up for those that can join me on the day. There are a few tickets remaining, but I don’t know for how long.
If you join me on the day, feel free to ask me how I managed to raise the funds for my first investment and how I accelerated the acquisition of the second, third and more besides.
I had a net worth of around £23k just before I bought the investment property that fixed my pension. Fast-forward to today and I am well into the ‘millionaire’s club’. I don’t say this to brag or boast, it’s simply a fact. And, if you remember, I admitted that I was pretty much financially backward just a few years ago. I have learnt and applied some things along the way, which have now accelerated the pace of growth that’s all.
My aim is to help other people to have their own Eureka moments too…and hopefully get there a little faster or earlier in life than I did.
Anyhow, if you want to join me at the workshop, just look for the ticket link in the show notes or drop me a line instead at podcast@thepropertyvoice.net.
As usual, email me if you want to talk about anything from today’s show or more generally in property investing. As usual, the show notes will be over at the website www.thepropertyvoice.net
But for now, all I want to say is thank you very much for listening once again this week and until next time on The Property Voice Podcast…it’s ciao ciao.