I’m not going to give you loads of Financial Planning advice, since the current pension arrangements here in the UK, and no doubt in the USA seem to be like trying to drive a stake into a sand dune; it feels secure enough, but it keeps moving overnight!
Anyway, having worked for the same firm for 31 years (since leaving high school), and bearing in mind that the firm had a “final salary” pension scheme, any advice I give would be out of date, since these are becoming a dying breed.
Many companies are either trying to wriggle out of existing schemes, or at the very least making sure that new employees don’t get to play.
What concerns me more is the making that decision to “go early” and its implications.
This is not intended to be a textbook method, just some jottings of what worked for me. Who knows, some of it may ring a bell with someone.
FIRSTLY, MY OWN CIRCUMSTANCES.
For about the past 12 years, the large telecoms provider that I worked for has been shedding staff.
To their credit, most of this was done in as humane a manner as possible, either by natural wastage or by giving people sufficient incentive to leave without feeling too aggrieved about the process. The first wave involved retiring anyone over 60 there and then, since they would have already been entitled to as much pension as possible.
In the early days of this process, I was still only 40 years old (ONLY? I hear you cry), and despite the promise of nearly 3 year’s pay to help me on my way, there were other considerations.
Firstly, a payment that large comes in for a nice fat wedge of income tax. Then of course, there’s the other tiny question, like “What else shall (or even can) I do instead?”
The prevailing employment situation has a lot to do with such decisions.
Leaving then would also have meant waiting for my company pension until I was 60 years old, and with 22 years in the job at that point, it would have been just over half the full expectancy.
Anyway, I quite liked my job.
In the back of my mind was the next milestone date, i.e. my 45th birthday. Why 45?
Well, the firm’s policy was to offer those of this “advanced” age an early pension starting when they were 50 years old.
This could either be based on ACTUAL pension years accrued, (still only 27 years in my case) plus a redundancy payment of up to 1.5 years salary, again, most likely partially taxable if in excess of 30,000 GBP, OR, you could have a redundancy payment of 6 month’s salary (not so likely to attract tax unless you earned in excess of 60,000 GBP
For many, this was the most tax-effective option, since the pay-back was that the firm would increase your pension years by 6.66 years on top of those accrued just by getting older
Anyway, according to my calculations, taking either option would have meant getting an equivalent job with commensurate salary for at least 5 years, followed by a somewhat depleted pension compared to a full 40-years service one.
My 45th birthday came and went. No one was pointing the finger at my division (and more specifically, at me).
Then came my 48th birthday. At this point I had 30 year’s service and more to the point, contributions to the pension scheme.
One day at a team briefing, my boss was about to say “Now I don’t want anyone to start worrying, since it doesn’t directly affect us, but”
For some strange reason, I found myself putting my hand up (literally) and saying something like “I’ll go, if it helps”, much to everyone’s surprise, since my job at that point was at its most interesting that it had been for years.
Three years on, I’m still amazed at my own spontaneity. It was as if there was a little devil on my shoulder saying “Go on, I dare you, make that change and make it now!”
You see, knowing that I wouldn’t even then be leaving until 2 weeks before my 49th birthday helped, and I’d done my sums previously, having set myself my 49th birthday as the “one to watch”.
These sums being: –
a) At age 49, I would receive 50% of a year’s salary as a redundancy payment, along with a further 10% bonus for foregoing a retraining package. 60% of my salary still came to below 30,000 GBP, so I had more to live on during my 50th year than when I was at work.
b) At age 50, an enhanced inflation-linked pension based on what would finally be 31 year’s service, give or take a month, plus the extra 6.66 years, and a pension lump sum based on nearly 38 year’s service(the latter being tax-free).
I figured that I COULD hang on another 2 years to get a “full” pension; 40 years being the maximum permissible, but there was no guarantee that this generosity was going to last (in fact it did last for another 2 years; but only just)
So that’s just what I did.
Of course, having the financial side sorted* is nice, but that’s only part of the story.
*I’ll deal with how I “sorted” living on less money later.
After the first 3 weeks of liberation from commuting on the Piccadilly Line, you begin to realize that you’re not actually on vacation.
Then the need to do something kicks in; in this case the “Tool Time” handyman bug, after all it was Spring.
FIRST it was the building of a new garden shed, bought with my leaving present of Homebase (think Home Depot only smaller!) vouchers.
THEN, it was building a new decking patio complete with water feature.
NEXT came a complete rebuild of the kitchen, doing it all myself except for gas plumbing.
AND I’ve now completely gutted and revamped the entrance hall landing and stairs.
FINALLY you run out of steam, and realize that handiwork is akin to painting the Golden Gate Bridge i.e once to get to the end, you need to start again, and frankly, handy or not, it’s not what I was put on this planet to do.
Besides which, both my wife and myself subscribe to the maxim that “Dust Is A Protective Coating For Furniture” so stepping up my contribution of the housework would not necessarily be well met, since it would create more problems than it solved.
Eventually, the awful realization dawned; I needed a JOB!
Bearing in mind, of course, that I have SOME income, it didn’t need to be high-powered with pay to match. Just something I like doing, which will also stop me spending money by tying my day-times up!
Fortunately, jobs that don’t have “viable” salaries in their own right are quite easy to come by – now there’s a surprise in this day and age (not)!
My own personal job involves working for one of the London Boroughs as part of their effort to roll out Cycle Training to 10-11 year old kids. The pay is just about worth getting up for, but as I said before, it keeps me, and my credit cards out of trouble.
The downside is dealing with two separate tax-offices!
I’ve even joined their pension scheme (!) since, as I said before, final salary schemes are getting thinner on the ground, and the opportunity to force my new employer to pay me 9% more is not to be sniffed at. (Admittedly, I don’t see any of it, but it’s as good an investment as the “little man” will ever make). Also, my own 6% contribution is tax-deductible, having been taken from gross pay. The plan is that this will afford me extra inflation-linked pension at the normal retirement age for local government employees which is now 65.
BALANCING THE BOOKS
Obviously, taking a 50-odd % cut in pay needs thinking about. Potentially, I was going from a take-home pay of about 1,800 GBPmonth to 1,100 GBP/month (this was nearly 9 years ago as I write). So how did I engineer my own soft landing?
Firstly, I had been investing in the firm’s share-purchase scheme up to the hilt, so my take-home felt more like 1,550 GBP/month anyway.
Then my travel costs accounted for another 100GBP/month.
So now I’m down to a 350GBP/month shortfall.
I had been paying alimony to my ex-wife for my daughter’s upkeep since she was 2 years old. I figured that, job or no job, now that she was 20 was as good a time to stop as any. After all, without any further education element (she didn’t go on to university), I could have stopped paying when she turned 18. To date, at the age of 27, she now has her first “proper” job.
So now I was down to a 150 GBP/month shortfall.
Then I stopped paying into a life insurance policy that was supposed to protect me against redundancy, after all, you can’t lose a job you don’t have.
Shortfall now 70 GBP
“Do-able” I think you’ll agree.
The following April I got rid of half of the mortgage and one of the associated insurance policies; whooohooo! Shortfall reduced to positive figures! Then of course, there’s my new salary, which I regard as the icing on the cake, and the reason why a lot of my articles involve some new gadget or other!
You also have to realize that earning less is “tax-effective”. Dropping out of taxation to a larger extent makes the impact of earning slightly less than half-pay much more palatable and in reality much closer to say 65% when it comes down to the wire.
Earning less still at a fairly early stage in your life does your credit rating no favors. Make sure you’ve done all your major borrowing, and aren’t thinking of going deeper into the property market.
Be prepared to feel unimportant. Someone warned me about this at my leaving party and I shrugged it off, by saying “You picked a fine time to tell me I USED to be!” but it’s true.
I have worn a necktie for three days since, one of these being for a job interview. Never wearing a suit or tie does seem to get you worse customer service, well, face to face, anyway.
Don’t be put off by any of that “But I’ve got my daughter’s wedding to pay for” stuff; she’ll get what I can afford when the time comes.
Since when did financing what is only really a fancy party count for anything in the grand scale of things? Of course, if you’ve got three daughters, you might want to labor on!
If you get the choice between larger lump sums or more pension, take the latter. It’s likely you’ll live longer by retiring earlier (there’s an article on Helium on that very subject), so you’ll want to be paid as much as possible. Also, the interest rate being paid on safe investments isn’t very impressive at the moment.
Worrying about leaving “nice little nest-eggs” for the kids is a mug’s game; being there for them while you’re alive is what counts.
I’ve been able to spend more time with my daughter since leaving full time work and it shows. Without wishing to sound too self-congratulatory, I’ve haven’t inherited anything, so why should anyone else?
If I make it to 90, with all my marbles, I’ll divide my remaining savings by ten, and spend that amount every year.
Anyway, none of us knows what’s around the corner, and it may become expected of everyone that they sell their house to pay for full time care.
It’s ironic that as more and more of us can expect to inherit property (following the last few decades of boom in home ownership), we’ll all be back to square one with nothing to pass on.
Start thinking about what else you could do; treat early retirement as a chance to change course, not a threat to your remaining health and prosperity.
Have a long hard look at your outgoings; I did this the day after I left, just to give me some data to work with; anyway, I can’t leave MS Excel alone. Things like fuel suppliers, alternative international phone call companies, better cell-phone tariffs, cutting your electricity usage, they all count. After all, you’ll probably have a bit more time to peruse this stuff yourself and become your very own control freak!
Something, which I’ve found works for me, is to price up all the handiwork labor I’ve put in, compared with GALMIN (Getting A Little Man In). If you imagine doing work that would have cost $300 or pounds on the open market, you might have had to earn $400-500 or pounds to pay that bill in the past. It all helps explain why living on half pay seems more “do-able” than I thought it was going to be.
In retrospect, I’m too young to stop work altogether; yes we all joke about hammocks slung between palm trees, but in reality, it’s nice to be useful and a respected member of a team.
I don’t regret the move I made, and my finances, especially after the mortgage was paid off, actually came good, with more spending power than I had previously. If I had any hair, I’d be one of hose “Silver Surfer” people we keep hearing about.
The only thing I don’t get is a company car, but if that’s the only price of never having to work again (except if I want to), then it’s a small price indeed!