Cheaply borrow from your future self

[guitarplayer]

I am brainstorming what is in the title. This is perhaps overly optimistic way of thinking about the world, but I am thinking this:

- As it stands today, if DW and I diligently pay our national insurance contributions for the next 26 years (this is done automatically through employment and can be done voluntarily when not in employment at a relatively small cost) we will be receiving inflation adjusted state pensions of $25,500 a year from about 30-35 years from now
- on top of this, we will likely have other incomes
- but actually, we might be fine on something like $10k-20k a year, which will lead to excess income

The exercise is to think about intelligently spreading some of that income in old age into earlier in life. The 'other incomes' will be in accounts that can be accessed earlier.

What would be the plausible ways of doing it?

- Trivial and unwise thing would be to forego paying the voluntary national insurance contributions, keep the cash and end up with smaller state pension payout. This is unwise because the most it costs is about $1,200 (this figure increases year-on-year but, for now, not tremendously) for inflation adjusted $370 a year starting in about 35 years (these are rough figures just to show how good of a deal this is)
- One way I vaguely see is remortgaging property to have cash at hand to spend, or just selling the property and renting which will give cash to hand and increase future spending (because paying rent).
- Or renting out the property owned to provide income earlier in life, and ourselves then having maybe a nomadic life but in old age likely renting something which will increase cost.
- Keeping the property we now have and renting it, then buying another property with a mortgage if at all mortgages fall to the lows seen a while back
- Some other ways of borrowing money cheaply, maybe from family, or some other form of 'get it now, pay later', I am trying to be imaginative here

[loutfard]

I like the idea of borrowing against future state pension income for a different reason. If reinvested correctly, that could make my income more resilient in the future.

[ducknald_don]

The main concern I would have is that the ratio of retired to working people is increasing which means funds are going to be spread more thinly over time. The state pension might look generous today but that doesn't mean it will continue to in a decade or more.

[guitarplayer]

Hence the ‘overly optimistic’ there at the beginning. What’s the discount rate (is this the right way to use this term) that it would be reasonable to apply? Perhaps halve the state pension would be conservative?

[bostonimproper]

At least in the US, pulling money from your primary residence would be the easiest way to do this. Historically, asset backed interest rates tend to be quite low. Maybe not right now, but decent chance they will be when this becomes relevant. There aren’t really many other circumstances for the average person to easily lever up cheaply outside of housing and student loans.

[Scott 2]

Are you saying the plan is to have zero or negative assets before the pension hits, counting on it to cover you into death? If so, your risk tolerance is higher than mine.


Either way, I would approach this as a portfolio optimization problem. The pension is a low risk asset with expected inflows and outflows. It has a net present value.

Maybe your consumption is capped. So you need less return due to the pension, and so can afford to hold less volatile assets. In the extreme, you could hold cash and not bother with investing at all.

Maybe you want to consume more, so you project a higher safe withdrawal rate in retirement. This reduces savings demand now, allowing greater consumption. Money is probably diverted from less reliable sources than the pension.


Playing with leverage seems like a problem independent of the pension. It's just another asset. The only way it seems strictly necessary is if you want to go negative assets before the pension kicks in.

[jacob]

The exercise is to think about intelligently spreading some of that income in old age into earlier in life. The 'other incomes' will be in accounts that can be accessed earlier.

What would be the plausible ways of doing it?

You're talking about consumption smoothing. Borrowing (and lending) is the most common way to achieve that. It's so common that it sets the general price levels in the economy. The financial side of ERE---saving hard and early---is actually the exact opposite of this strategy: Cheaply get paid by your past self.

Also see https://earlyretirementextreme.com/upda ... ation.html

Interestingly, my NW in 2012 when the post was written was 48x "jacobs". It is currently 160x "jacobs". If you want to avoid this situation, the best way is portfolio optimization, like @Scott2 said, splitting up your cash flow in terms of years or eras (= a more complicated spreadsheet). For example, in the US, age now to 59.5 would be taxable accounts, 59.5-62 or 67 would be IRAs, 67+ would be SS. Alternatively, you can start giving the money away regularly to take the foot off the runaway gas... or figure out out how to get rid of the millions you'll have when you're 85

[guitarplayer]

@Scott 2, yeah sort of the plan is to arrive at that point where there balance is zero at state pension age, then take it from there. That’s a temperament thing, have all basically covered then move forward. To build a personal basic income framework would be one way of looking at it. To me, when I arrive at that point I can then look around and decide what sort of capital I want to develop next, but other capitals will follow too. So theoretically it will be a point where moneymaking will become a by product more than now. I did think about just holding cash for the first era, or more thinking ‘so if I wanted it to be cash, how much would it have to be’.

For context, I come to ere from the opposite side than your mmm person. It is not easy for me to put myself in a situation where I make significant money, a bit along the lines of what 7w5 sometimes writes on these boards

By the way if you have a resource or formula to calculate a net present value of a pension please share it I have been trying to find one and for now resort to running time series in excel with different parameters to see how much capital it would have to be to theoretically deplete when I’m 90 or so.

For the financial side of ere, I get the idea of it being the opposite to consumption smoothing (have not read that article yet but imagine that ‘paying off your mortgage with the retirement pot tax free lump sum’ is one example), but I think decoupling from money economy in the form of needing little financial resources in the first place to carry out one’s business is a way more powerful element in this framework, this has been spelled out before and I think there’s a general consensus.

ETA: I’ve read that ere blog post, compound interest is really hard to appreciate when not living it.

Maybe it is in fact the case that in the end it will be the question of ‘what to do with it all’.

[Scott 2]

Quite the opposite - no formulas here. Given how fuzzy the qualitative factors are, I don't worry about perfect math.


In my own case, I model the impact of social security (similar to your pension) in two ways:

1. As an income stream in online calculators like this:

https://engaging-data.com/will-money-last-retire-early/

2. A page in my budget spreadsheet, which shows expected values of my various accounts, each year. It uses basic addition and subtraction.

I make simple linear assumptions about returns and expenses. IE - my savings will keep pace with inflation, my brokerage will offer a 3% real return.


The longer I'm retired, the simpler my forecasting becomes. I've discarded almost all of the complex ideas, models and tools.

Is it wisdom or laziness? Dunno. But I find life decisions are dictated by non-financial factors. The fancy spreadsheets were grasping at a level of control I don't have.

[sky]

Estimate your life expectancy, and add a safety factor to give your estate an end date. I recommend using 120 years from your birth year as an estate timeline. If you have a life partner younger than you, use their birthdate as the starting point.

Estimate how much the government undercounts inflation each year. If your pension provides a 3% cost of living increase this year, but prices went up 7%, use the difference as an inflation adjustment. In this case reduce income by 4% every year to reflect loss of future purchasing power compared to the present year.

Estimate the risk of the pension scheme failure. Perhaps 0.5% per year? Multiply that by years remaining in your estate life. This number serves no real purpose other than to remind you to keep some other source of income as insurance.

[PhoneticNachos]

This is why so many people use BNPL (buy now, pay later) apps and services like Sezzle.

It lets them smooth down their consumption curve.

Also why credit card companies etc. love people to have revolving debt. Never pay them off, but just happy to use them and pay the monthly payment forever.

[guitarplayer]

Though devil’s in the details isn’t it. If future money is cheaper than present money (because of tax savings) then it is better to buy (life) now and pay later.