Is my life-plan dumb?
1) Finish degree, work hard play hard
2) Enter prop trading/S&T/HF because its fun af
3) Spend £30,000 sharing in London a year (all bills included, not splurging on dumb shir, but still enjoying theatre shows, concerts etc whenever off work)
4) Save the rest, with aims of investing at a 7% return rate over 15 years
5) Assuming an average £100k a year savings rate (need £200k pre-tax/living expenses), and our roi, we can hit £3 million liquid by late thirties
6) By this point, we are ready to start a family
7) Buy land in an area we want to live (ideally London) and build our own property. This is more of a personal goal, as I have a passion for architecture and interior design.
Another possibility is to relocate to a cheaper area and ‘downgrade’ job. Who knows, maybe work will be 100% virtual by then?
8) Pay back minimal amounts on this property to maintain as much liquidity as possible. That £3 million can turn to £7.5 million in 10 years if liquidity is maintained.
9) If you are fed up of work at this point, you can retire/switch to a better role and live off dividends. If not, continue working and contributing towards your pot. Expenses increase with family aging towards proper school age.
10) Do whatever you want because you made it
Why this is an overestimate:
Doesn’t factor inflation
Assumes I’m good enough to cut it as a trader (think I would just cause its so fun)
Assumes 7% return
Why this is an underestimate:
If I have a partner working a decent job, more money to invest or live off of
Assumes £200k pre-tax average across 15 years - if a good trader, likelihood is this will increase. That could add an extra million into the mix
Assumes 7% return (could go either way)
I would be interested to hear other peoples ‘grand plan’.
Who is this "we" thing? Are you currently married?
No, but I'm assuming that by 30 (or earlier) I'll be in a long-term relationship.
Step 6) might be a problem lol. Starting a family in your late 30s is pretty late unless your wife is a fair bit younger than you are. Women have a bio clock and any woman that you're with that wants a family is aware of this and will likely want a family earlier. Not to say women can't have children in their late 30s, because they can, but it gets harder.
Step 8) I was gonna call out because I don't understand what you mean by "the 3 million will become 7 million in 10 years". How does this work? Does this completely ignore the interest rate on the mortgage of your home/land?
Doesn't factor in inflation, and that's actually a big deal. You should factor inflation into your investment forecasts to get the £s you'll have in today's money.
£100k a year average savings on £200k income is still pretty hard. Assuming you each earn £100k a year and contribute 6% to pension (why wouldn't you) then what's left over is about 60k (ignoring student loans and whatever which may also take a chunk). Thus to save £100k a year you'd need £20k living expenses between BOTH of you... That's less than you were spending on you own...
Another thing you've not considered: capital gains tax. Because you're gonna have to pay it. Idk the ins and Outs of the law on this one but put simply, unless your money is in a pension (locked till 58+) or a S&S ISA (20k limit a year), your money is in a GIA which has tax implications.
Thanks for the reply.
6) Good point - perhaps reshuffle this down to early thirties?
8) This was assuming that saving/investment rate stay the same (if I was to NOT buy a house). Basically, I don't want to buy the house outright as that would destroy liquidity, reducing future earnings. Even if paying back over time, £7 million will not be reached, but will still be able to maintain some liquidity rather than blowing your entire capital away. Of course this isn't a problem if your a top dog somewhere earning lots and can afford to 'rebuild' the pot backup, but that wasn't my assumption.
I was assuming £200,000 income as a single person (me), as an average across 15 years. So maybe only £70k in first years, but with later years reaching say £400k (I know you get taxed more), it averages out to £200,000. Of course these are ridiculous numbers, but surely achievable if you are good at what you do and stick it out.
And yes, the tax is a bummer sadly. However, 20% on the interest/roi amount (ballparking at £1 mil because I'm too lazy to do the maths atm), is only 200,000. Comparatively, that's not too big of a deal.
As a bonus question, why contribute towards a pension? I know you get certain tax benefits, but the fact you have to wait 40 years+ to access it surely makes it not that good of a deal (especially when considering the time value). Is it not better to have the capital early so you can build your own pot? Even more the case if your working in IB/PE and generally get the big bucks towards the end of your career, in which case the pension money at the beginning is negliable.
Assuming you get to the big bucks, most dont
You will probably live well beyond the pension withdrawal age (currently 55, rising to 57 soon).
The tax benefits are huge - assuming you earn >£50k then the portion of your salary that you sacrifice into your pension almost gets doubled. That’s an instantaneous 2x return - hard to find that in public markets investments these days. And then there are no capital gains or dividends taxes to be paid.
If you can save £200k into your pension by 30, the value will rise to £1.6m by the time you are 60 assuming 7% annual roi. This will fund annual income of £64k at a 4% safe withdrawal rate on top of your other savings and investments.
In other words, if you can get £200k into your pension by the age of the 30 then your retirement is completely taken care of and you only have to worry about what happens over the intervening period. This gives you a lot more flexibility to save and spend during the rest of your 30s and 40s - you could spend 100% of your income during those decades and still be on track for a comfortable retirement.
And because of the tax savings, you can hit £200k in your pension very quickly if you work in IB/PE/S&T - it’s basically 2-3 associate bonus checks and you’re done. Just make sure you don’t breach the annual allowance (which accrues for up to 3 years).
Not sure on how 4 and 5 work out- if you're hitting your earnings peak late in the 15-year period you have less time to compound returns via investments... also as tax rate scales it becomes harder to take home that incremental dollar in the first place.
Also why would anyone give you a land loan/mortgage to construct a house with no money down? I can't see how you're able to do that and "maintain liquidity." And your rent is essentially doubled for however long it takes you to build this dream house... another drag on savings.
Also life plans when you haven't even started working are dumb
agree. The transition form school to work is a big perspective shift, and peoples values/goals change as a result.
I'm sure the cap gains tax is more complex than that but I don't know enough to really comment.
Regarding pensions, look at it like this.
1. Your tax rate above 125k as of this tax year is 45% + you lose your 12.5k personal allowance. When you contribute to pension, it comes out before tax (and if via salary sacrifice, before NI too, that's another saving) so you save (and accumulate on) that extra capital.
2. Most companies match up to a certain % of pension value (they'll probably also give you some without contribution from you). E.g. that could look like 5% non-contributory, 5% match. Which means if you contribute nothing to the company pension plan you get 5%. If you contribute 1%, you get 7% total and if you contribute 5% you get 15% total. Remember that 5% is a pretax contribution so it's actually only maybe ~2.5-3% of your post-tax income (depending on what tax bracket the contributions would fall into).
3. When you withdraw the pension, at first you can withdraw 25% tax free at 55 (soon to be 58). Then you withdraw the rest as if it was PAYE (so if you withdraw 70k, you pay tax as if you were earning 70k) although double check this bit cos I'm iffy on it. So you save some tax there.
Tldr: Basically it's a long term tax-delaying wrapper that allows you to compound on untaxed income (with extra bonus from employers). You ultimately get taxed when withdrawing but if you maneuver your income a bit you can save some still.
People making GBP 125k are paying 45%? Damn you Brits are a bunch of kleptos. No wonder the founding fathers took up arms.
45% marginal, not 45% average.
But yes, it's high. It was 150k but well... What can ya do.
The highest marginal tax rate in London is 62% thanks to tapering of the personal allowance, and 71% if you have a student loan.
Even better - if you have kids and participate in certain childcare schemes then your marginal tax rate can theoretically be >100%, I.e. accepting a pay rise makes you worse off.
happiness is where reality meets expectations. your expectations are too specific and focus too much on outcomes rather than behaviors within your control. if this is a dream list, fine, but better to focus on the actions you do day in and day out instead of an exercise like this
This. Forgot to add this to the end of my reply. There are a million different things that can fuck you (the government, markets, some random fucking disease) or help you over time so while it's good to plan, thinking this far out is mostly futile.
Thinking about behaviours, with a general idea of the purpose of those behaviours, is the best way to go.
I don't have a problem with step 2 however giving color. At least in S&T from first year here (my experience someone else could be entirely different). You will be doing lot of the grunt work so yes aspects to it could be fun like if you sit in trading depending on the need and the group you might be taking on risk in a few months or if you're in sales you might be invited to start going out to like 1 if you're lucky 2 client events in first 2 months. HOWEVER for the most part you will be doing lot of grunt work. I don't mean to shit on you having fun but be aware it's not all sun shine and rainbows. This is something I wish I knew.
OP - I respect your ambition, but as others have said your plan seems far too specific. As a US-UK citizen I’m probably in a good place to opine specifically on this (also worked in London for a couple of years, funnily enough on around £200k total comp).
Your plan isn’t “dumb” but there are certainly some unrealistic elements. As others have said, taxes - on £200k you will take home around £120k (sadly!) so if you’re spending £30k on rent that already puts you below your £100k annual saving goal, and that’s before you’ve even gone food shopping!
Also I know you said you’ll try to avoid lifestyle creep, but trust me - it’s hard. Now of course there’s a great argument for not being stupid and dropping $$$\££ on bottle service etc - but there is a big gulf between that and living like a student (which I’m guessing you are now).
Myself I wouldn’t say I’m particularly materialistic (have a Tag and a Porsche but that’s just because I like cars, most of my “disposable cash” goes on exotic holidays tbh) - but there’s no way I could go back to anywhere near the living standards of a student now (as a single guy in my early 30s). Bear in mind in IB/PE/S&T you’ll be surrounded by people earning good money, who go to nice restaurants, go on exotic holidays etc. So if the highlight of your year is going to TGI Friday’s that might be hard to stomach by comparison - of course it’ll be nice to have tons of cash in the bank, but that doesn’t keep you entertained at the weekends. Trust me when you’ve had a hard week at work (I’m in PE now) you’ll want to do something at the weekend other than watch tv to decompress.
I did live a relatively frugal lifestyle for my initial years in IB (houseshare, not going on expensive holidays) - I have no regrets as I still enjoyed myself and was able to save up enough to buy a condo in a HCOL city. Also in IB frankly you don’t have that much time to enjoy yourself during the analyst years! Having said that, after 3-4 years it did really start to grate - yes I had a nice bank balance for my age (although much less than I have now which brings me to my point later on about earning power/potential), but I did find myself questioning “why am I doing this?” Having my own place now and a few nice things + enjoying holidays, I now find working in finance much more tolerable. Obviously we’re not the same and this will depend on the person, but personally I couldn’t have done my “frugal living phase” for much more than 5 years I reckon.
And that brings me on to the next stage - dating. What if you meet an awesome girl who doesn’t fully agree with your life plan? Eg she wants to buy a house or have kids before she’s 30 (tbh that wouldn’t an unreasonable expectation). Equally while she might support your frugality, I’m sure a lot of reasonable girls (ie not gold-diggers) would maybe start to question after a while why you earn a lot yet you guys never go on holidays to Thailand/Bali or eat at nice restaurants occasionally.
And going back to what I said about having more savings now than I did 5 years ago, despite spending more - by the time you get to your early 30s you’ll be earning much more than you were a few years ago, so does it make sense to quit just as your earnings are ramping up? It’s not like you’ll earn £200k in a flat fashion in finance - your earnings will likely be linear and start to ramp up dramatically as you reach your late 20s/early 30s. “Well I’ll work until I’m 40” you might then say - but do you really want to have two decades of frugal living? You only live once after all. Obviously many people don’t have a choice about it (eg in a low paying job) but if you’re earning a high salary that’s a conscious choice.
And yeah that brings me neatly onto my final point - life is ultimately for living. You can’t just say “I’ll start living at 35/40” - life doesn’t work like that. Your friends from today will likely be married with kids by then - so you won’t be able to go on exotic lads’ holidays with them like you could when you were all single at 25.
Equally whilst dating does actually get easier as you get older if you’re financially successful (in my experience anyway) that’s also at least in part because your expectations change - as a 30+ yr old guy I’m not trying to date 21yr olds or uni students, and they likely wouldn’t want to be with me despite all my cash (and even I wouldn’t really want to date a 21yr old at this stage of my life tbh). I think it’s fair to amount I have a decent amount of success now dating girls in their mid to late 20s, but dating uni/college girls is now closed to me. But you’re literally just beginning your life - and you don’t want to miss out on all those opportunities open to you now because of an overly specific life plan.
And as others have astutely pointed out, life is short - you don’t know what’s around the corner (illness/death etc). I know some people in menial jobs base their whole identity/life around “finally being able to live” one they reach retirement age at 60 or whatever. But that’s a risky strategy when you don’t even know if a) you’ll make it there for sure, and b) what state your body will be in at that point. But those in menial/low paid jobs maybe do that as it’s their only option of having something to look forward to - if you’re earning £200k in a relatively “interesting” job then for you it’s a conscious decision to potentially put your life on hold for a decade or more.
Good luck OP - whilst as I’ve said I think this plan is unrealistic, the fact you’re even trying to think about this stuff means you’re probably miles ahead of most kids your age. And from the sound of it I’m sure you’ll go far in life - just don’t forget to enjoy life at the same time!
I am curious, how old are you?
"Everyone has a plan until they are punched in the mouth." Mike Tyson
"No plan survives first contact with the enemy." Old military proverb
"In his heart man plans his course, but God controls his steps." Proverbs 16:9
That said, get married, have kids, live a quiet and peaceful life. Waiting until you are "ready" for a family is waiting forever because no one is ever ready. The focus on money will rarely lead to genuine happiness.
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