As mentioned in a number of previous posts, I hope to retire by the end of 2012 or 2013 when I will be 46 or 47. In spite of the financial crisis we remain on track to achieve this - in part this is due to the luck of living in a place which was relatively unaffected by the crisis and in part due to a career change providing me with a lump sum of cash when the markets were depressed and making a decision to fully invest that cash as soon as I could.
I need to think about how to position the portfolio for when I stop working. The original draft of the retirement plan prepared in 2005 called for about half of our income needs to be met from rental receipts and half from dividends on shares. Since then we have acquired more properties than we initially expected with the result that the net rental income from the properties would just about meet all of our budgeted retirement expenses. Of course, there are the not-so-small matters of (i) paying off the mortgages on the investment properties before the rental income becomes available for living expenses and (ii) paying off the mortgage on our home. In addition, I would need additional assets to cover emergencies, expected one off events and periods of vacancy on the properties.
Running the numbers suggests that I could clear the mortgages and leave myself with a portfolio of equities (and a few bonds) sufficient to retire on with an acceptable margin of safety by the end of 2013 (possibly 2012) if I wished. There are (as expected) some important caveats:
1. the Hong Kong property market remains sound. I don't need it to keep going up. I don't even mind a minor pull back in values. A fall in rental levels is another matter altogether. This is the major risk to the retirement plan
2. I go off contract at the end of 2011. I'm assuming that I will continue to be employed for the last two years and that my income will be similar to my current contract
3. I have been pursuing a strategy of investing in equities rather than paying off mortgages. With floating interest rates at less than 1% this has been an excellent strategy recently. I do not mind carrying some mortgage debt in retirement but I have to accept that doing so carries risks - in particular the potential to be hit by rising interest rates and falling equity prices at the same time.
Current thinking is to continue buying equities and not pay off the mortgages on the investment properties as long as interest rates remain low, switch to paying off debt once interest rates rise above a given level (2.5%?) and to pay off the mortgage on our home in full before retiring.
I will then meet our retirement expenses from a combination of surplus cash flow on the properties, dividends and interest receipts. As the remaining mortgages are amortised (they are all P+I), the cash flow from the properties will increase - providing a measure of protection against inflation.
This is clearly a riskier strategy than simply paying off the mortgages, but it has the potential to result in a more secure early retirement. Given that I could continue working if needed, the downside is merely deferral of retirement rather than a reduction in our standard of living.