How I save for retirement with a lumpy income

StockChartI’m finally publishing this as it’s been sat 90% complete in my drafts folder for about 5 months. As you might be aware, I’ve been spending my semi-retirement doing various other things and the blog hasn’t been touched for a while. 

However a brilliant piece over on Monevator plus a few comments about my absence on other blogs have given me the nudge I needed to finish it and hit Publish! 

I’m going to have a bit of a break from writing about tiny businesses and psychology today and get back to one of my sad, nerdy little hobbies: investing.

I’m hoping that this will be a useful little digression though, as planning for your eventual retirement becomes all the more important if you decide to work for yourself. After all, it’s a bit difficult to get a company pension when there is no company!

Anyway, let’s talk about getting wealthy.

One day my son, you must be FI

Although I’m the guy constantly persuading everybody to stop wasting their time trying to save their way to really early financial independence, I’m acutely aware of the fact that, eventually, I’ve still got to solve that problem. That is, one day in the future, I’m going to be too old to run around working 33% of full-time and I’ll need to retire.

Actually, what I really mean is we’ll need to retire as I consider my marriage to be a complete economic partnership. We don’t have ‘your money’ and ‘my money’, we have ‘our money’.

To this end, despite the fact that we don’t spend a massive amount of our lives working for money, we in the household still put a reasonable amount of effort into building our investment portfolio so that, one day (preferably at some point in our 50s), we will achieve financial independence and work will become entirely optional.

I’m not a fan of financial advisers and have no trust whatsoever for large financial services companies (having worked on the inside of a couple for several years when I was younger). For these reasons, I’m managing our accumulation of retirement investments myself.

Oh… who am I trying to kid? I’m actually a complete money nerd and love this stuff!

As scary as taking complete responsibility for accumulating enough capital to support yourself through your twilight years might sound, it’s actually quite straightforward.

Basic concepts

I’m going to steer clear of discussing our actual investment strategy at the moment (more of that to come later!) but, suffice it to say at this stage that we’re passive, asset allocation investors.

Instead, I’m going to focus here on what I’m doing to make sure that we’ll have enough saved up by the time we retire for good to ensure that we can still, well, you know… eat and stuff when we’re old.

Our retirement plan is pretty simple. It’s based around the following assumptions:

  • We will inherit absolutely nothing
  • There will be no form of state pension by the time we are old enough to have received it
  • No third parties (e.g. future employers ;-)) will ever contribute anything towards our pension funds
  • Our chosen portfolio configuration will allow the 4% rule to hold
  • We will spend the same amount as we currently do (except for child care) in 2016 pounds
  • Once we’ve accumulated our retirement nest egg, we will not have to pay any tax on the accumulated capital or on the flow of income that we derive from it
  • Once we have retired, we will have no capacity for economic production whatsoever (i.e. we will never work again)

Now, that little list is a mixed bag of pessimism (e.g. no inheritance whatsoever, being complete economic cripples after our late 50s) and optimism (e.g. a 4% safe withdrawal rate being sustainable in 25 years time).

Of course, none of us have a crystal ball and so trying to predict what the world will look like when I’m in my late 50s would be pretty foolish. However, in order to make a plan, it was necessary to put in some assumptions which didn’t sound too crazy. I think that I’ve balanced the optimistic assumptions with pessimistic ones so I’m reasonably confident that a plan built around this list of assumptions has a high probability of success.

So, to win, we need to have 25 times our current expenses invested productively before 2040 (the year my other half will be 60).

Now, what about the income side of the equation?

Lumpy income

Since leaving my job, I have experienced what other freelancers might consider the ‘feast or famine’ cycle.

  • I’ve (intentionally) had a few months off, earning absolutely nothing
  • I’ve worked full-time on project work and earned tens of thousands of pounds in a few months
  • I’ve done bits and pieces of ‘one off’ work which brought in low four-figure amounts
  • I’m currently doing some work which is taking up a couple of days each week and thus my income has been quite smooth for the last few months

Now, lumpy income doesn’t concern me at all from a day-to-day money management perspective. In fact, it’s always seemed strange to me that people can be ‘skint’ the week before pay day because the money seemingly burns a hole in their pocket. The long-term average is the thing that matters.

Managing income which arrives in unpredictable, irregular chunks such that you don’t starve is easy if you’re always living on money you earned a year ago.

However, having a predictable monthly income would make retirement planning a hell of a lot easier!

Compound interest calculators

If we both had regular jobs, it would be quite straightforward to work out what to save on a monthly basis.

To have a reasonable stab at saving the ‘right’ amount for retirement (i.e. neither living in penury in our old age nor being the richest corpses in the graveyard when we die), one simple technique we could use to determine how much to save each month would be:

  • Use the available data to form a reasonable guess for the long-term (real) compound annual growth rate (CAGR) we can expect from our investment portfolio
  • Multiply our current non-childcare expenditure by 25 to give a target joint net worth in 2016 pounds according to the 4% rule from above
  • Put our current net worth into a compound interest calculator as a starting amount and fiddle with the monthly amount invested until the net worth displayed for the year of my wife’s 60th birthday was as close as possible to the target

The problem with actually acting on that plan is that we don’t invest on a monthly basis.

In fact, there might be periods of 6 months or more where we don’t invest anything, followed by huge deposits as cash starts flowing from a big project.

I had to play around with the ‘how much should we be investing?’ problem a bit before I came up with a solution which deals with our potentially very lumpy income.

An ideal world

Having played with a compound interest calculator, I came to the conclusion that to hit our target net worth by the time my wife is 60, assuming a 4% real CAGR we would need to save just over £1000 each month.

Although we have no intention of managing this task on a monthly basis, thinking about how our wealth would grow if we did contribute to the portfolio so regularly has allowed me to plot a desired net worth trajectory.

I put together a spreadsheet which illustrates the growth of our wealth assuming that we invested £1000 per month and our holdings grew with a constant 4% annual rate of growth.

The resulting graph shows the unmistakable (but quite unrealistic!) shape of a smooth exponential curve (well, actually for the maths nerds out there there are linear and exponential components as money is being added at a constant rate :-)).


OK. So far, so boring.

What the hell use is that chart to somebody who isn’t even remotely close to the investing behaviour which the chart crudely models?

Your mission, should you choose to accept it…

Well, my nice unrealistic growth curve does one very important thing for me: it gives me a target which I know I need to try to hit.

So, as well as measuring whether or not we’re on track for retirement, my desired net worth trajectory graph acts as a way of modifying our behaviour.

Let’s expand upon that a bit.

How productive?

If I see that we’re falling behind our target net worth trajectory, it encourages me to do something about it.

For example, maybe we’re spending too much. I see the tell-tale signs during a couple of consecutive monthly financial reviews  and so I get on the phone and start drumming up some freelance work.

The following chart shows what that might look like (the red line represents our actual net worth):


It doesn’t matter a jot that our accumulation phase isn’t smooth. The imaginary ‘desired’ curve serves a useful purpose, in that it prevents us from ever falling too far behind (and equally, allows us to take more down-time if we get a long way in front).

Down markets

Of course, our actual net worth being lower than desired may be caused by something entirely different to

Ooh. We’ve been having a bit too much time off lately.

As our investment portfolio contains volatile asset classes such as equities, it’s very likely that swings in portfolio value due to market conditions will occasionally drag our net worth below the ‘desired’ line.

This will encourage me to work much harder at looking for earning opportunities when markets are down. This in turn will cause us to buy more when prices are depressed, hopefully leading to an improvement in our portfolio’s average rate of return.

Of course, on the same note, I’ll have to be vigilant to valuations becoming inflated (like now [mid-2017] perhaps?) lest I get sucked in to being too lazy!

In practice, I like to make a habit of staying ‘ahead of the curve’ as this gives us more options in the future.

Liquidity/accessibility trumps total tax advantages

Speaking of options…

Although I stated earlier in the article that I don’t want to get hung up on specifics like asset allocations and tax wrappers, I will just make this one point as I think it’s a crucial part of my accumulation strategy. [Note: this is NOT investment advice. Please do your own research!]

I think that tax-advantaged wrappers like SIPPs and the new LISAs should be used with caution, especially if you’re currently quite young. My reasoning: the government will move goalposts (e.g. minimum age for drawdown) if it is politically necessary to do so at the time. For some strange reason, I don’t necessarily trust the government to keep things how I want them.

Therefore, the vast majority of our wealth is being accumulated in investment ISAs. For you non-UK-dwellers, these accounts can only be funded with money which has already been taxed but the investment returns are tax-free and withdrawals can be made, penalty-free, whenever you want.

Choosing to mostly forgo the tax reliefs associated with using pensions is costing us tax that we could be deferring. I know that. However, it is my belief that having instant access to a large portfolio of assets which can be liquidated at a day’s notice gives us choices which are worth the cost we’re paying.

There’s a massive difference between

Our net worth is £200,000 (including house equity and pensions)


I could put my hands on £200,000 this week and use it to, in some way or other, completely change the course of our lives.

Responsibility is a heavy burden

There we go. I’ve outlined the basic concepts behind my strategy for ensuring that we have enough money when we’re too old to work.

From conversations with other people, it seems that the majority of them are relying on a combination of company pensions (that somebody else manages), state benefits and home equity to fund their retirements. Fair enough, unto each his own I suppose. Just don’t get lulled into a false sense of security!

It’s true that the freedom I’ve built for myself has given me responsibilities which most people have the option of delegating to other people. However, the up sides I get from completely controlling all of my asset wealth and my own time are massive. I’m not going to say that there’s no stress involved as I’d be lying but I think that being the master of my own destiny more than compensates for not having the illusion of security that being an employee with a 10% employer’s pension match might give me.

Other resources

I really believe that taking control of as many aspects of your life as possible is the foundation upon which anybody can build the most enjoyable life possible. In particular, money, used properly, is the swiss army knife of freedom. Here are a few other resources which could help you to increase both your freedom in the present and your security in the long-run.

How I quit the rat race – my free 6 part course detailing how I transitioned away from life with a full-time job

Following the rules vs being rational – don’t just follow blindly, think and act in your real best interests

4 reasons I have “Fuck You!” money – lots of liquidity can set you free a long time before you’re wealthy

The book that changed my life forever – like it or not, you are the master/mistress of your own destiny

If you want to keep up to date with the happenings in land, please sign up to the email list.

Your turn

What do you think? Am I signing up for beans on toast in my twilight years? How about you? Are you an investing virgin? Do you prefer tax relief or accessibility?

Please let me know in the comments.


I’d like to give you access to my FREE comprehensive 6-part email course which will show you the exact steps I took to quit the rat race in 18 months. Just enter your email address below.


[Image “Cartoon Character Hamster Exercise” courtesy of saphatthachat at]

5 thoughts on “How I save for retirement with a lumpy income

  1. You’re back!!

    So pleased to hear from you. I assumed you were happily busy with your project but still concerned that something was wrong or you’d given into the Siren call of the salary…

    I like your points about government meddling with SIPPs and LISAs. I’ve used my SIPP in addition to ISA in the past but I’m now considering that funded unless something changes for the better. Now I’m having to figure out taxable accounts.

    Useful chart: I have something similar and it is great to see when I’m ahead of the curve, I have a couple of target lines that show different retirement/tools down ages.

    May I ask what age you assume your child related costs go away? My siblings didn’t really move out until mid-late 20s and I was never sure how my parents felt about it.

  2. Hey Andy, glad to see that you’re still putting time into writing content on this blog.

    Just dropping a small note to cheer you on and thank you for the amazing email course about quitting the rat race.

    I enjoy your unique perspective and approach to personal finance and career.

    Here’s wishing you the best of luck for your financial goal!

  3. Hi Andy – great to hear from you! Interesting post. Being 10 years younger than Mr Ermine and quite a bit older than your good self, it is good to hear your perspective on this. Scary amounts of money needed, but wise to have a way to have a target 🙂 My income is lumpy too so this is useful food for thought….

  4. Great to see another post Andy.
    How is the big project coming along?

    I think I need some sort of yardstick to measure progress against as well, this is good food for thought. I calculate an on running “Time to FI” number in my spreadsheets but having the Net worth curve puts it in a nice visual form for you.

    With regards to the ISA vs Pensions/SIPP I think it is wise to fill up a pension/SIPP until it brings your income below the higher rate and then after that fill up ISAs. This is assuming you think your withdrawal income during retirement will be at the lower tax band, which I guess are subject to fiddling by the gov as well so who really knows.

    Seeing as we are both working part time I can’t imagine there is that much income going over into the HRT anyway so maybe a moot point for us, but still a valid strat for most people I think.

    Having said all that, I am currently boosting straight up cash reserves at the moment so haven’t put anything into an ISA for a while (which is annoying as the markets have been soaring!)


Comments are closed.