Can I quit work at age 34 and live off my investments?

ROB'S PORTFOLIO

Chris Dillow, the Investors Chronicle's economist says:

You wonder whether, at the advanced age of 34, you should give up work entirely. There’s only one thing that makes such a prospect feasible, and that is your amazingly low outgoings, of just £9,000 a year.

I say this because your investment performance in recent years hasn’t actually been hugely impressive. Yes, 2008 and 2009 were brilliant. But they were very unusual years which might not recur. Since the end of 2009 - which represent more normal times - you’ve made just over 50 per cent. That’s only marginally better than the All-Share index’s return of 49.8 per cent during this period.

If we assume that your returns in future are around 8 per cent a year, you would be able to retire and maintain your monkish lifestyle. However, there wouldn’t be much margin of error: what if interest rates rise, or share prices generally fall, or if your tastes change?

For this reason, I’d advise you for now to stick with your job unless you find it even more hateful than the average person. Doing so has two great virtues. The biggest one is that it provides a diversification benefit: your salary should keep coming in even if the stock market falls. Remember that human capital - your earning power - is an asset too. Do you really want to throw it away? Would the time you spend working really be so much more valuable spent elsewhere?

You might reply that, if your investments go badly, you could always go back to work. But could you find as good a job then as you have now? And how would you explain your actions to a future employer? “I thought I’d leave work and live off my investments but I lost money” would send two adverse signals: that you’ve little appetite for work; and that you’re not as smart as you thought you were. Would you employ such a guy?

A second benefit is that staying in work would give you more time to learn about your investment ability. Maybe you really are at the far end of the bell curve of investment skill and so could earn high enough returns that you could retire. But you need more evidence to be sure about this. Staying in work and continuing to invest would help you gather that evidence.

The same logic makes me think it might be worth holding onto your buy-to-let investment. I’m not sure you could make much more than 9 per cent if you invested it in equities. And what it offers now is diversification.

As for joining your final salary scheme, I’d ordinarily advise it. Again, it offers diversification benefits as well as tax benefits and - as you rightly say - low interest rates mean that future income is valuable. However, if you were to quit work after a short while and get your contributions refunded, the chances are that you would lose, insofar as you’ve made a zero return when you would (probably but not certainly) have made a positive one had you invested the cash in equities yourself. If you do decide to stay in work for some time, however, you should consider joining.

All this said, I find it uncomfortable to offer you advice because you and I have such different tastes for risk. I recently thought about retiring and despite being older and richer than you, decided against it because it seemed too risky. And for me personally, margin debt and spread bets are far too risky. In both senses, you are much braver than me. And a large part of me really admires you for that. Sadly, though, I fear there’s a big difference between wishing you luck and you actually enjoying it.

Justin Modray, director of Candid Financial Advice, says:

While you have been pretty successful in your investing to date, it’s a precarious business and relying in investment gains for everyday income is a tall order unless you have sufficient capital behind you to tide over lean periods. And, as I am sure you are aware, spread betting carries significant risk if prices move against you, so it is really important to have a clear strategy and handle on how much risk you are taking.

If you are earning a 9 per cent annual return on your buy to let I would hold onto it. Aside from the consistent income it delivers it is also somewhat lower risk than your investment portfolio. So even if you have a bad year investing, you will have the peace of mind this income brings - especially important if you do give up your job. And while it might be tempting to give up the day job if you are fortunate enough to successfully predict the next stock market crash, I would not be in a hurry to do so as relying on investment gains to get by will bring its own stress.

Final salary pensions are usually very attractive, since your employer is taking all the investment risk rather than you. The scheme open to you offers 1/49th of your pensionable pay each year which then provides an inflation-linked pension for life in retirement. The big advantage versus trying to beat these returns yourself is certainty. However, unless you are a scheme member for at least two years, your contributions will likely be refunded when you leave the employer, so bear this in mind if you think you will leave sooner than later.

As for debt, mortgages are a pretty cheap way to borrow and provided it is on your buy-to-let, you can offset mortgage interest as an expense against tax owed on interest received. So I would be inclined to hold on to it for now provided you are confident your investment returns will exceed the mortgage interest rate.