Saturday, 19 March 2016

Errors everywhere but I did get one thing right

My early personal finance records are sparse at best; however I was undertaking a bit of (pre)spring cleaning this week and came across an early retirement planning spreadsheet that was last updated in November 2007.  That’s just a month or so after I started on my FIRE journey.  It made for some interesting reading given my current FIRE position, so much so, that I thought it worth sharing particularly in view of some of the comments here.

On my FIRE journey so far I've found that Saving (Earning minus Spending) has been one of the most powerful accelerators towards FIRE.  To demonstrate to the end of February 2016 68% of my wealth creation has come from Saving while only 32% has come from Investment Return.  Looking at the 2007 spreadsheet I thought I could save £16,000 per annum and I wasn't planning on it increasing through my journey.  To contrast that assumption in 2015 I saved nearly £100,000.  Errors included thinking my Earnings had peaked and that I wouldn't be able to spend less than I was at the time.

I thought my investment expenses would run to 0.75% per annum.  Now ‘way back then’ Vanguard in the UK didn't exist but even so in 2015 they were down to 0.27%.  I also I thought my investments could achieve a real annualised 4.3% after expenses over the long term.  So far I've only achieved 3.4%.

I thought that in Early Retirement a safe withdrawal rate would be the 4% Rule – 4% of my wealth on retirement day increasing with inflation annually.  Today I think 2.5% is more appropriate.  That is a big error.  For a person wanting to FIRE on £20,000 it represents an extra £300,000 of wealth that needs to be accrued which is a big chunk of change.

I thought that the UK would be home and that I would need £28,000 of earnings per annum to live well in FIRE.  Today I think I’ll need closer to EUR25,000 and we’re now 99.9% Continental Europe bound.

Crashing all those numbers above together plus putting some home considerations into the mix made me think I’d need a little over £700,000 to FIRE which included some mortgage payments.  Today I think I’ll need £1,000,000 which includes paying cash for a home early into FIRE.

The Excel model had me retiring at age 50.  With a fair wind today I think I can FIRE at 44.  That is a big difference.

In this blog (for now) I stay very close to just the personal finance side of the FIRE equation.  I hoped by doing so I might be able to take the emotion out of it, show what’s possible if you stay at it, show there is a different way than that rammed down our throats every day and if successful it would result in a healthy readership of ‘like minded’ individuals who would adapt some of the techniques and bring new ones to the table.  If I average the last 10 posts that is 1,877 of you.  With the below chart being the end result of what I blog about, which is a far better result than I ever planned back in 2007, I made an error somewhere.

Personally, as I write this I'm floating on cloud nine.  Financial pressures are just disappearing as each day passes which is enabling nearly 100% focus on the important stuff in life and the world is about to become my oyster.  Yet at the same time we represent just 0.003% of the UK population (and we’re not all from the UK).  All of the mathematical errors above I now understand but this one I don’t.  Maybe I'm just the wrong one to spread the message.

RIT’s progress to FIRE
Click to enlarge, RIT’s progress to FIRE 

Looking back I made a lot of errors in those early 2007 days.  With so many errors did I actually get anything right I hear you ask?  Given I’m less than a year from FIRE as I write this post I think I had one thing very right.  I started.

As always DYOR.


  1. Maybe you need to do a post on your general views an attitudes to life. How you deal with certain situations etc. How they have changed from the 2007 self to your (almost) fire self.

    The finance side and approach makes a lot of sense, but increasing your earnings can be the really hard part. And that can be a factor of your approach to life.

    I feel my earnings are a real limiting factor to following your full journey but i am now incredibly frugal, changed what i value. i can save around £16,000 a year (i'm 27 with a permanent portfolio)

    should buying an overpriced house be more important than fire? can they tally together with rent savings?

    1. Agree that increasing earnings can be difficult but I also think it's possible with both mindset and hard graft. I think you actually need both of them to do well, certainly if 'working for the man'. One won't get you there. Once you get yourself into the top 10% of your peers at any level within an organisation I've always been amazed at how quickly doors open.

      Age 27 and saving £16,000 a year is impressive. You're miles ahead of me with just that bit of information given I didn't wake up and smell the roses until age 35.

      I've personally prioritised FIRE over an over priced house. This is because as I've mentioned below my approach will enable me to play cost arbitrage which includes house price arbitrage. It's been a difficult decision given the 'zero interest rate' world we live in today which means houses are currently affordable but not good value which then means renting is more expensive than 'home owning'.

  2. What a great post. It's always good to look back occasionally, as well as forward.

    I have a spreadsheet I created 6 years ago that planned a 12 year sprint to retirement, and only looked at a couple of times since. I'm still on track versus what I planned then for 2016.

    I found: I lost confidence in a 4% SWR (now 2.7%); I got married and had a child, unexpectedly, which means a few more working years; I could save more than I planned, but I spend more than planned with 2 dependents, earnings making the difference. Like you, the best thing I did was starting in earnest. I'm the same age as you, and have a little more net worth - while I think I'll work another 8 years, your blog has given me the confidence that if I want or need to I can check out of The Man's Hotel and live comfortably.

    1. Same age but more net worth - impressive. Either you started earlier (which I wish I had have done) or you've found something that works better at building wealth. Are there any main differences between your approach and mine?

    2. Hi RIT. I look at retirement planning as a sort of Drake Equation. A bunch of multiplicative factors where there is no right answer and we all have our own personal values for the parameters. There are not many parameters needed. Earnings, satisfaction appetite, risk appetite, spendings, time. Maybe education/learning. Trade each for the other. Twiddle the knobs.

      I'm happy to sit in a difficult 60% satisfaction job for 25 years then retire for 35 years. Others would rather an easy 90% satisfaction job for 40 years then retire for 20. I wouldn't increase my hours by 10% for 25% more pay. Others would jump at the chance. I wouldn't decrease my hours by 10% for 5% less pay. Many would.

      So in my Drake Equation I work 40 hours a week in a very difficult job I only enjoy about 50-60%, but don't need to think about outside those 40, and I'm able to save £100k pa after spending £50k, and I hold a fairly low appetite for savings growth risk. That's a comfortable equilibrium for me, others would either jump at or shy away from being in my shoes. Aged 34 with net worth £30k I made my Drake Equation trades and now at age 44 have a £1m net worth, with real savings growth maybe just 10% of that. I don't see I was particularly lucky or smart, I just twiddled the knobs.

      One generalisation I would make though is that people are poor estimators of risk. I see very aggressive appetite for investment risk, perceived or real I know not, but very little risk for exploring change on the job front, and often from the same person. This conservative worker yet adventurous investor beast is far more prevalent than the adventurous worker and conservative investor that I pigeon hole myself as. So that's my wealth building 'secret', that taking personal job risk is more richly rewarded than striking on any investment portfolio magic.

      Earn loads, spend wisely, be careful around tax and fees, invest conservatively, retire early.

      Enough rambling.

    3. What a great reply. I've mentioned we're all different many times in the past but I very much like your succinct mathematical analogy. It is so true.

      I also agree with you on the risk front. I've been challenged a few times in the past about my 'low returns'. I also see PF bloggers out there who are claiming to be 'retired' who are 100% in equities. I couldn't sleep at night but then I also suspect their view of 'retired' is not the same as mine which is work is 100% optional.

    4. Too many PF blogs are about one parameter. Be frugal! Be a super investor! Reduce fees/tax! Save hard! Maybe that's human nature, look at diet approaches for instance. I much prefer the intelligent introspection of an RIT or an eccentric soliloquy from a Suffolk ermine. Maybe it's a British thing.

    5. Thanks for the hat tip there. I too very much enjoy the musings of the ermine (with the added bonus of some very good rants).

    6. @Anon - could I ask what job you have that pays 150k net?

  3. Hi RIT, what I find interesting about this post is the "working for the man" mindset. I guess that's fairly common, perhaps especially in jobs that are not intrinsically rewarding.

    If I think about it I suppose I can see the link between going to school because your parents tell you to, and then going to work because that's what you "have to" do. Working for the man is then an extension of going to school, and both suck about the same amount for most people.

    I would say I fell off of the "working for the man" bandwagon in 1993, when I was made redundant from Sainsbury's, shortly after being made redundant from the Minsitry of Defence (I was 21 at the time). I realised then that the organisations I worked for didn't give two hoots about me and so I decided to return the favour. I realised that I was not working for "the man" but was instead working for me and for what I wanted; not what anybody else wanted.

    So from that point onwards I decided to work at whatever I wanted to work at, which included cab driver, bus driver, bailiff, security guard, salesman, computer programmer and now investment newsletter publisher. So over time my desire to retire early has reduced as I'm not trying to escape anything and actually enjoy having the need to earn money as a motivating factor to get me out of bed each day.

    I understand the risk reduction that comes from having a million in the bank, but none of us are getting out of here alive anyway and so that degree of risk reduction doesn't interest me.

    I don't want to waffle on anymore, but just to say that it is interesting how our mindset and frame of reference for looking at life and its various challenges can lead to wildly different goals and decisions.

    1. Interesting position John and one which resonates with my own journey.

      I guess there are the two basic choices - head down, work hard in a job you don't really enjoy and build up your savings/investment wealth to a level where you can escape.

      Then, as you have done, choose some form of work which gives some personal satisfaction which I guess would be less stressful and which is more sustainable longer term so you don't feel the urge to 'get free'.

      I think I am more in the second camp but admire the effort and shear determination of those like RIT in the first camp.

      As always, there are many paths up the mountain.

    2. Thank's for the views John's. I really am not in a situation to comment about the different approaches as unlike yourselves who have 'worked for the man' and 'worked for yourselves' I've only ever done the former. I can however add a bit more flavour:
      - I wouldn't say I don't enjoy the job itself, in fact some projects can be incredibly rewarding. What I don't like is the high stress, punishing hours needed to do well and very limited security.
      - My route gives me a next stage of life where just about any region of any country becomes available. This enables me to play cost arbitrage but also enables me to for example pick a region for its beauty (cycling trails, working trails etc) rather than an ability to earn an income, even if it's my own. John K I do understand that if I could manoeuvre myself into for example a career such as yours today then maybe that is still possible.

    3. Hi John

      Interesting that you mention that you're not 'trying to escape anything' because I'm the same. Whilst I don't love my job and despte there being the possibility that my job could be at risk at some point in the next year or two, I like my job and I like the people I work with. I even like my boss!

      But because I know this isn't always going to be the case, my boss and the people I work will eave/retire/move on, etc and I want to be in a healthy financial position when I get fed up with work.

      Anyway RIT, I wonder how different my spreadsheets/goals will look like in 10 years time!?

  4. Thanks for the post, RIT. My investment aims have been all over the place for the last two decades (life changes) and I have made many mistakes (just about the first thing I ever did was to buy direct from a fund manager - I had no idea that I could get a discount through a middleman). However, a key thing which I think is the most important thing, regardless of what investment criteria you decide, is that you take an interest in your own financial future, do some research and attempt some planning i.e. you accept some personal responsibility and think about the future (something that the present and recent governments have not done on a timescale longer than 4yrs).

    When you do retire, if it does not risk your identity, would you kindly tell us what you job is/was? I have often wondered.

    1. I'm sure I'll be able to give more detail. Please don't wonder to much though as you might be disappointed given it's really not that exciting when compared to some peoples careers/jobs :-)

  5. Hey RIT. As someone who bought property in the UK in 2014 after years of sitting out the market for fears of a crash, I can say the reason I did finally buy was I examined why I'd been wrong all the time I'd waited. I could write an essay on this but it boils down to two sides. Government intervention and me not doing my planning correctly.

    The first was out of control, and I maintain that I made a choice based on information I had at the time. However, I've had to reevaluate that view. I now believe, based on actions and evidence, that the government will go a long way to prevent an outright large crash.

    The second part is my own fault. I later drew up cash flow spreadsheets showing how I could have owned and rented out rooms in my own house, since I house shared anyway all the while waiting to buy. It should have been my house and the income from the lodgers should have been going to me, instead of a landlord. This would have mitigated any but the most severe crash since I house shared for nearly 10 years before buying. 10 years of lodger income is a lot of income.

    This blog post of yours got me thinking about it again, evaluating errors. I wonder, have you ever drawn up a cash flow and risk spreadsheet comparing the value of buying vs renting, based on decisions made in the past and on a decision made now?

  6. The key thing is to start the process and then any assumptions can be tested and reviewed and changed over time.

    I would say that 5%+ real equity returns and a 4% SWR (from 4% natural equity yield) are still working assumptions for me.

    I think those earning and saving less but over a longer time will more likely get 32% from savings and 68% from investment returns, rather than the reverse in your case.

  7. I've recently found this blog and consider it a very useful resource. Keep up the good work RIT.
    Here is my FIRE story. I'm 50 this year.I grew up in London did an arts degree at uni took a safe job in the Uk public sector, got a master’s degree 3 years part time and did reasonably ok but nothing special in my early career. I had no FIRE plan.
    In 1993 we bought a semi in a London suburb off around 3 times earnings that proceeded by dint of location, interest rates and demographics to rise sixfold in value in the fourteen years we owned it. We gained this for a 5% deposit. The first three years were hell as we went down to one salary (three children came along) and I took on extra jobs to cover the mortgage but it taught me what you could live on monthly and buy at the right point in the 18 year house price cycle.
    Secondly being married, having children and a house made me push for promotions. My salary increased by about 250% in an eight year period from 1993-2001 when I left to join the private sector. The trick work wise once you have the right qualifications I believe are take on more responsibility for things others consider too difficult and network hard with people who can help you get promoted
    In 2004 we bought a family house and kept the original home as a buy to let. This meant we had rental income which more than covered the mortgage payments on the latter at lower interest rates plus capital growth. This and an aggressive policy to pay down debt on the mortgage meant we were largely debt free by 2006 and with a tentative asset value of £1m. This position gave me the confidence to go freelance.
    In 2007 we sold both our properties in the UK bought another bigger property that needed loads of work doing to it in the UK and a holiday home in the Caribbean. All four decisions were with hindsight disastrous. We lost our main non work income sold a good family home bought a too large home and holiday home that would cripple us over the next few years all at the top of the market. We sold the new family home and the holiday home for losses. Key lesson here is know your own risk appetite and keep building passive income.
    The other result was that I no longer wanted to live in the UK on retirement. We eventually made our way to the south of Spain in late 2009 which is where we intend to retire or part retire this year or next year. We waited 6 years to buy a house and have finally bought due to exchange rates and housing prices are now low.
    Despite all the investment disasters from around 2007 as a freelancer I have worked for over 8 out of 10 years on good day rates in the UK. The exception was 2010 to 2012 where the aftermath of the financial crisis work disappeared and day rates were slashed. My wife has worked for the last 4 years and we have managed to put three children through fee paying school. Key lesson here is if you can command an attractive day rate and have enough cash flow to keep the salary you take low this is profitable work. During this period I think we saved about 50% of income most years.
    Counting pension, property and other investments our net income from investments is £7-8k per month our outgoings around £5k per month falling to £4k once the last school fees drop away next year. This leaves some room for unavoidable expenses/ongoing saving. Assuming this year's portfolio valuation our outgoings will represent about 2% SWR (safe withdrawal rate).

    Financial decisions left include the following:

    - What equities to buy to maximise income and minimise risk (UK value investor is a very useful resource I find)
    - I am over-invested in property and P2P and what should I do about it (property net yield 3%, P2P a bit higher say 4-5%)
    - I have no idea what to do with my free time. This is my fault due to an over concentration on getting here in the first place. Can anyone recommend good resources for what to do in retirement?

    A long post but hopefully of use to fellow FIRE seekers?