Saturday 9 April 2016

Q1 2016 – Rocket boosters lit and then stayed lit

Quarter 1 has been what can only be described as one where the rocket boosters fired and subsequently propelled my personal finances forward at a rapid rate of knots.  I passed the one year to FIRE (financially independent retired early) mark during the quarter and then finished the quarter with wealth addition of some £55,000!  To put that into perspective that is more than half of what I achieved through the whole of last year.  Positively both my Saving Hard and Investing Wisely approaches made strong contributions:

RIT Year on Year Change in Wealth (Saving Hard + Investing Wisely)
Click to enlarge, RIT Year on Year Change in Wealth (Saving Hard + Investing Wisely)


I define Saving Hard a little differently than most personal finance bloggers.  For me it’s Gross Earnings (ie before taxes, a crucial difference) plus Employee Pension Contributions minus Spending minus Taxes.  Earn more and one is winning.  Spend less or pay less taxes and you’re also winning.  Savings Rate is then Saving Hard divided by Gross Earnings plus Employee Pension Contributions.  To make it a little more conservative Taxes include any taxes on investments but Earnings include no investment returns.  This encourages me to continually look for the most tax efficient investment methods.

Even with a large portion of my bonus going to those better able to spend it, including HMRC, I was still able to save some £31,000.  This was possible by once again keeping spending nicely in control.  In fact my personal rate of inflation (ex taxes) compared to Q1 2015 was actually -7%.  An interesting dynamic has developed here.  With FIRE being so close my better half and I seem to have just sub-consciously battened down the hatches as we can see the finish line which is then self-fulfilling.

Combining Earnings, Spending and Taxes together results in an average Savings Rate of 48% for quarter 1 against a plan of 55%.  Sounds like a pretty poor effort until I also mention HMRC took 47%, including some back taxes, with us living off the remainder.

RIT Savings Rate
Click to enlarge, RIT Savings Rate

Saving Hard score: Conceded Pass.  I yet again missed my savings plan of 55% but against a back drop of back taxes I’ll take it.  Savings were also still able to add 3.6% to my wealth, which is not to be sniffed at, even at this late stage of my journey.  Savings also continues to make the biggest contribution towards my wealth accumulation with 67% now having come from savings and only 33% from investments.  Compound interest is still not really firing on all 4 cylinders.


Investment return for Q1 2016 (02 January 16 to 02 April 16) was a healthy 2.8%.  In 7 out of the last 8 years savings has made a greater contribution to my wealth than investments.  That theme has continued into quarter 1 with my investments contributing £24,000.

My investing strategy continues largely in line with that developed at the start of my DIY journey except for 3 tweaks (now mentioned many times previously) that are now necessary given my relative closeness to Financial Independence.

The first is to increase cash and cash like holdings (NS&I Index Linked Savings Certificates predominantly) to give the option of a family home purchase and to ‘ensure’ I can live off dividends alone in FIRE.  This continues to build nicely with holdings increasing from £203,000 at the end of 2015 to £224,000 (EUR278,000) today.  Some more work to do with our dream Mediterranean home still expected to cost EUR350,000.

The EUR350,000 Mediterranean View
Click to enlarge, The EUR350,000 Mediterranean View

The second has been to increase total wealth, less cash, dividends to 3% with that number coming from a decision to drawdown at 2.5% after expenses which then leaves a little for reinvestment to ‘safeguard’ the living off dividends idea.  Even though quarter 1 yields few dividends for me this remains well in control with my yield holding at 3.7%.

In 2015 I received £21,600 in dividends with 2016 already looking like being something like dividends of £23,300 (EUR28,900) which is more than I believe I’ll need to fund the lifestyle we’d like to live on the Mediterranean.

RIT Annual Dividends
Click to enlarge, RIT Annual Dividends

The third has been to begin further diversifying my portfolio as I've reached a critical amount of wealth.  This kicked off with an increased weighting to FTSE250 companies.  I have continued with this theme adding another £8,000 worth of VMID within my ISA.

My current asset allocations now look like this:

RIT Asset Allocations
Click to enlarge, RIT Asset Allocations

I continue to invest as tax efficiently as possible with my tax efficient holdings now consisting of:
  • 44.1% held within SIPP's
  • 11.5% held within the no longer available NS&I Index Linked Savings Certificates (ILSC’s)
  • 11.1% held within a Stocks and Shares ISA.

Tax efficiency score: Conceeded Pass.  At the end of 2015 this was 67.0% and it’s now 66.8%.  At this stage of my journey this now is what it is and not really able to be influenced.  I’m still maximising my ISA contributions with the full £15,240 going in for tax year 2015/16.  I’m also still hitting the pension fairly hard but am also being careful to make sure I have enough outside of pension wrappers to both secure a home and ensure I (hopefully) have more than enough to cover myself between FIRE day zero and the government tinkered private pension access age.

Investment expenses also continue to be treated like the enemy.  They really haven’t moved since 2015’s 0.27%.

Minimise expenses score: Conceeded Pass.  No improvement but still not shocking.

If I'm Investing Wisely I should be able to at least match a benchmark.  My benchmarks are continually challenged by readers but at least for now my Benchmark here remains a simple UK Equity and Bond Portfolio aligned in percentage terms with the building blocks of my own portfolio which is then rebalanced once every year.  Today that benchmark allocation is 66% UK Equities and 34% UK Bonds. The 2 indices I use to replicate that benchmark are the FTSE 100 Total Return (Capital & Income) Index which in quarter 1 returned -0.4% and the iBoxx® Sterling Liquid Corporate Long-Dated Bond Total Return (Capital & Income) Index which has returned 3.5%.  The total return of my benchmark is therefore 0.9%.  In comparison my 2.8% return results in a significant benchmark beat.  Interestingly, if I was to split the UK Equities portion 50% to the FTSE100 and 50% to the FTSE250 that benchmark would become 0.1% resulting in even more out performance for the quarter!

Investment return score: Pass.  A significant out performance when compared to both benchmarks now being tracked.  I'm even happier knowing that my benchmark doesn't carry any investment costs where my portfolio sees expenses including fund and wrapper expenses, investment spreads, trading commissions, withholding tax on some investments and deducted at source tax on savings interest.

In the scheme of a lifetime of investing this quarter is insignificant.  I'm all about time in the market and not timing the market so as always let’s zoom out and look at my performance since I started down this DIY road.  This still looks excellent when compared to my benchmark with the chart below tracking the performance of my portfolio against my Benchmark and inflation (RPI).  Note that the chart assumes a starting sum of £10,000 which is not my portfolio balance at that time but is instead simply a nominal chosen sum to demonstrate performance.

RIT Portfolio Performance vs Benchmark vs Inflation
Click to enlarge, RIT Portfolio Performance vs Benchmark vs Inflation

Since the end of 2007 the benchmark continues to beat inflation with Inflation growing at a Compound Annual Growth Rate (CAGR) of 2.6% compared with the benchmark at 4.1%.  In contrast my portfolio has increased at a CAGR of 5.9% (up from 5.7% at the end of 2015 showing nicely why you don’t want to be out of the market as it can make great strides over short periods of time).  In real inflation adjusted terms that’s therefore now 3.3%.  My whole investment strategy since 2007 has been to generate a long term Real Return of 4% and so I remain well behind plan, but have done some catching up in this quarter, albeit above the 2.5% I intend to drawdown in FIRE so not all bad news.

Long term investment return score: Fail.  Still well ahead of long run benchmark but also well behind plan.

Combined Saving Hard and Investing Wisely should eventually give Early Financial Independence and the option of Retiring Early.  When I started this blog in November 2009 I stated that my aim was to retire (which at the time I defined as work becoming optional) in less than 7 years.  I am now 6 and half years into that journey and assuming I can continue to save at expected rates, while achieving a real return of 4%, I forecast that financial independence will arrive in about 8 months at current valuations.  If it happens I will have missed my target by the slimmest of amounts however it will still mean FIRE in less than 10 years from when I went DIY in 2007.

Savings and investment return have allowed total wealth to increase 6.4% in a single quarter.  As I write this post wealth is now at £915,000 against a target of a little over £1 million and I can smell victory.  A cool million will give us the Mediterranean lifestyle we desire, with some contingency for exchange rate movements, and vastly increased discretionary spending if we so desire.

My journey to FIRE now looks like this:

RIT Path Trodden Towards Financial Independence
Click to enlarge, RIT Path Trodden Towards Financial Independence

Retiring early score: Pass.  Pretty much bang on with my 7 year target from blog start up and also less than 10 years from going DIY.  In a single quarter I’ve accrued a further 6.4% of the wealth I need for FIRE.

I couldn't have asked for more from Q1.  How was yours?

As always please do your own research.

A quick footnote.  Subsequent to my post detailing my experience of P2P lending via RateSetter I've continued at it with annualised returns now at 4.6%.  If any reader is interested in doing something similar RateSetter still have the promotion running where if you've firstly done your own research, then subsequently sign up as a new lender via this link directly and lend £1,000 you’ll receive £100 (I receive £50) after 1 year.  That’s up to a 10% return on top of whatever you get in the RateSetter lending market.  Of course your capital is at risk with peer-to-peer lending so please do make sure you do your own research first.


  1. Pensions: if you become resident in Malta will the age 55 constraint still hold?

    1. Yes, I'll be able to access my Private Pension at 55 (UK Rules) but I'll be taxed on it in Malta (Malta UK Double Taxation Convention). I'll be able to access my State Pension at 67 currently.

      Of course, like anything to do with pensions it's subject to continued government tinkering.

    2. Yes as it is held within the UK but the payments out as pension income will be subject to the tax rates in Malta.This is the same for me in France but in France it also means there is no such thing as the 25% tax free cash on drawdown! You need to plan ahead and maybe drawdown before you move abroad.....

    3. I understand you can still take the 25% but it's taxed per the rules of your new country. You have some options here though also. For example Cyprus seems to have a tax quirk if your pension income arises from services rendered abroad which a UK pension would have been. In this instance you can choose to either be taxed at a rate of 5% for amounts exceeding EUR3,420 per annum in 2015 or at normal rates. Normal rates would be suitable for a normal year but if you were grabbing 25% to remove it from government tinkering then the 5% could be a very attractive option given I've paid higher rate tax on the way in.

      Of course DYOR here as I have not (yet) paid for formal tax advice.

  2. Investment returns are going well RIT.

    I did not manage 2.8% as my shares and investment trusts are just about breaking even for the first quarter. However my move into global index funds seems to be doing the business with returns of 8% on the Asia ETF, 7% on VHYL and my largest holding Vanguard LifeStrategy 60 returned 3.2%. The return for the whole portfolio including fixed income is 2.3% which is much better than I was expecting in mid February!

    1. As always thanks for sharing your performance John. Looks like this time I've out performed your good self but I know in the past you've also out performed me.

      The big helpers for me this quarter were UK Index Linked Gilts up 5.5%, European Property up 12.5%, Gold up 19.4%, US Equities up 4.7% and EM Equities up 6.5%. I'm sure the weakening £ had plenty to do with a lot of it. On top of that some interest and dividends rolled in which should never be forgotten about.

      This was balanced against UK Property, UK Equities, European Equities, Japanese Equities and Australian Equities which were flat to down.

      Looking at it this way it nicely demonstrates how diversification reduces volatility.

  3. Good post, thanks for the update. Remember that your ISA will not be tax efficient when you leave the UK, you will most probably have to pay capital gains tax and income tax on the dividends (as I do here in France).On the plus side if you can keep your income down to say euro 20-25000 you may get 'low income'benefits such as reduced property and health taxes,you can top up your income by spending cash savings.Just more for you to think/research before the day!Keep going..............

    1. Good point:
      - In Spain I'd be taxed at up to about 22% on S&S ISA capital gains and dividends
      - In Malta at up to 25% on S&S ISA dividends remitted into Malta and 0% on gains as I would be non-domiciled.
      - In Cyprus again because I'd be non-domiciled I'd have 0% tax and 0% Special Defence Contribution to pay on S&S ISA dividends. Capital gains is interesting because it's almost the opposite of the UK. I'd have 0% to pay on S&S ISA sales but Capital Gains Tax is imposed at the rate of 20% on gains from the disposal of immovable property situated in the Cyprus (so the family home is in scope), although there are some generous allowances here.

      Again DYOR as I am yet to pay for formal advice. That will happen once we lock our new Med location in.

    2. Congratulations RIT - and thanks for illustrating where your outperformance has been generated.

      But - what about Brexit ? The bookies odds still suggest we will remain in EU ( probably a much more reliable indicator than opinion polls ) - but there is considerable uncertainty as to what position existing "expats" ( who are emigrees of UK and immigrants to their new country of residence). I would be very concerned if I lived in Gibraltar - but BREXIT could quickly result in UK citizens losing access to their adopted countries health care systems - and what arrangements would be made re income tax , CGT , pensions as well as payment of UK state retirement pensions to those outside of UK - and will they continue to be index-linked ? ( currently triple-locked ). An unexpected consequence of BREXIT might well be a large influx of UK citizens currently living abroad- returning to live in the UK. Those who have voted for BREXIT might be inviting such an ( unstoppable ) return of expats - most of whom are retired - and will likely place a considerable extra burden on our NHS . I think I would rather have the same number of EU citizens coming to UK instead - at least they are coming here to work.

      So - BREXIT might enforce a delay on your plans - until this sort of question is clarified.

      One thing is fairly certain though - a vote for BREXIT will weaken the pound further ( so less euros/£ ) wheres a vote to remain will cause the £ to strengthen against euro and $.

      I just hope that a very large %'age of UK citizens living abroad bother to register for a vote - a million or so of them might ensure we Remain .

    3. Given my plans I'm guessing most readers can easily guess which way I'll be voting :-)

      From what I've seen this is what I see as possibly happening to UK citizens already resident of an EU country (no expert here so if any readers have a view please do jump in here):
      - International laws will enable them to stay in their chosen EU country as residents.
      - Taxes would just follow Double Taxation Conventions that are already in place and for most were in place before we joined the EU.
      - If they are in receipt of a State Pension the UK may stop index linking of it. There is history here, for example, Australia is one that comes to mind. In our current low inflation environment I guess that wouldn't hurt immediately but with time it might start to bite those heavily dependent on it.
      - If they are in receipt of a State Pension the UK may stop the free/subsidised healthcare via the S1 that they receive in their new country.

      How could a Brexit affect the RIT family unit:
      - Our 'Heinz 57 Varieties' family history means we are fortunate enough to have a collection of passports of many colours. If we Brexit we will still have a single EU passport in the family unit so the door is still open.
      - That means Malta, Spain and Cyprus should be still no problem to emigrate to but the paperwork may just be a little more complicated.
      - Taxes would just be under the Double Taxation Convention as mentioned above.
      - Prior to State Pension Age we'll still have to do the same thing for healthcare. With Malta we'd just pay into the state system from day 1. With Spain we'd go private for a year and then pay into the convenio especial. With Cyprus we'd just go private.
      - Post State Pension Age it might be a very different story. Instead of registering the S1 enabling free/subsidised healthcare paid for by the UK we may have to pay ourselves. Malta would be easy as we'd just keep paying SSC as before and it's already budgeted. Spain would be a bit more problematic as the convenio especial cost goes from EUR60 per month to EUR157. Cyprus would be even more problematic as the private costs do escalate quite quickly once you get a few years under your belt. I'd have circa 21 years before this became a problem though and a lot could change in that time.
      - As I've written about before I am intending to make Class 3 NI contributions to secure my 35 years of contributions making me eligible for a full State Pension. This is my insurance policy against it all going wrong. If they stopped Index Linking it I might have to rethink that.
      - If the £ was still very weak when we were ready to buy (we'll be renting initially until we found our preferred location) we'd probably just delay purchase a few months until it sorted itself out. I can't see why long term the £ vs EUR just wouldn't keep doing their pre-Brexit thing. It's not like we're leaving the EURO or anything.

      I won't have the funds to escape to the Med until after the Brexit vote but no matter which way it goes if what I think could happen happens I think we'd still be off.

    4. Just to be aware that even if you have a 35 yr NIC record, if you have been contracted out, you may well not be eligible for the full flat rate state pension.

    5. Yes- my comment re what might happen to sterling after the referendum was a prediction for the short(ish)term. Who knows what will happen over the long term - but a euro was worth 70p a few months ago - now worth 80p- that's a 14% depreciation of sterling vs euro.

  4. Thanks for your work on this blog it is good food for thought. I found an interesting web site on asset allocation that you may be interested in.

  5. I'm not totally convinced your net wealth grew at all in Q1 2016. Sterling declined about 6% against the Euro in Q1 2016 and you intend to spend the rest of your life outside the UK, so measuring your wealth in sterling seems quite inappropriate to me

  6. Yes, but what has sterling being doing against the Euro before Q1 2016?


  8. It's been a while since you've gone a month without posting a new item.