“Financial independence is generally used to describe the state of having sufficient personal wealth to live, without having to work actively for basic necessities. For financially independent people, their assets generate income that is greater than their expenses.”
3,186 days ago I started on a journey to early Retirement which at the time I defined as work becoming optional. Only later did I discover that the more appropriate terminology for what I was chasing was FIRE – financially independent and retired early. Every week since that journey started I’ve sat down and updated my financial position and progress to FIRE. Today this stared back at me:
Click to enlarge, Path trodden towards financial independence
One of these is the risk that my State Pension might not be triple locked or at least increased with inflation. Now in my financial planning I’ve never assumed I’d be entitled but I’d always planned on continuing to pay in voluntarily as my insurance policy against financial Armageddon. Now that insurance policy might be almost worthless as we all know the damage that inflation can inflict. A second is the risk that at State Pension age I won’t be entitled to the same public healthcare as a local in my new adopted EU country courtesy of UK PLC. This might mean private healthcare into our dotage but what if we do fall into poor health and our chosen private provider decides we’re no longer profitable enough for them.
At the other end of the scale we’ve seen the government of one of my potential homes, Cyprus, reduce Immovable Property Tax (IPT), which is the equivalent of Council Tax, by 75% in 2016 with a plan to then subsequently abolish it in 2017. This is a country with so much debt that the Troika stepped in to bail them out only a few short years ago and now they’re cutting taxes by 75% or more. Sure it plays into my hands for now but it’s not much good if it leads to bust and closed cash points later.
So in light of all of this what right do I actually have to call myself financially independent? Below is my justification.
The RIT household could today get on a plane destined for the Mediterranean and once Immigration had been cleared could at current exchange rates use some of my £1,014,000 to buy this (even though we’ll actually rent for at least 6 months):
Click to enlarge, Detached, 3 bedroom, 120 sqm home in Paphos, Cyprus
Which comes with one of these:
Click to enlarge, I can see myself in there on a weekday summer evening
And which has views like this:
Click to enlarge, Yes those are sea views
Ignoring any house price negotiation I’d most certainly be up for and after purchase costs my wealth would quickly be down to £799,000. For some time now I’ve been saying I will create an annual income from my wealth by drawing down at 2.5%. After this research, this research and this modelling I’m still happy with that rate. That gives me £19,973 per annum to live a luxurious lifestyle. Is it possible?
I’ve always said that my plan was to try and live off the dividends of my portfolio in FIRE. In 2016 I should bring in £20,382 worth of dividends. On top of that I can add £1,921 worth of dividends that will come from again transferring my expensive insurance company based work pension with its accumulation funds into a low cost SIPP where I’ll buy low cost OEIC’s or ETF’s. So I’ll be spending 90% of the dividends I earn and reinvesting the rest. I’m ok with that.
Click to enlarge, £20,382 worth of dividends expected in 2016
I now need to run the home I’ve just bought. I’ve assumed repairs will run to 1% of the home value. On top of that I’ll need electricity, heating where I’ve assumed an open fire for 4 months of the year (after all this is to be a luxurious FIRE), water and home/contents insurance. I’ll also have IPT and local authority fees. I estimate that lot will cost me EUR5,139 per annum so my EUR22,429 just became EUR17,291.
A car will be a complete luxury, but hey why not, we want the freedom to live outside of the main towns and to travel at will. I’m assuming I buy a new (even if I actually will probably buy second hand) small hatchback and write its value off completely over 10 years which is conservative. I’ll then need to insure it, get some breakdown cover for it, tax it, occasionally change tyres/service it and buy some fuel for it which will be for fun only rather than commuting. My car habit should cost me EUR2,304 per annum leaving me with EUR14,987.
Click to enlarge, A small hatchback will be more than adequate
Even pre-government tinkering I’ve known we’ll need to pay for healthcare up until State Pension age. One positive is that in my planning I’ve always assumed I’ll be paying for it forever so post-Brexit changes don’t concern me greatly financially. Where I do still have risk is if a private company decides in our dotage to stop covering us or puts the prices to such an extreme that they are saying they don’t want to cover us and we can’t get coverage elsewhere. The way I look at this is that worst case we end up in another Med country where we can buy public healthcare or even in an extreme end up back in the UK. If we don’t go we stay in the UK and if we do go we might end up back in the UK but will have many years of happy memories living our dream. I think I’m ok with that.
On top of healthcare we’ll also pay voluntary Class 3 National Insurance (NI) contributions, to build 35 years worth, which should make us eligible for a full State Pensions. Once we have enough that money will then be available for increased healthcare premiums which will occur as we age. Best case is we get the pension which will be 100% bonus unplanned spending, neutral case is it remains ‘inflation linked’ so we keep our insurance policy and worst case is it loses its ‘inflation linking’. Again, it will only ever actually be required if my portfolio blows up for some reason and so very worst case is we live off the State Pension in the Med until it’s value is eroded too severely by inflation. After that we end up back in the UK to see out our time. Life could be worse.
Healthcare and NI contributions are planned to run to EUR3,868 per annum leaving me with earnings of EUR11,119.
Food wise we currently eat very well. I’m assuming we keep eating well. On top of that we will also need to communicate with the outside world so will need internet and a mobile phone. That all takes another EUR4,128 leaving EUR6,991.
So I have EUR6,991 per annum leftover for fun, holidays, personal effect like clothes and one off’s. That is far more than I spend today and also only has to cover my costs. On top of that my better half has her savings/investments which will fund her fun/holiday/etc costs and her fun pot is larger than mine. So now back to what if the £ collapses post Brexit? If I was to cut my discretionary spending by a third I could cope with an exchange rate at parity forever. If I was then to allow the home to degrade over time (and what old persons home doesn’t) and not replace bathrooms, kitchen etc but still replace things like boilers it could get to as low as 0.95 and I’d still be ok.
My plan has me buying a luxurious home, with a pool and sea views, that is far bigger and affluent than I have ever lived in. It allows me to continually buy new cars. We have money to stay healthy both by eating well and by ensuring we have adequate health insurance. I have more discretionary spending money than I’ve ever had in my life. I can also cope with a GBP to EUR exchange rate down to 0.95 and still live a very happy life as my tastes are inexpensive. Finally, the worst case seems to be that we end up back in the UK if political turmoil combined with financial Armageddon occurs. I think I’ve earned the right to call myself Financially Independent or FI based on that.
Now what about getting on with it and moving forward with the Retired Early (RE) bit I hear you ask? My problem here is that I just never expected to reach FI so quickly. To put it in perspective year to date my wealth is up some £160,000! Even just back in late May I was saying it would take me 6 months at least to reach the point of FIRE. I’ve now made some commitments which mean we won’t actually be able to be in the Med until late spring/early summer 2017. The negative to this is that I have to keep working at a job that is becoming tougher and tougher. The positive is that if Mr Market just performs to average between saving and investing I could add another £150,000 to my wealth over that time. That truly gives me options – a more posh home, a smarter car, more travel or probably the most likely just more wealth for the same spending which buys me even more withdrawal rate or exchange rate protection. Is it one more year syndrome (OMY)? I don’t think so. More pleasantly surprised syndrome from somebody who IMHO built a plan that has just worked.
As always DYOR.