Saturday, 14 October 2017

Quarter 3 2017 – Celebrating a 10 year anniversary

10 years ago I took a step back and looked at where my life was going.  Family life was great for which I was and remain incredibly fortunate.  However when I looked at my career I saw an industry that was being hollowed out, was being outsourced to the lowest cost country and where all the stuff that was fun was slowly being weighed down by stuff I disliked.  I was also 34 years of age and by that time had been working for 12 years across the globe yet when I looked at how that work had helped build our financial future I saw limited progress with the vast majority of the money I had earned having ‘disappeared’.

I was at a turning point, some might call it an early mid-life crisis, and clearly had to do something different.  Stay the course and I was looking at having to work until the nice government would let me retire but the risk I ran was finding myself without a career before that period.  So I started to think about retraining to do something different.  I’d also heard of people retiring a little earlier (this was before the millions of personal finance blogs appeared on the scene) and so I spoke to some financial planners about how they might be able to help me bring retirement forward a little. One of my strengths is quantitative analytics which meant I was able to work my way through their sales pitch which led me to the conclusion that while that route would help me bring retirement forward I would also be helping to bring their retirement forward as well.

In tinkering with those spreadsheets I also discovered something quite amazing.  If I could modestly increase my earnings, modestly decrease my spending, invest averagely and just not give my wealth accrued away to the financial services industry or tax man I could possibly bring my retirement forward  a long way.  I also thought I could do that myself and so in October 2007 I built a spreadsheet and a plan that would see me retire by age 50, a period of only 16 years.  I thought it also meant I didn’t need to retrain and instead just had to get my head down and run the plan I had built.

Over those last 10 years I haven’t increased my earnings modestly but instead more than tripled them after inflation effects by using a few simple techniques.  That has included no allegiance to any company and instead required me to work for 4 companies where I’ve had 6 job titles.  We didn’t decrease spending modestly but ended up switching our lives from one focused on standard of living to one focused on quality of life which freed significant cash for investing.  Financially I also went from an amateur learner to (hopefully not arrogantly) a teacher.  The end result wasn’t a journey of 16 years but instead a journey that looked like this:

8.7 years to financial independence and optional early retirement
Click to enlarge, 8.7 years to financial independence and optional early retirement

During the last 10 years we’ve also had a lot of fun trying to figure out where we’d like to live when work doesn’t dictate the location.  We‘ve been as far afield as Australia;

Australian suburbia, just not European enough for us
Click to enlarge, Australian suburbia, just not European enough for us

as close as Herefordshire;

A modest well insulated oak framed home in Herefordshire nearly won us over
Click to enlarge, A modest well insulated oak framed home in Herefordshire nearly won us over

but in the end our hearts always came back to a life on the Mediteranean.  So that’s where we are going before Brexit.

It’s been a fabulous 10 years but the job is not quite yet done so with the dividend laggards for quarter 3 2017 having now paid up and our feet still planted in the South East of England let’s see how 2017 continues to play out.

Financially, it continues to be reasonably successful with wealth as I write this post up £156,000 (14.1%) or in the currency of the Med a more modest EUR128,000 (9.9%) thanks to the Brexit omnishambles that continues to play out like a school yard spat.  Let’s look at the detail.

SAVE HARD

I continue to define Saving Hard differently than most personal finance bloggers.  For me it’s Gross Earnings (ie before taxes, a crucial difference) plus Employer 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 Employer 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.

My savings rate for the quarter was 47.3% against a plan of 55%.

RIT Savings Rate
Click to enlarge, RIT Savings Rate

In monetary terms that’s just under £83,000 added to my wealth year to date.  This is only a small £8,000 add from where I was in the middle of the year.  This is because with Mrs RIT now having retired, while I still pay exorbitant rates of tax, we decided from when she retired early to my FIRE date I’ll only be retaining any savings that can be tax efficiently invested.  The rest will go to her fun money stash.

Saving Hard score: Conceded Pass.  Well below plan but with us only spending 10.0% of my gross earnings, with the rest lost to tax, it’s still a reasonable effort.

INVEST WISELY

Investment return 07 January 2017 to 07 October has been a reasonable 5.4%.  Total wealth is now £1,267,191 or EUR1,424,145.

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)

My investing strategy continues largely in line with that developed at the start of my DIY journey except for the 3 goals that have now been in play for some time and which are now necessary given my closeness to FIRE.

The first was to continue to increase cash and cash like holdings (NS&I Index Linked Savings Certificates predominantly) to give the option of a family home purchase in the Mediterranean.  Something that is putting a drag on my investment return but is a conscious decision.  This now stands at £331,000 (EUR372,000) which after a bit of negotiation is enough to buy our dream home.  Goal achieved.

The second is to ‘ensure’ I can live off dividends alone in FIRE.  After the home purchase I have 2.8 years of spending left in cash so that’s close to my target of 3 years.  I should easily achieve that by the time I FIRE.  On top of that dividends in 2017 are looking like they’ll cover my full FIRE spending 1.1 times which I’m also happy with as during a downturn I have plenty of discretionary spending budgeted for that can be easily trimmed back.  With a fair wind that cover will reach 1.2 times by the time I FIRE which I think would make me pretty much bullet proof.  If that doesn’t work I think I will have wasted my time on this goal and instead should have just bought an undergorund bunker, guns, ammo, beans and antibiotics.

In monetary terms year to date I’ve pulled in £22,819 worth of dividends meaning the year should end with at least £26,861, which is EUR30,165 if I convert it at the worst Euro exchange rate since its inception.

RIT Annual Dividends
Click to enlarge, RIT Annual Dividends

The third is my new goal which is to start working towards my Early Retirement Financial Strategy.  This is what my asset allocation looks like today.

Current RIT Asset Allocations
Click to enlarge, Current RIT Asset Allocations

However, if I net off a home purchase it turns into this.  Note: historically I’ve always counted my NS&I Index Linked Savings Certificates as a bond.

Current RIT Asset Allocations less home purchase
Click to enlarge, Current RIT Asset Allocations less home purchase

I’m still a little overweight emerging markets and UK equities but I’d certainly go into Early Retirement (ER) looking like that.

I continue to invest as tax efficiently as possible with my tax efficient holdings now consisting of:
  • 44.5% held within Pension Wrappers with the majority being within a Youinvest SIPP and Hargreaves Lansdown Vantage SIPP
  • 8.7% held within the no longer available NS&I Index Linked Savings Certificates (ILSC’s)
  • 12.3% held within a TD Trading ISA.  

Tax efficiency score: Pass.  At the end of 2016 this was 65.8% and by the middle of 2017 this had fallen to 64.6%.  With all my savings that can no longer be saved tax efficiently now being diverted to a vey tax efficient retired Mrs RIT I’m back up to 65.5%.  This should now continue to improve up to FIRE.

Investment expenses also continue to be treated like the enemy and today are the same 0.22% as was seen at mid-year.  At the end of 2016 they were 0.25% so this remains a nice improvement.

Minimise expenses score: PassMore actions taken in this quarter to keep those investing expenses down.  Certainly better in my pocket than that of a financial services corporation.

In the scheme of a lifetime of investing this year to date is insignificant.  I’m all about time in the market and not timing the market so let’s zoom out and look at my performance since I started down this DIY road.  I remain happy with my long run nominal Compound Annual Growth Rate (CAGR) of 6.9% which is a real (using RPI) return of 4.0%.  The chart below tells the story.  Note that the chart assumes a starting sum of £10,000 which was 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 my benchmark has managed a CAGR of 5.8%.  So I have 1.1% of out performance when compared to the benchmark I wanted to beat from early days  My whole investment strategy since 2007 has been to generate a long term real return of 4.0% and for a large part of my journey I was well behind but it seems it might not have been a fetched target after all.

Long term investment return score: Pass.  Right on plan but just when will this bull market become a bear.  It’s been a great run.

RETIRE EARLY

Combined Saving Hard and Investing Wisely should eventually give Early Financial Independence and the option of Retiring Early.  I’m already Financially Independent – that took me 8.7 years.  The question now is when to Retire Early.  Today is my 10 year anniversary of this great journey and if I play out one more year I still have 9 months to run.  I currently have a real problem with this and really think the answer is one more year’ish but I won’t behave rashly.

My final chart for today shows just what is possible if you start, stay determined and never ever become a victim.

RIT Progress Towards Retirement
Click to enlarge, RIT Progress Towards Retirement

Retiring early score: Conceded Pass.  Financially I’m there with retirement having been possible as early as age 43.  I think I now just need to grow a pair and pull the FIRE’ing pin.  The mission really is accomplished.

As always please do your own research.

How is 2017 playing out for you?  Are you having or will you soon have an important anniversary?

17 comments:

  1. Your long run rate of return is impressive but I do wonder if this has been skewed. Your early investment starts just as we're coming out of the worst market crash in decades so you'll have benefited from a pound cost average scheme which started from a very low entry point.

    I'm looking at my own projections and struggling to see how I can achieve my own FIRE point in the time frame you have. I'm conservatively thinking my long run return might be closer to 5% if I'm lucky rather than 7%. And this makes a significant difference.

    Also, I've lately been questioning my hard core savings mode. My partner and I have been taking some stress lately and I'm struggling to maintain my level of output at work due to a little bit of demotivation. I'm wondering if I need to tweak a few things in life to bring that motivation back. After all, it won't pay off if I burn out before I even achieve my goal. For example, we're thinking of getting a house cleaner. This is a cost and something we do ourselves currently and I wouldn't have considered a year or two ago. But at the moment it seems like it might be a small monetary sacrifice that may make a bit of a difference to our lives and help us stay focused. There are a few other things such as this that I'm reconsidering and looking at the end result, a few small tweaks might mean one month of extra work at the end of FIRE but could actually make positive noticeable differences right now.

    Have you ever had to make compromises like this? You seem more determined and willing to put up with "crap" than I might be.

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    1. My spending journey has never been about minimal spending, extreme frugality or achieving FIRE in the shortest time. Compared to some in the UK I probably even come across as wasteful and a spendthrift. For us it's all about maximising quality of life which means spending on the things that bring real value and then buying just enough of that. Some examples of where we spend money for quality:
      - I generally buy my lunch while at work which costs me circa £60 per month. This gives me family time that I value. I do however drink the free work coffee/tea as I don't value Starbucks/Costa/.
      - We travel. 2 trips abroad so far and 1 more trip before year end. This year that has so far cost us £484 per month. It's our biggest non-essential spend area.
      - When we moved flats we decided to pay a little extra rent for a great view of a green space. It made a huge difference to our wellbeing.

      It's about chasing FIRE while living and the same holds in FIRE. In FIRE I have 47% of my expected spending allocated to discretionary spending. Ie stuff that brings us quality of life.

      If a cleaner would improve your quality of life I'd say go for it.

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    2. Great, thanks for the response and advice :)

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    3. No problem. It's why this blog is still here. To share experiences with each other.

      Just remember it's not advice though as I'm not licensed to extract large expenses from you in exchange for 'advice'. I'm just sharing what I do.

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    4. If you're feeling demotivated at work, perhaps you need a change of role/workplace. I'm not really sure how getting a cleaner will help with that, but its your money to spend as you see fit!

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    5. Congrats on the 10 year anniversary, RIT! Your journey is incredible and continues to motivate me. As regards to @mwpt getting a cleaner, I think I understand the reasoning - work's not great and then when you get home, you have no motivation to do the housework and it all starts piling up which adds to the stress. Getting someone else to do the cleaning means you don't have to worry about keeping on top of it. If you can afford it and it's going to make your life easier, then I too say go for it.

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    6. Thanks for the wishes weenie. I'm front running you by a few years so I'm glad to provide you with some motivation. Your story is also a very positive one.

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  2. Thanks for sharing your journey over the last ~10 years. Good luck with the remaining months of your “one more year”, and beyond.

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  3. "I’m all about time in the market and not timing the market": what if the market decides to take a different view? I find two charts here helpful.
    https://www.patplc.co.uk/sites/default/files/documents/PAT%20AGM%202017.pdf

    Scroll down to p6, the plot of CAPE since 1881 (for some approximation to the S&P presumably). Observe that we are in the red zone i.e. equities are in the top quintile of being expensive. Scroll to p7: history suggests that over the next 10 years we can expect annualised real returns of only 1.7%.

    History may be no guide: purportedly we've been enjoying the lowest interest rates since records began about 5,000 years ago. That would make me rather cautious, probably especially cautious about fixed interest bonds and US equities. Hold on to those ILSCs.

    Minor thought: how does Cyprus (or Spain or wherever) tax the index-linking on ILSCs? As interest?

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    Replies
    1. Even though I rarely post about CAPE these days and no longer use it to set my allocations I do still update my dataset occasionally. What's interesting is that in the US CAPE is at 31.2 against a long run average of 16.8 and has only ever been higher on 2 occasions - December 1999 when it reached 44.2 and September 1929 when it reached 32.6. I think we all know what happened next on those occasions.

      Different time periods on the data but what I also find interesting is that both the UK and Aus datasets which I also calculate CAPE for carry nothing like the overvaluation that we see with the US markets. In fact both show as slightly undervalued last time I measured.

      Interesting times...

      I'm not a tax expert but this is my understanding on the ILSC's:
      - Cyprus would see it as interest so as a non-domicile no tax for 17 years and then I'd pay no tax but I would pay the Special Contribution for Defence on it which is 30%.
      - Spain would see it as interest so I'd be taxed at 21% on it (tax bands are 19%, 21% and 23%).

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  4. An inspiration as always, RIT.

    I passed FI late last year - and am now in the process of negotiating going part-time and focussing my role on what I do best. I continue to pack away 70% of my salary into my pension although that number will change when I go part-time. Elsewhere, I still reinvest interest payment/dividends and add about 20% of my net pay to the coffers.

    Workwise, I feel like I'm on a second wind as new bosses get me and are finding interesting work.

    Made a few needed tweaks to my diet and exercise routines which have improved health and performance. Only a broken ankle is holding me back at the moment!

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  5. I think from your position the observations are spot on. For me, looking in, I am concerned about the market and wary of taking any exposure at the moment.....but that is because from my position I have a very high cash fund to offset other risks.

    Re the cleaner - I never would. For me it keeps it real, great exercise and very chathatic. I used to develop properties and I cleaned and laboured on every one despite a gruelling work schedule (to be fair on a development being prepared to get your hands dirty is a leadership quality not missed by the trades supporting you).

    But we are all very different, if I can't convince you cleaning is great and invigorating...then it's your money and a cleaner is a reasonable choice. I Certainly wouldn't fit a window, run an electric cable or fix a roof but many in my position might try...for me I am better out earning to pay for someone else to do a job I can't or don't want to (or is inefficient if I did do it).

    So you draw the line in which jobs those are. My bias is our town (North Yorks) is full of couples earning £50k each but with gardeners, cleaners etc almost as status symbols. Those guys struggle with health and weight and pay gym subscriptions when a weekend clean and garden for 4 hours is just the ticket. Our town might be a little unique though, high earners no wealth.

    P321

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  6. Thank you for sharing your journey and milestones with us.

    Although I live in Hong Kong that has a totally different pension system than that in the UK, I think the FIRE strategy is pretty much the same regardless of where we are.

    Wish you a fulfilling life when you start enjoying your FIRE :)

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  7. The uptick over the last two years is a hockey stick. Looking at your graph, and with a downturn that reverted to the mean you’d still be over a million. To me, that what OMY is all about, such protection. Enjoy the race the line.

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  8. I think you’re exposing yourself to a lot of risk buying a house that early in the journey. Can’t you rent for a year or two before taking the plunge to really ascertain if you like the area and will be happy there.

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  9. Hi RIT, can't believe it's been ten years - looking at dearieme's comments above reminds me it was your FTSE CAPE analysis that first brought me to your site. at the time I thought retiring in 15 years was ambitious and you've achieved it in less than 9 - and still going strong.

    In terms of my journey - I just found out my work place SIPP has reduced the all in charge (platform + fund) to 12bps, which I think is pretty competitive. Not long before this I told the regional CEO at a workshop that I'd switched to HL as platform fee was effectively 8bps. Most likely coincidence but I felt it import to articulate how great an impact fees have on investment performance, something that you've always spelled out. Of course there is an element of self-interest for the Company in wanting to retain funds, as making charging more competitive and losing 50% of the fee is still better than losing 100% if the funds transfer out altogether.

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