Saturday, 14 July 2018

2018 Half 1 Review, The penultimate accumulation post

A little over ten and a half years ago I started to accumulate wealth with a vague notion of work becoming optional in a relatively short time.  At the time I was calling this Early Retirement.  It was a time when the more famous sites like Mr Money Mustache or Early Retirement Extreme didn’t even exist.  It was also a time when terms like FIRE also didn’t exist.  It was a time of self discovery vs being able to learn from those that had walked the path.

With my resignation now in and FIRE now just over the horizon this post series about accumulating wealth is fast drawing to a close.  This is the penultimate one.  The second last post where I ramble on about how I’m try to accrue wealth quickly.  It will soon become all about managing drawdown to protect my wealth.  I’m looking forward to it.

To stay on the subject of accumulation, in the first half of 2018 wealth growth was a modest 2.8% or £36,000.  If I was at the start of my journey the word modest would not be one I would be using to describe wealth growth of £36,000 in 6 months but as someone looking back at a journey that has managed annualised wealth growth of 21.4% it is modest.  Let’s look at the details.

SAVE HARD

I unapologetically 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.  I finished the quarter with an uninspiring Savings Rate of 42.3% against a plan of 55.0%.

RIT Savings Rate
Click to enlarge, RIT Savings Rate

This is just a remnant of me now being towards the end of my accrual journey.  I’m at peak earnings which includes taxes at 45% (the Additional Rate) plus 2% national insurance as well.  On top of that I’m also seeing peak tax on my non-tax efficient investments.

The bit I can control, my spending, is well in check.  Year to date, excluding work and rent costs, that’s a reasonable £659 per month.  It’s been helped greatly by us not paying for a summer holiday or summer FIRE location research.  We’ve decided this year to just keep our heads down over the summer as we now have our FIRE location picked out and we just want to focus on our FIRE preparations.  After all that will allow us to be on holiday anytime we like.

RIT Spending
Click to enlarge, RIT Spending

Saving Hard score: Pass.  Well below the target of 55.0% that I set many years ago but when I net off taxes that leaps to 84.2%.  That’s good enough for me.

INVEST WISELY

2018 H1 (06 January 2018 to 07 July 2018) investment return closed at a very modest 0.3%.

Investment wise I continue to morph the portfolio from one focused on accumulation to one preparing me for drawdown in FIRE.  This means:
  • Cash and cash like holdings (NS&I Index Linked Savings Certificates predominantly) for the non-mortgaged home purchase but also to give me a few years of cash buffer as I enter FIRE continued to improve.  At the close of 2017 that stash was sitting at £334,000 and is £340,000 today.  Plenty for what we’re trying to do and I’ll share that in subsequent posts.
  • I’m also trying to ‘ensure’ I can live off dividends alone in FIRE.  2017 total dividends were £27,384 and this year is looking like a very modest increase to something around £27,644.  For a while now I’ve been working with a forever assumed Euro exchange rate of 1.123 (which of course may prove to be a mistake given the Brexit omnishambles but I’m sticking with it for now) which would make my 2018 dividends EUR31,045.  In contrast my latest proliferate Med FIRE spending, a budget where 47% of spend is for fun, is expected to run to EUR27,593 giving me spending cover of 1.13.  Given how much I can wind back spending in a severe bear market this is looking healthy. 
RIT Annual Dividends
Click to enlarge, RIT Annual Dividends

For completeness this is what my asset allocation looks like today.

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

I continue to invest as tax efficiently as possible with my tax efficient holdings now consisting of:
  • 44.1% held within Pension Wrappers with the majority being within a Youinvest SIPP and Hargreaves Lansdown Vantage SIPP
  • 8.3% held within the no longer available NS&I Index Linked Savings Certificates (ILSC’s)
  • 14.5% held within an Interactive Investors Stocks and Shares ISA. 
Tax efficiency score: Pass.  At the end of 2017 this was 66.3% and half way through 2018 it’s now 66.9%.  This is helped by all new money that can’t be tax sheltered now being passed directly to the already FIRE’d Mrs RIT for investing in her fun money portfolio.

Investment expenses also continue to be treated like the enemy.  2017 finished with expenses at 0.23%.  Today they are at 0.22% helped by a partial pension transfer and by not making previous investing mistakes like buying expensive active funds that I can’t currently sell given my current earnings as they don’t have UK Distributor/Reporting Status.

Minimise expenses score: Pass.  A reduction by taking some conscious actions throughout the first half of the year.  0.01% doesn’t sound like much but given my current wealth that’s £135 a year staying in my pocket.  I’ll take that.

In the scheme of a lifetime of investing this year 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’m relatively happy with my long run nominal 6.7% which is a real (using RPI) return of 3.8%.  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

Long term investment return score: Conceeded Pass.  My whole investment strategy since 2007 has been about generating a long term real return of 4%.  3.8% is slightly below that but good enough for my planned FIRE.  That said just how much longer can this bull market run – a bad sequence of returns could just be about to occur at a time when I won’t be able to be able to buy the assets that go on sale.  That said provided that sequence of returns is no worse than anything seen historically I’ll still be golden.

RETIRE EARLY

I’ve proven that combining Saving Hard and Investing Wisely gives Early Financial Independence and the option of Retiring Early.  Both the theory and my personal experience says that if you want FIRE it’s the first of those that is the priority.  This is the contribution I’ve personally seen from each element.

RIT Contributions from Saving Hard and Investing Wisely
Click to enlarge, RIT Contributions from Saving Hard and Investing Wisely

As mentioned above I’ve now been on this journey for 10.5 years and all that Saving Hard and Investing Wisely adds up.  My progress to FIRE now looks like this:

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

Wealth today sits at £1,345,000 which is 123% of what I thought I’d need in FIRE.  Looking back I’m glad I did my One More Year(s).  That extra buffer feels really good.  That wealth has come from nothing more than hard graft, considered spending and taking some time to focus on some selected investment fundamentals.  Netting off the home purchase, converting to Euro’s and now with proliferate spending in the FIRE calculation that’s a starting withdrawal rate of 2.2% against a planned 2.5%.  I don’t think it gets much better than that...

How has 2018 started out for you?

As always please do your own research.

29 comments:

  1. (i) Should you perhaps consider setting up a flexible mortgage on your new house (if such things are available in Spain)? It could give you welcome flexibility at low cost - e.g. it could give you the possibility of raising cash with which to buy equities if the markets take a tumble.

    (ii) Diversification. (a) How about some gold? It acts somewhat like FX and also is an investment in monetary disorder. A depression with companies, governments, and currencies defaulting? Gold's the thing. A very high inflation rate? Hurray for gold. It can be expensive to store but on the other hand you can store it somewhere that gives you great confidence e.g. store sovereigns at the Royal Mint. No income tax to pay, no VAT, and no CGT (at least no UK CGT). Someone living in the Eurozone ought to be worried about the horrible monetary disorder that will ensue when the Euro finally fails or the financial repressions that will take place to defend the Euro. (Remember poor Greece.) (b) Commodities. Silver behaves as a commodity and you can buy it in a non-synthetic way that doesn't depend on a web of financial counterparties honouring futures and options (whatever they may be). Heavens, you can even store it at the aforesaid RM. Neither gold nor silver need use up any space in your tax-shelter pensions and ISAs.

    (iii) Insurances. Is it worth taking out any insurance (Life? Critical illness?) in the familiar British system before you leave?

    (iv) "I’m all about time in the market and not timing the market": easily said by a chap whose investing has taken place in an era of falling or near-zero interest rates. But is it wise? Consider this paper:
    https://www.york.ac.uk/media/economics/documents/discussionpapers/2017/1706.pdf

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    1. As always some good food for thought there dearieme. Some immediate thoughts:
      - Spain? Post coming up soon. Is it a forever home? We don't know but what we do know is that it's a very beautiful part of the world and will likely suit the next stage of our life very well.
      - Flexible mortgage? I don't think that's the way we'll go. This is because we're not trying to improve our average returns as back testing, admittedly using US based data, suggests I'll end up with real wealth more than 3x what I'll start with in real average terms. Instead I'm trying to protect myself from a 'worst case' average sequence of returns. To do that I want to bring forward essential future spending to the 'good times'. So that means buying a home with cash but also things like minimising future energy costs through things like Photovoltaic cells given our Med location.
      - Gold. I have 'physical' in the form of PHGP buy I don't have physical 'buried in the back garden'. I've never really gone as far as an EOTWAWKI investing philosophy. Once in our new location I'll definitely hide some cash and who knows might even 'bury' some physical gold.
      - Insurances. The way I think about insurance is that overall the collective who buy insurance lose as to stay solvent insurance companies have operational costs, shareholders to satisfy and taxes to pay. At the individual level I then bolt on a risk x severity type of thing. With that in mind:
      -- Life/Critical Illness. Back testing and I'm going to die with significant more wealth than I ever started with. The income spinning off from that wealth should keep the RIT family that remains in good health. If that wealth collapsed then it's likely the insurance companies would be collapsing as well so insurance wouldn't be worth the paper it's written on.
      -- The risk of our home burning down is low but the severity is high as to replace it would take about 20% of my remaining wealth. The risk of me damaging a very modest car is higher but the severity of replacement is low as I've seen higher daily movements in my wealth from Mr Market. Therefore we'll insure our home but not our modest contents. I'll buy third party car insurance in case I hit a Lamborghini driven by all those who maximised pension freedoms but am not worried about replacement if I put myself in a ditch.
      -- Heal insurance. Registration and residency will be dependent on private insurance so we'll definitely be buying that.
      - Time in vs timing the market. Thanks for the link. Again back testing says I can weather storms that are worse than we've ever seen historically which includes high inflation, bankers panics, depressions and world wars. I can also reduce my spending by circa 50% if under duress. If it gets worse than that I'm probably going to be looking for bottled water, tinned sardines, guns and ammo.

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  2. Hi RIT, thanks for the update. Wow - I didn't realise you pre-dated ERE and MMM, I'm not sure I would have been able to start my journey without those sites as well as your own.

    I'm really impressed at the £200 per month food spending. Is that the whole family or just your own share? We spend at least 3 times that amount for a family of 4 people. I've noticed a lot of bloggers spending tiny amounts on food shopping and wondered how they do it, especially as many eschew cheap carbs like pasta. Given that health is more important than wealth for a long and happy "retirement", is the diet that you are funding from that £200 a sustainable one?

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    1. The best guide on diet is Jeeves: eat fish. Tins of sardines are inexpensive. You can get variety by eating Canadian ones (little herring) or the usual European ones (little pilchards). Use Aldi and even smoked salmon isn't terribly expensive. Mackerel pâté is also widely available at no great cost.

      The other thing to look at is offal: the supermarkets practically give chicken livers away, for example. A bit of bacon, a bit of time in the kitchen and, voilà, chicken liver pâté. A bit of toast and celery - food of the Gods.

      In winter there's a fine range of European peasant foods to enjoy - Bigos, Himmel und Erde, Haggis, Tripe, Steak and Kidney Pie, Broths ...

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    2. @David, dearieme and bc1050

      I believe MMM started blogging in 2011 and ERE in 2008. I didn't start blogging until 2009 but actually started on my journey in late 2007 so it was a lonely start :-)

      I've had a few people comment on our food spend. It doesn't feel like we're doing anything special now but we have made a few conscious choices over the years:
      - we gave up alcohol many years ago and it is one of the best things we've ever done. It really helped with mind and body. The most expensive tipple now is peppermint tea.
      - the lowest priced grocery shop I've written about both in my book, in posts here and as alluded to by bc1050 definitely works. Let me give a simple example. During the week we ate a very tasty pea based soup. The frozen peas we used cost less than £1 per kg and I could have spent up to £3.14 per kg. Multiple that across multiple products and it makes a big difference.
      - while neither of us are vegetarian we do eat a very vegetarian based diet using wherever possible in season vegetables. Meat that is worth eating is expensive. It's also not overly planet friendly.
      - I look to my left just now and I also see a fruit bowl full of seasonal fruits.
      - we try and cook/make everything from scratch.

      Is it sustainable. I'm not a nutritionist but every plate of food we eat is full of multiple colours of fruit and vegetables. Simply I always think a plate of brown food bad and a plate of a variety of colours good. Where I think I might see variation is that I believe seasonal produce in our new home is less expensive but as I move from a "sedantary" to a "more active outdoor" lifestyle I expect my daily calorie intake to increase. Overall that might increase costs but even if they double I think we're still good given the current 2.2% WR and discretionary spending levels available.

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  3. We estimate 400 euros a month for 2 of us eating a healthy but not luxury diet of fresh food while living in Spain so I think 200 could be too low. That said on my last visit in June we went in past an Aldi store there and some of the prices were much lower than what I expected. They had a 6 pack of bottled beer for 2.4 euros so could be cheaper once you know the right places to buy. Then there are the utility bills and costs for keeping the garden and pool in good condition (community charges if you live in an apartment complex). Medical costs and internet, mobile phones, etc all add up. That said this is based on Spain so perhaps its cheaper in Cyprus

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    1. Moving away from food (we're budgeting EUR250/month) to some of the other costs you mention:
      - the home will likely include solar hot water. We're then budgeting EUR1,200 in electricity to run a modest home and pool. We'll likely get PV cells which would reduce that but would consume some capital. On top of that we'll need heating for 2-3 months of the year which we'll achieve with wood/pellets where we've budgeted EUR400. What do your current costs annually look like?
      - for home/garden maintenance I genuinely don't know as we've been 'dirty renters' for a long time. I'm budgeting 1% of the home purchase, so about EUR2,500, per annum. Do you have a view here?
      - community charges should be low/non-existent and council tax will be significantly less than I currently pay at a few hundred Euro's per annum.
      - medical insurance and class 3 NI contributions will be our biggest cost at over EUR3,500 per annum. That will also increase annually as we age but at some point the class 3 payments will decrease. We exactly know the costs here as we have quotes.
      - internet and mobile we also know costs exactly as that's available online.
      - on top of the above I'm also budgeting selected insurances, car depreciation/fuel/tax and the all important fun/holidays.

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    2. Hi RIT,

      Some comments...

      1. I am still researching whether I will go for the gas water heater or the solar system. The thing that was putting me off solar vs gas was the "sun tax" in spain that taxes you for having solar although I hear this law is to be axed so I will revisit this. You can google for spain sun tax to read more on it. We are also going for a wood burner to keep heating costs down. Some people I have met in Marbella have been telling me they use their heating system more than the air conditioning so not sure what the actual use will be. Electricity is expensive in spain and my most recent bill was over 200 euros a month and we havent even moved in yet. That was just keeping the pool filters running

      2. We have a 1000m2 plot to take care of and currently paying the gardener 180 euros a month plus another 150 for the pool guy. Once we move in we shouldn't need the pool guy and perhaps reduce the time needed for the gardener. If you are in an apartment community the costs will be shared among all the owners and will depend on where you are located. They should be able to tell you exactly what this is.

      3. Our property tax is 200 euros per month

      4. I have medical costs at around 180 per month for both of us. I am told the quality of healthcare is very good.

      5. I am still pondering on the car and whether I will buy one or lease one. I have seen some sites in Spanish that offer what appeared to be quite good deals but havent looked into the details of this yet. Not sure if I will need to have some income locally to get accepted for a lease deal.

      6. I will also add in around 90 euros per month for a quality gym membership with a range of exercise classes included

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    3. Hi bc

      The sun tax must have been one of the most ridiculous things a government has ever done and just must have involved the exchange of brown envelopes somewhere along the line. A country with abundant sunshine discouraging green energy perfectly suited to the climate. It was actually an unfavourable line item in our final decision spreadsheet as Cyprus has a net metering system which seems more appropriate.

      EUR200 a month seems like a lot for electricity particularly given you are not living there. I know you have to run the pool but you shouldn't be using much energy otherwise at the moment. I don't have first hand experience (and of course it depends on size) but on one of the blogs I frequent they shared their Southern Spain leccy costs at EUR100/month for a 3 bed/2 bath/pool villa.

      We haven't decided on a wood burner or pellet burner yet. If out purchased home comes with one then decision made. If it doesn't then some research will be in order. I'm attracted by the ability of the pellet burner to moderate temperature more tightly.

      I'l be the gardener and pool guy :-) although though it sounds like we might be looking for something a little smaller. A home of 120-140m2 with land of 500-700m2 will do us nicely. Enough space for some fruit trees, an olive tree, a pool, a gazebo, a BBQ and a little bit of grass.

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  4. Hi RIT, great to see you’ve FIRE’d. I’ll be interested to follow your de-accumulation journey - I’m sure I’ll get some useful tips for when I take the plunge. On the subject of TIPS I’m looking at the IShares US Treasury Index-linked ETFs (ITPS/TI5G) as a hedge against inflation. I’m not a fan of gold as provides no income. At least TIPS pay a real yield when inflation is benign and will gain in value if there is unexpected inflation. All the best in your retirement - have you completed your notice period?

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    1. Hi Prospector

      Not quite FIREd yet. Have just resigned but won't be in the Med and FIREd until the late Autumn as I have a reasonably lengthy notice period to work out.

      Interesting you're looking at ITPS. A quick look shows it yielding a real 0.77% vs my INXG yielding a (frankly ridiculous) real -1.62%. I assume both are in respect of the countries relative inflation but even allowing for that the yield to maturity must be at least 1% more favourable to ITPS. What do you think is driving that? The requirement for DB pensions et al to hold inflation linked gilts?

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    2. Yes massive dislocation in the UK index linked gilt market due to demand from pension schemes wanting to hedge inflation linked benefits with relatively little supply. In the US supply and demand seem much better balanced. For a UK investor investing in ITPS you run currency risk. IIRC ITPG and TI5G are currency hedged long and short dated US tip ETFs respectively. Though if you buy a currency hedged fund then you face UK inflation outpacing US and not gaining on the exchange rate (though you are protected from a GBP relief rally if a Brexit deal does manage to get sorted)

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    3. Agree fully. Some very good food for thought here. Given the part of the world I'm heading a EUR denominated inflation linked bond fund might be even more appropriate but they're also on a negative yield albeit better than the UK at -0.47%.

      Maybe for another day but given the current dislocations and that I now have far more than I should ever need I'm actually considering increasing my risk profile with time by just not rebalancing going forwards which should give me a FIRE "rising equity glide path". A bit more work involved yet but initial backtesting shows little difference from a worst case sequence of returns perspective with about 10% difference in final wealth after 40 years. Median and average wealth improved by about 50% though.

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  5. Hello RIT

    Perhaps I missed it, where exactly are you going to retire and what tax strategy is in place to maximise your income?

    Otherwise, your blog is fascinating reading ...

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    1. Hi OzMunky
      Post coming up soon but we believe we:
      - have the tax situation firmly in control; while
      - having settled on a beautiful part of the world that will suit our needs nicely.

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  6. It must feel good RIT to be coasting towards the finish line and the start of your new life.

    My own returns for the half year was a modest 2.5% including income to end June...still better than the interest on my cash deposits with the Coventry.

    I think 2.5% planned drawdown should allow some considerable further growth on the investments. Looking forward to reading more on how the story unfolds post FI. Good luck.

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    1. Nice job on the 2.5% John. I'm conscious that the FTSE100 total return was up 0.9%, FTSE250 was down 0.1% and UK index linked gilts were down 0.3%. What gave you the biggish boost?

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    2. Thanks. My spread of investment trusts have given the portfolio a boost...Scottish Mortgage 19%, Tritax 6%, TR Property 7%, Finsbury 6% and Aberforth Smaller 9%, Commodities 14% (negatives were Edinburgh -2% and HICL -6%). My global multi asset index returned a combined 1.5% possibly held back by the rise in sterling but may do better second half if £ declines with looming Brexit shambles.

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    3. Morningstar predicts that the Safe Withdrawal Rate for an 80:20 portfolio, a 40 year retirement, and a 90% probability of success, will be 2.6% p.a. for the UK. See exhibit 13.
      https://media.morningstar.com/uk%5CMEDIA%5CResearch_paper%5CUK_Safe_Withdrawal_Rates_ForRetirees.pdf

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    4. HI dearieme
      There was a lot of good discussion about that paper back here http://www.retirementinvestingtoday.com/2017/09/improving-safe-withdrawal-rate-for-uk.html

      The great comments from Elef are particularly notable. Even with this paper I'm happy with my 2.5% + investment expenses.

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  7. I don't have anything meaningful to say RIT (do I ever?). But thanks as always for the update. I'm hoping you and the family are well.

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  8. Our experience of living in a Mediterranean climate included:

    No need for a/c but ceiling fans were essential.

    In winter we coped largely by "rugging up" but if we needed heat we used an electric fire. Electricity was cheap where we were living.

    No costs for the pool: the landlord had dismantled everything and carted it away.

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    1. LOL. That last sentence has my day off to a cheery start. Thanks.

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  9. Hallo there,

    Apologies if you've covered it elsewhere, but it strikes me that with you current lifestyle the biggest threat to your happiness in FIRE land isn't financial, but keeping yourself busy enough.
    I'm sure in the first few weeks/months you'll be busy setting up paradise, but after that how do you plan to go from (I recall) working huge amounts of hours to being totally at leisure? Are you going to write another book maybe?

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    1. Hi Al

      The hours that I currently work are not want I want to do long term. I was prepared to do them for a short period as they allowed me to really accelerate my journey to FIRE and I've written about that previously. I can see it playing out with:
      - decompression including setting up a new home (as you mention) and getting serious about outdoor pursuits that will increase my fitness; then
      - I definitely want to spend a lot more time exercising - cycling, hiking and swimming. I currently don't do as much as I want by a wide margin and my body is telling me this. I also don't enjoy being in the industrial fake world that many of us currently live. I can spend literally hours in a forest learning/looking/experiencing/soaking up and always come out feeling at peace. Where we are going there are clubs for these pursuits as well which will also bring social events.
      - I also want to expand my book after decompression and some FIRE time.
      - I also always defined early retirement as work becoming optional. I can actually seeing myself doing some volunteering.
      - Globalisation has seen our family and friends spread across the globe. We want to do a bit of slow travel to spend time with them as well as experience new parts.

      That should easily keep me occupied for at least the next 5 years. After that I can see me wanting to spend more time at home as I'd love to get a half decent garden together including fruit trees and some vegetables. At one point in my life I had something in its infancy and I was really enjoying it but my 'career' stopped it in its tracks as it needs constant time commitment. In FIRE I'll have that available to me.

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  10. Thanks for the update, RIT. Exciting times for you and your family - it must be great to be pretty much at the finish line and seeing your hard-worked plan come into fruition.

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    1. The mood in the RIT household is indeed buoyant. It looks like you had a great holiday weenie. Unfortunately we'll miss our summer break but it's a small price to pay for a smooth run into FIRE.

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  11. RIT - best of luck. I am almost at same point moneywise, just on my One More Year now. It's been interesting to see how many of my considerations and thoughts you have had, in a different form. For me it will be getting on my bike, enjoying London, having time with the wife and for myself. Until then...OMY.

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  12. Hi RIT

    Congrats on getting this far and I look forward to hearing all about your new life post move.

    I was just wondering what your plan is in terms of your portfolio. Are you planning to move your assets into € denominated funds in order to protect against currency risk - given that you'll be spending in euros?

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