Monday, 14 January 2019

2018 In Review, Let Decompression Commence

A place to reflect, near Adonis Baths, Paphos, Cyprus
The fourth quarter of 2018 contained the pivotal moment of my FIRE journey so far – FIRE day.  Financially it represented the transition from rapid wealth accumulation to hopefully well managed wealth decumulation or drawdown.  As I write this though more importantly it also represented the start of what seems to be called the decompression phase of retirement and I’ll freely admit I’m finding this really difficult.  Prior to FIRE I had 60 – 70 hours a week either commuting or in the workplace where I would be seeing new data that would require action every 15 to 30 minutes.  I would then be paid reasonably well for this effort on a monthly basis with some being spent to live well while the majority was saved.

Now we get to do what we want when we want and there is no need for urgency but also if we want to eat I now need to withdraw from my wealth that will only be renewed passively.  I can’t speed it up without taking more investment risk.  So what emotions have I been experiencing?  Initially, mainly a lot of stress caused by giving a good work handover and pushing too hard on our relocation plans to Cyprus.  That has now subsided with us now having been here for about 6 weeks.  After the stress left I experienced euphoria!  I’d done it, I can now do whatever I want and am free to be where I want when I want.  That also has now subsided.

So what am I experiencing right now?  That’s have we done the right thing and should we persist.  There is certainly some fear in there as well.  Fear of running out of wealth, fear of not having enough wealth to meet our quality of life ambitions for the next 40 or so years, fear of my skills quickly becoming stale and not being able to re-enter my career when that occurs...  At one point I even thought about asking my employer if they’d take me back and I have also looked briefly at what jobs are out there.  Thankfully, I’ve bitten my tongue and moved on for now.

So what am I doing about it?  Firstly, I’m getting outside and exercising as much as possible.  Initially, I’m just covering a lot of miles on foot to explore what’s around me.  The result of that so far is that I’ve lost 7kg.  I also think the increased exercise and loss of stress is resulting in my sleeping like a baby currently which can’t be a bad thing.  I’ve also started to write things down – a lot of things both psychologically and financially.  If it remains cathartic it may even end up in a 2nd Edition of my book in the coming months.  I’ve also started to try and meet new people but that’s going slow.  The informal cycling club here has either closed down or is only operational in the warmer months and some other clubs I’ve investigated have an average age of attendance at least 15 to 20 years my senior.  I guess that’s one of the challenges of an early retirement.

Beauty everywhere, Paphos, Cyprus
Click to enlarge, Beauty everywhere, Paphos, Cyprus

So what’s next?  We’ve always said we want to give this FIRE to the Med a fair chance.  We’ve jumped in with both feet and have always said 6 to 12 months to allow time for the homesickness to subside and decompression to play out.  In the coming months we also have some travel planned to see far flung friends and family in person which may also put a different take on things.

That the psychological piece.  Let’s now looking onto the financial front where wealth closed year on year down £19,000 even after savings in 2018 of £28,000.  Let’s look at the details.

SPEND SENSIBLY

This section in my quarterly updates used to be called Save Hard which I defined as Gross Earnings (ie before taxes, a crucial difference) plus Employer Pension Contributions minus Spending minus Taxes.  Given I no longer have Gross Earnings (only passive income from dividends and interest) or Employer Pension Contributions I’m going to switch this to a focus on spending sensibly only.

2018 spending totalled £31,971 with £12,911 of it occurring in the final quarter of 2018.  This was not unexpected as it included my higher cost of living in the South East of England for most of the year but on top of that it also included establishing ourselves here in Cyprus.  That included big ticket items like international removal costs, sorting out our Cyprus private medical insurance for the next year which necessitated expensive visits to private UK GP’s (you would die before getting an NHS GP appointment in the part of the UK I was living) as well as car hire for a period.

The chart below shows where the money went.  Those removal and car hire costs can be seen under Miscellaneous and the Medical Insurance costs can be seen under Personal Care/Medical.

Looking forward to 2019 I see no reason why spending won’t now reduce to the £24,000 per annum planned.  There have certainly been some puts and takes on where the spend will go but directionally I don’t think I’m far off.  January 2019 spending is shaping up to plan with a view of what that might look like also shown in the chart.

RIT Spending
Click to enlarge, RIT Spending

Spending Sensibly score: Conceded Pass.  An explosion of costs at the end of 2018 but not unexpectedly so.

INVEST WISELY

2019 (06 January 2018 to 05 January 2019) investment return closed at -3.7%.

Investment wise the portfolio is now positioned for FIRE drawdown.  Cash and cash like holdings (NS&I Index Linked Savings Certificates predominantly) for a non-mortgaged home purchase and to give me a few years of cash buffer as I enter FIRE sit at £342,000 today.  I’ve also positioned my portfolio to hopefully enable us to live just off the dividends. 2018 total dividends were £28,704 which if we succeed in living well off £24,000 per annum will mean I’m spending 84% of dividends.  Right on plan.

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 from a UK perspective now consisting of:
  • 43.5% 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)
  • 14.6% held within an Interactive Investors Stocks and Shares ISA. 
If we stay in Cyprus then this isn’t going to be very helpful as the NS&I ILSC’s and ISA’s are not recognised as tax efficient vehicles.  Positively though as we are of non-Cyprus domicile all of our interest and dividends should now attract zero tax for the next 17 years.

Tax efficiency score: Pass.  At the end of 2017 this was 66.3% and at the end of 2018 is now 66.8% from a UK perspective.  If we stay in Cyprus long term that will shift to 100% tax efficiency which is a pass in anyone’s books.

Investment expenses also continue to be treated like the enemy.  2017 finished with expenses at 0.23% and today they are slightly lower at 0.22% helped by a partial pension transfer earlier in the year and by not making previous investing mistakes like buying expensive active funds that I can’t currently sell.  If we become certain we won’t be returning to the UK within 5 years of leaving I will clean that up reducing expenses further.  There is no capital gains tax on the sale here in Cyprus but UK HMRC has far reaching talons thus the 5 years.

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.  My long run nominal is 6.0% which is a real (using RPI) return of 3.2%.  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: Fail.  My whole investment strategy since 2007 has been about generating a long term real return of 4%.  A real 3.2% is well below that but importantly we are now long into a bull market and the returns just aren’t there.  While better than my benchmarks real 1.8% it’s still nothing to crow about.  I believe I have a portfolio that historically would have survived the worst bear markets from a drawdown sequence of returns perspective historically but it still doesn’t feel real good.  The question is what action can I take but sit tight for now...

RETIRE EARLY

Wealth today sits at £1,307,000 down a little from the peak £1,367,000 in August 2018.  My complete journey is shown in the chart below which is now segmented to show my new decumulation phase.  From where I sit today in the throes of decompression I am so glad I did my One More Year(s).  That extra buffer feels really good right now as I wrestle with have we done the right thing.

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

Piecing everything together and we end up with the drawdown tracker below.  The spending explosion of quarter 4 2018 can be clearly seen but positively even that only equates to an annual drawdown of 2.5% of current wealth.  On the negative side of the equation there is a long road ahead to get that spending back below 85% of dividends but the maths tells me it will work so a bit of trust is now needed...

RIT’s Drawdown Tracker
Click to enlarge, RIT’s Drawdown Tracker

How did 2019 play out for you?

As always please do your own research.

27 comments:

  1. Great post touching on how you're feeling about this. Look forward to further updates and wish you all the best with how this plays out. Life is all a big adventure isn't it?

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  2. Great update RIT. It's got me excited for my own FIRE date which is now just under 5 months away. I'm looking forward to your ongoing updates. Cheers, PJ

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  3. Hi RIT,

    Can I ask what the total value of your equities are that you earned your £28K dividend income from? I find simple examples of "I have this much invested in equities, and earned this much in dividends" are actually quite hard to find, and would be a good barometer for those of us still finalising/tweaking our investment plans.

    Thanks, and well-done on completing your plan.

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    Replies
    1. Total value of equities, REIT's, Property ETF and Bond ETF's is £884k so I'm achieving a dividend / distribution yield of about 3.2%.

      Delete
  4. Thanks for the end of year update RIT.

    Just one aspect that is not so clear...you declare total dividends of £28K and propose living off the bulk of this i.e. £24K but from your chart it seems that the biggest provider of the dividends - maybe £15K - is your SIPP which you cannot access for some years so just wondering how you are squaring this?

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    Replies
    1. I imagine that he plans to spend an equivalent amount from non pension funds - the has the same overall effect on his finances and effectively shifts the portfolio into the SIPP.

      This works fine as long as you gain access to the SIPP before the funds outside are used up!

      Delete
    2. Hi John and Bob

      What Bob describes is exactly what I'll doing. I'll sell down non-SIPP to the value of the SIPP dividends. Then I'll use my SIPP dividends to buy what I've just sold in the non-SIPP.

      When I back tested the plan, admittedly using a US dataset, I still had a positive non-SIPP balance at 60. I've used age 60 as hopefully a prudent number vs my current age 55 as the government are continually tinkering. For example they are already indicating (I don't think it's law yet but might be wrong on that) for some that the age they can access their private pension will be 57.

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  5. Interesting to hear you describing the adjustment process.

    I have some experience of this sort of life adjustment. About 10 years I go left the UK as a 'trailing spouse' to my wife who took a job in the Netherlands. I had no new job to go to at that time so it was a sort of temporary retirement (career break) until I found something new, I was not in work for about 18 months but have been working in a job that I, mostly, enjoy since.

    I did experience some homesickness, which I wasn't expecting, but I've heard from others, in a similar situation, that it's fairly common and will diminish. I do, however, think you'll have to give it a least 12 months. Moving countries is difficult and it takes a lot of time to adjust, mundane tasks are more complicated to complete because you have limited local knowlege and language difficulties (even in places where English speakers are well accomodated) are taxing.

    The other part is finding enough activity to fill up your new found freedom. I found setting up a new home (DIY etc) whilst my wife was at work kept me occupied. I was also doing an OU course at that time which helped (sadly OU course are quite expensive for non-UK residents).

    It was also be difficult to establish a social network. Language lessons were useful because it links you up with people in a similar situation especially if they're are during the day rather than the evening. My children (born later) also forced us to expand our social network. Neither me or my wife are really what you would call 'joiners' so the social aspect has been quite hard for us, and still isn't perfect.

    I wouldn't want to dwell on the negatives because overall moving here has been overwhelmingly positive not least from a financial/quality of life perspective. But it has been difficult.

    You strike me as a resourceful and resilient sort so I'm sure it will work out.

    Good luck!

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  6. Good luck to you, RIT. I had three weeks off over Christmas and experienced my own taste of decompression. Better sleep and more of it together with reading plenty of books was the main result.

    As a part-timer for six months or so now - I too found that most social activities tend to assume people are working (and so happen in the evening) or for those of normal pensionable age. Volunteering can help fill the void and with persistence you will likely (perhaps through evening and volunteering activities) find others in a similar position. I know I have.

    Most of all, I have been treating it very much as a time to experiment. If I have a vaguest interest in something, I'll say yes as who knows it may turn out to be my next passion project. I found thinking about my childhood interests and considering what might be the adult equivalent useful inspiration.

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  7. Hi RIT

    It was very interesting to read about your feelings and emotions - I think many people reckon early retirement will mostly just lead to 'happiness' but there are so many things to consider and like you say, it's going to take a while to adjust. Going from the 60-70 hour working weeks to having all that free time has got to take some getting used to and I hope you find some more hobbies/interests to keep you busy, although there's that second book to write! :-)

    It's fabulous that your investments are throwing off more dividends than your planned spending - I think that's the ideal scenario for anyone, just living off passive income.

    For me, 2018 ended with my portfolio slightly lower than expected due to the drop in the stockmarkets but still up as a result of extra capital added as normal over the year so in that respect, it's still going in the right direction!

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  8. I can just imagine you, tooling about the countryside near your house, inspecting everything like a wolf cub, and warbling:

    When they begin the beguine
    It brings back the sound of music so tender,
    It brings back a night's subtropical splendour,
    It brings back a memory evergreen.
    I'm with you once more under the stars,
    And down by the shore an orchestra's playing
    And even the palms seem to be swaying
    When they begin the beguine.


    I trust that some part of that is true.

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  9. it's good to see that you are still posting and how the transition goes will be of interest for all of those who hope to follow in your footsteps.

    One question that I have:
    It looks like your plan to fund your early retirement is not from "living off the dividends" since much of your dividends are tied up in the SIPP (as are mine).
    How will you balance your cashflow over the next few months and years? It's not a matter of running out of money (you'd hope) but managing where the money is coming from and going to.
    For perspective, I'm looking at living off the yield but current outgoings exceed pre-SIPP dividends and it makes me wonder where the money will come from - selling assets isn't something I want to be doing and it makes me wonder if early retirement will leave me assetless before I hit 55/58/60/68 when I can access my pensions.

    Thanks, GFF

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    Replies
    1. Hi GFF
      Please see my reply to John and Bob above. Hopefully that explains what I'm doing. If it doesn't make sense might be worth a post.

      Delete
  10. Hi RIT,

    This seems to be a rather important comment from GFF . Looking forward to seeing your response.

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  11. Ciao RIT,
    Great update, I've read it with pleasure and found it really interesting! I have a question for you, because I don't understand very well what you're referring to... The "Tax Efficiency" part... Could you explain it a bit better? In Cyprus they do not have taxes for residents? Thanks and ciao,
    Stal

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    Replies
    1. Hi Stalflare
      Firstly, I'm not a Cyprus accountant and I'll find out if I'm right in due course but this is my understanding. In Cyprus dividends and interest are not treated as income so don't see income tax. What they do however see is what's called a special contribution for defence which is 17% for dividends and 30% for interest. However this is only applicable if you are a tax resident and domiciled in Cyprus. I will become a tax resident but I won't be domiciled for a long time as for that you need to either have a domicile of
      origin in Cyprus (which I don't) or have been a tax resident in Cyprus for at least 17 out of the 20 tax years. So for the next 17 years I won't be paying tax on either dividends or interest thus my 100% tax efficiency statement.

      Delete
  12. Has weather been a bit of a shock as I believe it has been a tough winter in Cyprus?

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    1. It has been wild and because the houses aren't built for it cold! My leccy bill for January is going to be far bigger than I ever saw while living in the UK. The solar hot water system is needing to be boosted by leccy plus I'm using an air conditioner in heat mode.

      I've also heard it's been the wettest period for over 40 years but I'm not sure how true that is. There was so much rain that they actually had to stop the water supply at one point as the pumps to the treatment facilities had problems. I guess the water was silty in the dams because of the big inflows. At what point there was so much hail that it looked like it had been snowing. Plenty of wind, lightning and thunder as well.

      We've had a decent couple of days so have managed to get some miles in exercise wise but they're saying rain again early next week.

      Delete
  13. Hi RIT, good to hear how you're getting on, and in your customary warts n all style. I was intrigued by this:

    "fear of my skills quickly becoming stale and not being able to re-enter my career when that occurs..."

    Have you always planned to make a comeback one day, or is this more the fear that you may not be able to, should it become necessary?

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    Replies
    1. Hi TA

      The plan was to not make a comeback into my career. I've always said that my definition of early retirement was that work would become optional but by that I was more thinking if I worked again it would be doing something that was different as a minimum or that I was passionate about (looking back at the later days of my career I was good at it, diligent at it but I wouldn't say I was passionate about it when compared to the early days) in an ideal state. That might be voluntary.

      Now that said I'm honestly not sure how this decompression is going to play out. As I mentioned in the post I'm actually finding it very tough - brutal even - which I think is a good thing as it's forcing me to think about life priorities which I didn't do while I was on the career 'treadmill'. We've turned a lot upside down and need to let it settle. Will I make a comeback? The plan is to not but I wouldn't say I won't at this point. In a few months hopefully I'll have better clarity.

      Delete
    2. Yes, it must be quite a shock to the system to go through so much change at once. Here's a piece from someone on a similar path but a little further down the track:
      https://www.caniretireyet.com/fire-make-life-harder/

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  14. I have my fingers crossed for you RIT - you are really having to test out the sequence of returns risk in the real live world. Having said that you have done all your sums and projections and you more than understand the small risks.

    So I'd say - keep up the decompressing and enjoy the next phase of your life. PS. Lots of my friends are 20 years older than me - age is only a number, common interests let us remain friends.

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  15. Hi RIT,

    Glad you still intend to keep posting the other side of FIRE and you're settling in. I can vouch for the benefits of exercise - i've lost several kg since started I running. Looking forward to the 2nd edition of your book.

    2018 our overall portfolio return was up thanks to diversification - the overseas shares bucked the trend in most equity markets thanks to improved sentiment, I think driven by the recent oil finds...better lucky than good. The "UK" (bit in SIPPs/ISAs) still advanced thanks to saving hard trumping negative investment returns.

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  16. Hi RIT,
    I am a newbie to the world of DIY investing and I am researching which platforms to use for ISA, LISA, SIPP etc. Can you please confirm if the investment expenses of 0.22% that you have mentioned excludes platform fees as I believe these usually are around 0.25%-0.35% range?

    Thanks for sharing your knowledge and wisdom.

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    1. Hi Unknown
      That 0.22% definitely includes platform / wrapper expenses. My wrapper expenses are:
      - trading account which only holds direct shares is £0;
      - SIPP 1 which only holds ETF's is 0.25% but is capped at £25 per quarter given what I hold so that's £100 or 0.04% given my holding value;
      - SIPP 2 which only holds ETF's and REIT's is 0.45% but is capped at £200 per year or 0.07% given my holding value; and
      - ISA which holds direct shares and ETF's is £22.50 per quarter so that's £90.

      A couple of thoughts:
      - by holding ETF's vs funds with the SIPP's I am getting a capping benefit with the platforms I've chosen.
      - very generally when you have a small amount in a platform you want a % based annual fee (still need to shop around though) but as that builds there is a cross over point where you want a platform that will charge you a fixed £ per year.
      - if you haven't already seen it Monevator has an excellent platform expense comparison tool.

      Does that help?

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    2. Being new to DIY investing, my holding values are not that big and I am paying 0.25% with CharlesStanley + 0.15% for funds = 0.40%. So it looks like I need to do a bit of thinking and planning.
      This certainly gives me a good sense of direction - thank you Sir.

      Delete
  17. I love how you dig into the emotional/psychological side of going ahead with the 'RE' bit of FIRE. Many congratulations on making it.

    7kg weight loss is a bonus! Hopefully more due to exploration than stress.

    Mate, it's very inspirational to an aspiring FIREer.

    Right, I'm going for a look around your website.

    All the best,

    FIREflyfree

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