Showing posts with label retirement. Show all posts
Showing posts with label retirement. Show all posts

Saturday 9 January 2016

An Interesting Week

Blowing bubbles
Source: wikipedia
Rather than a particular focus this week my brain has been a little all over the place.  Maybe it’s the after effects of too much Christmas and New Year cheer...  What it means though is that instead of a detailed focused post today what you get is a smattering of random thoughts.  If that’s not your thing then you might want to move onto your next piece of Saturday reading.

Stock Market Fun

The big boys and girls seem to have come back from their Christmas vacations and (started to?) put the markets back in their place.  On the week:
  • China’s Shanghai Composite Index is down 10.0%;
  • The US’s S&P500 is down 6.0%;
  • Japan’s Nikkei 225 is down 7.0%;
  • Our FTSE100 is down 5.3%; and
  • Our FTSE250 is down 4.0%

It’s only a week of market action but I thought it might be interesting to compare that action to a diversified portfolio that has different asset classes across multiple countries.  I hope I have one of those so comparing to my portfolio I’m down 2.3% on the week.  I’m not yet at FIRE but even now in pounds, shillings and pence that is a fall of £19,320 which is more than a year’s worth of post FIRE post home purchase living expenses.

London Housing

It’s all too rare that The Investor over at the excellent Monevator has a good rant but there was some good value this week with the post they don’t tax free time.  Like The Investor I've watched the London property market go insane so this comment

“But with London prices having moved from extreme to insane to “oh, so this is what my grandmother meant when she said flinched at 50p for a bag of chips that used to cost a ha’penny”...”

was particularly amusing.  Now every year I try and assess the house value of all the counties ofEngland and Wales so I already knew it was insane and really no longer a place for anyone who isn't an oligarch or money launderer.  Hell even the bankers can’t afford it any more.  In light of this throwing this chart together this week did make me smile:

London first time buyer gross house price to earnings ratios
Click to enlarge, London first time buyer gross house price to earnings ratios

Does this make my first picture today relevant?

Saturday 19 September 2015

Living off the Dividends in Early Retirement

The number one fear of any early retiree (or any retiree living of investments for that matter) must nearly be a bad sequence of returns early in retirement.  I can only imagine the emotional rollercoaster of watching a stock market fall in value by more than 80% in real terms (like the US market did during the Great Depression), rebalancing into it continuously, while knowing that you’re no longer working so ‘can’t’ replenish and then on top of that then being forced to sell down capital to live off.

US Market Percentage Falls from Real New Highs
Click to enlarge, US Market Percentage Falls from Real New Highs

With this in mind and for some time now I’ve been trying to build my portfolio in such a way that I can live off less than the dividends received at FIRE (financial independence retired early), which will allow a little for reinvestment during the good times, while providing some protection during periods of falling dividends.  The methods I've used to do this have included the addition of a High Yield Portfolio (HYP) and moving from accumulation funds within an expensive work insurance company defined contribution pension to income funds within my own SIPP.

With this in mind I’m today going to conduct a little thought experiment.  Will I have enough dividends spinning off in FIRE to avoid selling down wealth during a severe bear market?

Now before I go on I’m of course aware that past performance is not a guide to future performance.  To keep it simple I’m also going to use the US market as a proxy for my ‘global’ equities portfolio which of course is not 100% accurate but I have a good dataset for the US (unlike other countries).  Hopefully it will give a bit of steer as we do know global equities have a high correlation with each other plus this is just an order of magnitude thought experiment and I’m not chasing perfection here.

At time of writing this is how I’ve managed to increase my dividends over the years:

RIT’s Dividends Received by Year
Click to enlarge, RIT’s Dividends Received by Year

Saturday 15 August 2015

My Spending

Saving Hard has thus far been one of the biggest contributors to my reasonably rapid FIRE (financially independent retired early) Number progress.  For me this has never been about simply spending the least amount possible but instead always about maximising the answer to the formula Earnings – Taxes – Spending.  This results in a twofold approach:

With this in mind I suspect my spending profile will look quite strange when compared to many, but hey we’re all different and that’s what makes the world an interesting place.

In July 2015 I spent £1,926 (an annualised £23,112) and 2015 Year to Date I've averaged £2,068 per month (£24,816 annualised).  This covers all family spending, whether for fun or just too live, plus any personal spending that I desire.  The only thing excluded is my better half’s small personal spending.  Given this is hopefully my final full year before FIRE I want to track my full 2015 average spending as well as monthly for a couple reasons:
  • It gives me a floor of spending at which the family are happy with the lifestyle that we are living.  This will help tell me when I’m FI (financial independent), which will be before FIRE’d.  It will also help me understand how much overhead my 2.5% wealth withdrawal rate, at the start of FIRE, combined with my £1,000,000, actually provides me with.
  • We are still torn between early retirement in The Mediterranean vs Old Blighty and this will also help us understand our average spending profile when in different countries.
Retirement Investing Today July 2015 and Average 2015 Spending
Click to enlarge, Retirement Investing Today July 2015 and Average 2015 Spending

Now the detail:

Saturday 1 August 2015

My FIRE Number

Since starting this blog at 35 years of age in 2009 I have never revealed my portfolio values or targets in £ terms.  Rightly or wrongly I've always believed that it was irrelevant to readers given we all have different earnings, investments, risk profiles, savings rates and target retirement amounts.  This has resulted in posts that always focus on the theory and how I'm applying it but that in hindsight come across as dry and impersonal.

Today I'm going to try and change that by starting to talk in real numbers rather than percentages.  My hope is that it will up the debate a little and help us all continue to learn from each other.  I just hope it doesn't kill the community that has developed over the past 5 or so years.  Given the name of this blog and my closeness to FIRE (financially independent retired early) the amount of wealth I am trying to accrue is probably the number that is currently most important to me and probably one of the most popular topics debated/discussed within personal finance blogs and forums.  So let’s start there.

As a person who does not plan on receiving a State Pension and is not going to be receiving any sort of inheritance it is a crucial number for me as to fully FIRE it needs to be enough to last my family and I for the rest of my life.  That could be 45 or more years.  The methodology to calculate it was first devised back in 2007 when I first started on my DIY FIRE journey and went like this:
  • I was renting in London, as I still am today and though of London as home
  • I asked myself what a good salary would be that would enable me to live well including covering rent or mortgage payments.  That number was £30,000
  • As I worked towards FIRE I would increase that salary annually by inflation.  Today that salary within my Excel spreadsheet is £37,691
  • I calculated what I expected my portfolio to return annually in real terms.  This number still dynamically calculates in my Excel spreadsheet every week when I update my financial position.  That number after expenses was 3.8%.  A number I later learnt wasn't so far from the (in)famous 4% Rule
Dividing that FIRE salary by the expected return enabled me to calculate my number.  Today Excel tells me my early retirement number is £1,011,034.  To avoid discussions about me being obsessive compulsive let’s do a little rounding - I will be financially independent and have the option of early retirement with wealth of one million pounds.  My journey to the million is shown in the chart below.

Friday 3 July 2015

A Sobering Income Drawdown Demonstration – 8.5 Years In

While my recent posts on sequence of returns risk during drawdown and bond to equity volatility vs returns are still fresh in our minds let’s return to our retiree's who are another drawdown year on having now been in wealth drawdown for 8.5 years.

For long term consistency I want to make as few changes to the original assumptions as possible however this year one change would seem prudent.  To represent the equities portion of the portfolios I use the iShares FTSE 100 UCITS ETF (ticker: ISF) as a proxy.  This year that ETF has become an iShares Core Series ETF resulting in a TER change from 0.4% to 0.07%.  I'm going to allow that change to occur within the assumptions as it simulates a real change that an investor might see.  All other assumptions are unchanged from the original post.  Re-emphasising some of the key assumptions:
  • Our retiree’s are drawing down at the stated withdrawal rate plus fund expenses only.  This means any trading commissions, wrapper fees (eg ISA, SIPP fees), buy/sell spreads and taxes have to be paid out of the earnings taken.  For example, our 2% initial withdrawal rate retiree's are actually drawing down at between 2.10% and 2.21% dependent on the asset allocation selected.
  • All calculations are in real (inflation adjusted) terms meaning that a £ in 2006 is equal to a £ today.
  • 6 Simple UK equity / UK bond portfolios are simulated for our retiree's.  The UK equities portion is always the FTSE 100 where as mentioned above the iShares FTSE 100 ETF (ISF) is used as the proxy.  For the bonds portion a simulation is run against UK gilts (FTSE Actuaries Government Securities UK Gilts All Stock Index) where the iShares FTSE UK All Stocks Gilt ETF (IGLT) is used as the proxy and the bond type I prefer in my own portfolio, UK index linked gilts (Barclays UK Government Inflation-Linked Bond Index), where the iShares Barclays £ Index-Linked Gilts ETF (INXG) is used as the proxy.
  • The wealth accrued at retirement (the 31 December 2006) is £100,000.  To simulate a larger or smaller amount of wealth just multiple by a constant. For example if you want our retiree’s to have £600,000 just multiply all the subsequent pound values by 6.

A 4% Initial Withdrawal Rate

UK Retiree Real Portfolio Value, £100,000 Initial Value, 4% Withdrawal Rate, 30 June Value
UK Retiree Real Portfolio Value, £100,000 Initial Value, 4% Withdrawal Rate, 30 June Value, Click to Enlarge

I've picked a 4% withdrawal rate because of the often quoted (dangerously in some cases IMHO but that’s for another day) 4% safe withdrawal rate rule.  The 50% equity : 50% gilts portfolios (the red lines on the chart) are the closest representations to the 4% rule with obvious differences being that:
  • the 4% rule was for a US punter with US based investments while I'm simulating UK punters with UK based investments; and
  • the 4% rule doesn't consider fees where I'm capturing the OCF's of the ETF's which makes my withdrawal rate very slightly higher.

Saturday 30 May 2015

Insuring Against Sequence of Returns Risk with the State Pension

Anybody who is intending to retire (particularly those taking early retirement) without a healthy Defined Benefit Pension or without knowledge of a guaranteed healthy inheritance should be wary of and maybe even have a healthy fear of sequence of returns risk.  It is the risk of receiving a series of investment returns that are negative (or lower) during a period when you are in portfolio/wealth drawdown which then never allows your wealth to recover even when investment returns normalise.

Blackrock have a couple of charts which demonstrate the phenomena nicely.  Firstly, let’s look at Sequence of Returns during the Wealth Accrual Phase (ie before Retirement).  The chart below shows 3 investors who each make an initial investment of $1,000,000 at age 40 and then never invest again.  Each has an average annual return of 7% but each experiences a different sequence of returns.  25 years later each has the same portfolio value even though valuations varied along the way.

Sequence of Returns during Wealth Accrual Phase
Click to enlarge, Sequence of Returns during Wealth Accrual Phase

Now let’s look at Sequence of Returns during the Wealth Drawdown phase.  Again we have our 3 investors making the same initial $1,000,000 investment, the same average annual return of 7% with annual returns following the same sequences as during the Wealth Accrual Phase.  25 years later each have very different portfolio values with Mr White now forced to beg for food under a bridge.

Saturday 16 May 2015

Life’s Great Saving Hard and Investing Wisely for Early Retirement

This week as I was thumping up and down the motorway on my lengthy daily commutes I couldn’t help but take some glimpses of the current and potential future life that this journey to Early Financial Independence is providing.  There are of course negatives but the positives really did override my thoughts.  Let me share a few random musings.

Saving Hard

In a post back in March I shared a little about my personal life which included my ‘9 to 5’.  Today is my 397th post on Retirement Investing Today and that post is right up there when it came to Comments at 51 to date.  Some of them pointed to a punishing work life which prompted me to look around at my colleagues and I do agree that I work much harder than most but this is a little by design as I always want to stay in the top 10% of my peer group.  The rub is that what seems a negative to some is now just normal and on autopilot to me plus on the whole my health and wellbeing is as good as it has ever been.  The positive though is that this approach allows things like earnings increases of 44% in a year and I can already see a door potentially opening that may allow another step change in earnings.  So while I admit to being tired come Friday night I also think my colleagues probably are as well.  The difference is that I have an extra chunk of cash which I can save to power me towards Financial Independence Retire Early (FIRE) which means I’ll be done in the not too distant future and they’ll retire when the government lets them.

On the spending front I've also realised that Living Well Below My Means is now just an autopilot activity.  I no longer crave stuff and get zero satisfaction from consumerism.  I do still track spending religiously just in case I need to correct course but I no longer have any sort of budget and certainly don’t have a £0 one.

These two mind sets currently allow me to save 54% of gross earnings.  Sure it’s not at my target of 55% but do you know what – I really am starting to not care anymore.

Gross Savings Rate
Click to enlarge, Gross Savings Rate

Investing Wisely

My investment portfolio which is largely just a set of diversified tracker funds is running pretty close to plan through nothing more than passive portfolio rebalancing and to the end of April 2015 has grown by a Real (after inflation) Compound Annual Growth Rate after expenses of 4% since inception.  It’s also now pretty close to being an autopilot activity.

Performance of £10,000 within RIT Portfolio and Benchmark vs Inflation
Click to enlarge, Performance of £10,000 within RIT Portfolio and Benchmark vs Inflation

One active element with my investment portfolio is of course my High Yield Portfolio (HYP).  Trailing dividend yield is a healthy 5.0% when compared to the FTSE100 at 3.5%.  Capital Gain since inception is also a healthy 38% vs 31% for the FTSE100.  Over the shorter term it’s not so rosy with Capital Gain year to date at 3.5% vs 6.0% for the FTSE100.  So this non passive piece is not quite on autopilot but the strategy is well defined and I'm still happy with the results.  The question I'm starting to ask myself though is can I really be bothered with it.  I'm going to watch it for a year or two more but if results do start to converge toward the index I may just go passive.

Sunday 5 April 2015

Safe Withdrawal Rate (SWR) Thoughts

Many of us in the Early Financial Independence, Early Retirement, community are chasing an amount of wealth which when achieved will allow us to as a minimum call ourselves financially independent and as a maximum allow us to head into full early retirement.  To calculate that target wealth number it’s likely (I know I have) we've ascertained how much we intend to spend per annum and then divided that number by a Safe Withdrawal Rate (SWR) we’re happy with.

The 4% Rule is a SWR that is bandied about freely as a rule of thumb.  Personally it’s too bullish for me and so as I type this I'm planning on an SWR of 2.5% plus 0.25% to allow for investment expenses for a total withdrawal rate of 2.75%.

When we choose a SWR we’re likely trying to calculate the maximum real inflation adjusted annual income we can take while ensuring we don’t run out of wealth before we run out of life.  In doing so what we are really doing is trying to protect ourselves from worst case sequence of returns risk.  In trying to protect ourselves from this sequence of returns risk (and assuming history repeats which we all know is not guaranteed) we actually end up with a scenario where in the vast majority of cases we end up with a lot more wealth than we started with at check out time.

Let me demonstrate with an example.  To do this I'm going to teleport myself to the US and use the excellent cFIREsim calculator as we’re pretty starved of decent free tools here in the UK.  I'm going to assume I retire with one million dollars ($1 Million), give myself a 60% US Equities : 40% US Bonds asset allocation, spend at an inflation adjusted $25,000 per annum (a 2.5% SWR), assume annual expenses of 0.25% and assume I need that level of spending for 40 years.  The output of that simulation is shown below:

cFIREsim output
Click to enlarge, cFIREsim output

Saturday 6 September 2014

2 Years to Go

Only three weeks ago I was writing about my 75% of the wealth required to retire milestone and now as I sit writing this post, drinking a tasty homemade coffee which is helping me save hard ( ), it’s time to write about yet another.

Today my top level asset allocation looks like this:

My Low Charge Investment Portfolio
 Click to enlarge

The detail behind this is still very much in line with my strategy that I first published in 2009.  Between the 04 January and 02 August 2014 (funny dates as I record my financial position weekly) this investing wisely portfolio returned 3.9%.  Move forward to today and that year to date return has morphed into 7.0% in around a month.  Should long run history repeat to average this portfolio should return about 4% per annum in real inflation adjusted terms over the long term (it’s returned exactly that since I started this journey in 2007) going forwards.

On top of that I continue to work on methods to save hard:

Average Savings Rate
Click to enlarge

Sunday 24 August 2014

The Two Phases of Wealth Building

Every week I religiously capture the value of each of my investments which I then sum to give me an instantaneous net worth.  This week saw my net worth increase by more than £5,000 without contributing any new money.  For me that is a very large amount of money, and of course Mr Market could take that £5,000 away this week, but it reminded me of the two phases of wealth building that I'm seeing as I'm working to build wealth over a quite short period of time.

The first phase is Building Capital.  As you start on your wealth building journey this is the first phase you pass through.  Here you just want to be adding as much capital to your wealth as quickly as you can get your hands on it.  Saving Hard by Earning More and/or Spending Less will have a much bigger effect in this phase than Investing Wisely.

The second phase is Return on Capital.  Here while Building Capital is still providing a big boost to your wealth it’s now more important to have a stable investment strategy which is very tax and investment expense efficient.  In this phase you could even start to ease of the Saving Hard by for example going part time or taking up that lower paid higher enjoyment opportunity you’ve always desired without moving your financial independence day greatly.

Let me demonstrate the two phases with a simple example (where I’ll ignore inflation) that tries to cover many of the points that I personally live (and have lived) as well as regularly capture on this site.  Average Joe works hard and for his hard work receives £45,000 per year making him a 40% higher rate taxpayer.  Joe wants early financial independence to give the option of early retirement and so starts to think about he might achieve that.  He realises he firstly needs to focus on Building Capital by Saving Hard.  His employer offers a pension scheme where if Joe salary sacrifices 5% of his own salary then they will match it.  There’s some free money there so he goes for it.  Salary sacrificing also brings the benefit of lowering Joe’s taxable salary to £42,750 saving both employee and employer National Insurance.  Joe’s employee NI saved is added immediately to his pension but his employer also generously adds the 13.8% employer NI that they also save.

Wednesday 2 July 2014

A Sobering Income Drawdown Demonstration One Year On

When we left our UK Invested Income Drawdown dependent Retiree’s a year ago there was trouble afoot.  Our 4% Withdrawal Rate Retiree, which remember is the Safe Withdrawal Rate (SWR) Rule of Thumb many talk about and even use, was particularly vulnerable having lost between 11% and 24% of wealth in only 6.5 years.  Since then a couple of notable things have occurred:

  • The 2014 budget saw the income drawdown rules again altered.  From the 27 March 2014 retiree’s are now able to withdraw from their pensions at the rate of 150% of the Government Actuary’s Department Tables (GAD Tables).  Additionally flexible drawdown, allowing unlimited withdrawals from your pension pot, is now available for anybody with a guaranteed income of £12,000.  Then from April 2015 these rules will change again and allow unlimited access to our pensions from age 55.
  • The second is that Professor Wade Pfau published research showing a UK retiree positioned with a 50% UK Equities/50% UK Bonds portfolio and drawing down using the 4% SWR rule of thumb would actually run out of wealth 23.8% of the time within a 30 year period.  Scary stuff given how loosely the 4% Rule is bandied around the personal finance blog world these days.  Professor Pfau then calculated that if history should repeat (and of course past performance is not necessarily indicative of future results) then to ensure you don’t run out of money over a 30 year period your withdrawal rate before investment expenses and taxes are deducted has to actually be less than 3.05%. 

Going forwards this is going to make life interesting.  For a retiree to draw down £24,856, the equivalent of current average UK earnings (Office for National Statistics KAB9 dataset), requires wealth (including Pensions, ISA’s and non-tax efficient investments) of £814,950 if we are to minimise depletion risk over 30 years according to Pfau’s research.  At the same time from next year we can grab whatever we like from a pension pot that on average only contains £36,800 at retirement according to the Association of British Insurers.  Of course many of us don’t just save in pensions (for example only 43% of my wealth is in a Pension of which only 14% is sitting with expensive inflexible insurance companies) and of course not all of us will withdraw crazy amounts to buy Lamborghinis (if the rules haven’t changed I’ll be withdrawing as much as possible to keep my total earnings just below the Higher Rate tax limit with the difference between spending and withdrawal being put into an ISA) but it’s probably uncontroversial to suggest it does have the potential to leave the uneducated very exposed.

With that in mind let’s look at how our UK Invested Income Drawdown dependent Retiree’s are doing one year on.  For consistency all assumptions are unchanged.  Re-emphasising some of these assumptions:

  • Our Retiree’s are drawing down at the stated withdrawal rate plus investment expenses.  This means any trading commissions, wrapper fees, buy/sell spreads and taxes have to be paid out of the earnings taken.  For example, our 2% Initial Withdrawal Rate Retiree is actually drawings down at between 2.25% and 2.36% dependent on the asset allocation selected.   
  • All calculations are in real (inflation adjusted) terms meaning that a £ in 2006 is equal to a £ today.
  • 6 Simple UK Equity / UK Bond Portfolio’s are simulated for our retiree.  The UK Equities portion is always the FTSE 100 where the iShares FTSE 100 ETF (ISF) is used as the proxy.  For the bonds portion a simulation is run against UK Gilts (FTSE Actuaries Government Securities UK Gilts All Stock Index) where the iShares FTSE UK All Stocks Gilt ETF (IGLT) is used as the proxy and the bond type I prefer in my own portfolio, UK Index Linked Gilts (Barclays UK Government Inflation-Linked Bond Index), where the iShares Barclays £ Index-Linked Gilts ETF (INXG) is used as the proxy.
  • The wealth accrued at retirement (the 31 December 2006) is £100,000.  To simulate a larger or smaller amount of wealth just multiple by a constant. For example if you want our retiree to have £600,000 just multiply all the subsequent pound values by 6.

Monday 26 May 2014

Further Exploration of Safe Withdrawal Rates (SWR) for UK Investors

If you’re like me and don’t have a Final Salary Pension waiting in the wings, rich parents (which might include an inheritance), intention to buy an annuity and don’t want to be raiding bins for food scraps in old age then the amount of wealth you accrue before calling yourself financially independent, allowing early retirement is a critical number that you really can’t afford to get wrong.  Retire with too little wealth and you could expend it all before parting from this fair land making life in old age very difficult.  Be too conservative and fall into the “one more year of work” syndrome and well all I can say is you’re a long time dead.  So we’re looking for a Goldilocks amount of assets.  Let’s try and figure out what that amount might be for a UK resident.

Given the seriousness of the topic I must give the following Wealth Warning before we move on.  I’m just an average person on a DIY Investment journey to Financial Independence and am certainly not a Financial Planner.  The content of this post is for educational purposes only and is not a recommendation of any type.

We've looked at Safe Withdrawal Rates previously.  In that post we focused on the 4% Rule or 4% Safe Withdrawal Rate (SWR) which in brief works on the principle that if in your first year of retirement you withdraw 4% of your portfolio, then yearly up rate your withdrawals (your “Gross Earnings” plus any investment expenses) by inflation, the end result will be that you won’t exhaust your portfolio in your lifetime.  If you dig a little deeper what it actually says is that using past market performance (which we of course we know does not necessarily predict future market results) for a 50:50 Stocks : Bonds portfolio then you have a 96% of not expending your portfolio in a 30 year period.

Tuesday 13 May 2014

Earn More by "Asking for More"

So where have I been I hear many of you asking?  Let me start from the beginning...

Regulars will know that my strategy is to retire as soon as possible.  To be more specific I'm actually still on the fence as to whether I will actually Retire Early, leaving paid employment altogether, or only go as far as Financial Independence, leaving the high stress day job and side hustling some pocket money doing something I love.  At current run rate I’ll be presented with the FIRE (Financial Independence and Early Retirement) option before my 45th birthday which will see retirement in about 10 years from when I woke up, started to do my own research and settled on Early Retirement way back in 2007.

To achieve this I'm of course living the motto of this site - Save Hard, Invest Wisely to Retire Early.  With data from 2008 my first chart shows that while both Saving Hard and Investing Wisely are both having a big impact on my annual wealth growth it’s actually Saving Hard that seems to have its nose in front even after accounting for the Miracle of Compound Interest.  Saving Hard can be achieved by Earning More and/or Spending Less and given its contribution to my financial plans is something I am unrelenting in trying to improve.

Wealth Growth Year on Year attributed to both Saving Hard and Investing Wisely
Click to enlarge 

Wednesday 4 September 2013

Use Technology for Early Retirement and Not to Extend Wage Slavery

Looking back over my short 40 and a bit years, technology and access to it really has exploded.  Thinking about technology a little deeper though and I start to wonder whether the majority of people really are using it or whether it’s actually using them.  Let’s look at a few examples.

Credit cards may not be a technology in the strictest sense of the word but technology advancement sure has helped make them an everyday item.  It’s debatable as to who or what was the first credit card, but roll the year to 1951 when 200 pre-approved persons were able to present a Diner’s Club card at 27 New York restaurants and you have something that sounds pretty close to what we have today.  Except even in my “early” years, some 30 years or so post 1951, I remember my parents not even possessing a credit card but instead choosing the debt free alternative, layaway or lay-by.  Fast forward to today and it’s rare to find somebody who doesn't possess a credit card.  Unfortunately this great convenience seems to have been used by the majority to bring forward consumption by piling on debt at the expense of either larger consumption later or earlier retirement.  Instead let me demonstrate how I use my credit card (yes I have a credit card and also save 60% of gross earnings).  I buy everything I need (of course my definition of need is very different to that of many) on credit card knowing that I have the money in the bank.  I get the item now but depending on when in the month I make the purchase I don’t have to stump up the cash, which automatically happens via direct debit, for between 1 and 2 months.  Over that period that money is earning interest for me, adding to my wealth and bringing retirement that little bit closer.

I remember my first computer, which also came in the 1980’s.  It was an IBM XT clone desktop with a processor capable of 4.33MHz and a ‘turbo’ button which pushed that to something like 10MHz.  It had a 20MB hard drive, a CGA monitor and two 5 ¼” (remember those?) floppy disk drives.  It certainly didn’t have a microphone or a camera and in hindsight it did very little to better my life.  Today we have Smartphone’s, Tablet’s and Laptop’s with multiple GHz processors, 100’s of GB (if not TB) hard drives and high definition screens.  Combine that with the internet which was still in its infancy in the late 1980’s and the opportunities to create extra wealth are today nearly endless.  The majority of people just don’t see or don’t want to see the opportunities. Let’s look at a few.

Sunday 4 August 2013

Retire to Europe – Option 1 - Malta

As a British Citizen I am in the enviable position of having the right (at least for now) to take up residency in any 1 of 26 other EU countries.  Countries as far north as Finland, as east as Cyprus, as west as Portugal and as south as Malta.  A melting pot of languages, cultures and history which when combined provides for a myriad of potential lifestyle options and life experiences.

Prior to retirement these options can be limited as you’ll likely be making decisions based on where you can get work and your language skills but once you reach financial independence these become less of a barrier as you:

  • won’t need to consider how to make a living through work;
  • many potential side hustles/jobs can still be performed in your native tongue/s; and
  • you’ll have time on your hands to learn the local language.

Of course as Ermine’s comment rightly pointed out in the Transition to Retirement post your human setting, which include access to family and friends, will also likely be a limiting factor on packing up and moving to a new country for many.  Personally I'm in the fortunate (or unfortunate depending on how you look at it) position of having few ties to the South East of England but instead have family and friends spread far and wide throughout the world.  This includes a healthy number of good friends and family on the Continent.  This means that a move to Continental Europe actually brings some family and friends closer while I leave some good friends in the South East.

My current plan has me moving out of London and the South East of England to either another UK location (Shropshire or Suffolk being current favourites) or to Europe.  A large driver of this is the price of housing and other basic costs in the South East.  By moving away I will be presented with the opportunity for a more fulfilling life as I’ll have the opportunity to move further up Maslow’s Hierarchy of Needs pyramid shown in the figure below.  In brief Maslow detailed that every person has the desire and ability to move up the pyramid but they cannot move onto the next level of the pyramid until they have met the needs on the lower level.  By moving away I won’t have to expend as much of my retirement wealth (nor worry about it as it won’t represent such a large a portion of my total assets) on the lower Physiological Basic Needs which includes Shelter and providing a pick a Safe retirement location I’ll be able to concentrate on moving through Belonging, Self-Esteem and hopefully achieve Self-Actualisation.

Maslow’s Hierarchy of Needs
Click to enlarge (Source:

Sunday 28 July 2013

A Transition to Retirement

I am currently at the point where if I can maintain my current savings rate and forecast average investment return run rate I expect to have accrued sufficient wealth for full financial independence in a little less than 3 years.  This will mean I will have the option of either:

  • continuing to work in my current full time career knowing that I don’t need the company but that the company needs me; or
  • taking early retirement from my current day job which will allow opportunity for everything from doing nothing to side hustles to part time work (whether in my current or a new career) to a new full time career which might include my own business;

all at the relatively early age of 44.

With only a few years to run until Financial Independence I now believe I'm at the point where I need to start thinking about how to transition from my current position to retirement.  Before I document my first musings on what the strategy might look like to financially transition to early retirement let me first detail some relevant considerations that need to be accounted for based on where I am today:

  • I am planning to be in the position where I will need to generate no active income with all expenses being covered by investment return from my accrued wealth.  Planning this way means any work undertaken, which might earn an income, becomes an activity that brings enjoyment or learning opportunities only. 
  • I am a higher rate, 40%, tax payer and expect to be a basic rate, 20%, tax payer in retirement.  This along with the facts that as part of a pension salary sacrifice arrangement my employer adds to my pension a large part of the 13.8% Employers National Insurance Contribution that they now save, plus I also get the 2% Employees National Insurance contribution above the Upper Earnings Limit added to the Pension, means I have a lot to gain by making large pension contributions.  At current rates my pension contribution is about 50% of my monthly 60% of gross earnings savings rate.  This means that over the next 3 years, after accounting for expenses, taxes and investment types in and out of the pension, I expect my Pension wealth to move from 41% of total net worth today to something closer to 44%.  I am therefore left with only 56% of my total net worth to live off until age 55 when I can start to Drawdown on my Defined Contribution Pension.  Of course that assumes the UK government doesn't change the retirement age or other pension rules meaning I'm also carrying a bit of contingency in my planning.
  • I haven’t yet bought a home and while I will have the assets to sell to buy the home outright a small mortgage looks prudent to maximise my wealth retention by paying some short term interest payments which will allow long term minimisation of taxes.  Some of these tax minimisations will include not cashing in any of my Stocks and Shares ISA wealth as I want that tax free income forever, avoiding payment of any capital gains tax and not selling some offshore Non-Reporting Funds where the gains are subjected to income tax rather than capital gains tax, which I foolishly bought before I knew what I was doing, while I'm a higher rate tax payer.  This will reduce any Capital Gains Tax from 28% to 18% after allowing for my Annual Exempt Amount (£10,900 for 2013/14) and the tax on the gains of my Non-Reporting Funds from 40% to 20% or possibly even a portion at 0% if I'm careful.

Sunday 7 July 2013

Is it More Important to Earn More or Spend Less

If we are ever to build wealth for financial independence then we must first get to the point where we are spending less than we earn.  The remainder after spending are the savings which can then be invested wisely for early retirement (or whatever cause you are looking to build wealth for).  To maximise our savings (hence accrue the amount of wealth we require in the shortest possible time for a set investment risk) we should first take all the earning more and spending less opportunities available to us that take little to no extra time.  On the earning more side this could include asking for a salary increase if you employer is paying you less than the market rate and on the savings side it could be living in a home that is well below what you can afford, not grabbing that Starbucks on the way to work, having the lowest price grocery bill or even taking on a cheaper mobile phone plan even if it means you don’t get the latest smart phone to name but four.

Once you've done that you’re now at the point where to increase your savings rate you need to start expending more time and energy.  On the earnings side this could be working paid overtime, working free overtime if you think it will give opportunity for higher earnings later, looking for a new job that will better recognise your current skills and hence pay you more, undertaking training which will arm you with more skills to enable you to earn more or even developing a side hustle job to bring in a little extra cash.  On the spending reduction side it might include learning how to and then making your own cleaning products, growing some of your own fruit & vegetables or even mending your own clothes.

To achieve a savings rate of 60% of gross earnings I know that personally I have taken all the earn more and spend less no extra time opportunities that I can think of plus I am expending huge amounts of time and energy on earning more.  I am also devoting some extra time to spending less but this area is certainly not maximised as both my living conditions (a small London based rented flat) plus earning more efforts filling the week restrict this somewhat.  The question is does this philosophy generate maximum savings or should more time be spent on spending less?  This site is all about fact based analysis and so let’s run some simple numbers to find out.

Sunday 16 June 2013

A Sobering Income Drawdown Demonstration

If when you retire you:

  • aren't fortunate enough to have a defined benefit pension from your employer coming at some point;
  • decide against buying an annuity;
  • don’t have any non-investment income streams such as part time work;

then after allowing for whatever State Pension is due your way, you’ll be living off whatever wealth you have accrued during your working life (plus whatever return you can achieve on that wealth).

We've previously looked at how you might calculate how much wealth you need to build before retirement.  Today I'm going to run a sobering simulation that demonstrates just how important it is firstly give yourself some contingency in those retirement calculations but then secondly monitor your progress once in retirement, adjusting where necessary (just as you did during the accrual stage), to prevent yourself from running out of investments.

Before we run the simulation let’s define the assumptions:

  • Our retiree decides to pull the retirement trigger on the 31 December 2006. On that date the FTSE100 was 6,220, it peaked the following year and today it sits at 6,308.  That’s a nominal rise of only 1.4% in around six and half years.  You've probably guessed our retiree retired just before the Global Financial Crisis (GFC) took hold. 
  • Our retiree removes his income for the following year on the 31 December of each previous year.  That income is placed in a safe place where a derisory amount of interest is earned.
  • All calculations are conducted in real (inflation adjusted) terms meaning that a £ in 2006 is equal to a £ today.  The inflation measure used to correct for sterling devaluation is the Retail Prices Index (RPI).
  • 6 Simple UK Equity / UK Bond Portfolio’s are simulated for our retiree.  The mix includes our retiree being conservative (25% UK Equities : 75% UK Bonds),  standard (50% UK Equities : 50% UK Bonds) and aggressive (75% UK Equities : 25% UK Bonds) when it comes to portfolio risk.  Two different bond types will also be used in the simulation.
  • The UK Equities portion is always the FTSE 100 where the iShares FTSE 100 ETF (ISF) is used as the proxy.  
  • For the bonds portion a simulation is run against UK Gilts (FTSE Actuaries Government Securities UK Gilts All Stock Index) where the iShares FTSE UK All Stocks Gilt ETF (IGLT) is used as the proxy.  We also run a simulation with the bond type I prefer in my own portfolio, UK Index Linked Gilts (Barclays UK Government Inflation-Linked Bond Index), where the iShares Barclays £ Index-Linked Gilts ETF (INXG) is used as the proxy.
  • Our retiree rebalances to the target asset allocation on the 31 December of each year to manage risk.
  • Only fund expenses are included.  Trading commissions, wrapper fees, buy/sell spreads or taxes are not.
  • The wealth accrued at retirement (the 31 December 2006) is £100,000.  To simulate a larger or smaller amount of wealth just multiple by a constant. For example if you want our retiree to have £600,000 just multiply all the subsequent pound values by 6.

Saturday 2 February 2013

Calculating that Important Retirement Number

For anybody planning on a retirement, whether that’s Early Retirement Extreme, Early Retirement or a Typical Retirement not dependent on the whim of Government, based on a passive income stream generated provided by a portfolio which includes assets such as Equities and Bonds, then the amount of assets you need to accrue before pushing the retirement (financial independence) button is possibly the most important number that will be ever considered in your lifetime. 

Given the seriousness of the topic I must give the following Wealth Warning before we move on.  I’m just an average person on a DIY Investment journey to Financial Independence and am certainly not a Financial Planner.  The content of this post is for educational purposes only and is not a recommendation of any type.

For this post I am going to use a fictitious Average Joe who is in a similar position to me and is planning for Retirement.  This means he:
  • doesn’t intend to purchase an annuity but instead intends to only use Income Drawdown to Generate Gross Earnings (Earnings before Tax) from the portfolio;
  • doesn’t have the benefit of a Defined Benefit Pension or other income streams.  Therefore all of his Gross Earnings must come from the interest, dividends and capital growth of his portfolio;
  • doesn’t have rich parents who are going to leave him an inheritance; and
  • wants to maintain the same standard of living throughout retirement so will increase his Gross Earnings in line with inflation every year.

The actual calculation of the Retirement Number (how big a portfolio is required to retire) is actually very trivial and depends on only two numbers.  It’s getting those two numbers that is the difficult bit and where all the risk is.  The first number is what Gross Earnings do you want in retirement and the second number is what Initial Withdrawal Rate do you intend to start with.  The maths is simply Retirement Number = Gross Earnings / Initial Withdrawal Rate.

Let’s look at both of those numbers in detail.

What Gross Earnings do you want in retirement?

This is just a matter of sitting down and thinking about what expenditures you intend to have in retirement that will give you the standard of living you desire.  Here is a short inconclusive list of possible considerations:
  • You’re no longer saving for retirement so don’t need that portion of your current salary;
  • You’re possibly no longer working so may not need to be paying for transport to and from work plus other costs such as work clothes;
  • You’re hopefully tax efficiently invested in wrappers like ISA’s meaning you need a lower Gross Earnings than Gross Salary to give the same amount of money in your hand each month.
  • If you’re in the UK then the assets in your portfolio are taxed in a more friendly way than your current Salary meaning you also need lower Gross Earnings; and
  • You possibly own your home by now meaning you won’t be making those current mortgage payments. 

I calculated my retirement Gross Earnings back when I was in my mid thirties and first started on my journey towards financial independence.  Every year I have then up rated this amount by inflation to ensure my standard of living will be maintained as the pound is devalued.  When I hit retirement I intend to continue with this strategy.

On Retirement Investing Today I never reveal my Gross Earnings target because it’s just irrelevant.  Everybody has different needs, wants, risk tolerance and portfolio type meaning we all have a different Gross Earnings requirement.  To enable us to run an example let’s assume that our Average Joe requires Gross Earnings of £25,000 when measured in today’s £’s. 

Thursday 15 November 2012

KISS Investing for Retirement

Alright I’ll admit it.  Investing for retirement is my hobby.  This means that I continually run all sorts of detailed analysis, some of which I share on this site, to try and squeeze a little extra investment performance from my portfolio.  An added benefit of this particular hobby is that it’s a frugal type of activity which other than the cost of running this site really costs nothing at all other than an old laptop and an internet connection.  While this is my chosen behaviour I’m also the first to admit that I could probably remove 99% of the complexity and still get 99% of the result by following the Keep It Simple Stupid, KISS (bet you thought I was talking about an American Rock Band there for a while), rule.  Today let’s take a step back and look at what that effective 1% effort might entail to enable this 99% result.

Important: Before we get started, I must point out that what follows is not a recommendation to buy or sell anything, and is for educational purposes only. I am just an Average Joe and I am certainly not a Financial Planner.

1.    Start.  If you never decide to take control of your retirement planning then you will never achieve early retirement.  Instead you’ll retire when the government tells you to which sounds a bit depressing to me.

2.    Spend less than you earn.  Sounds obvious doesn’t it?  It mustn’t be because a lot of people fall at this hurdle by being in debt.  If you don’t spend less than you earn then you are never going to reach Early Retirement or even have a little extra than the State Pension provides if you retire at State Pension Age.  This I believe is a critical point as no matter what other decisions you make about your investments it all multiplies by the level of saving you are making.  The level of saving is I believe one of the key differences between Early Retirement Extreme, Early Retirement, Typical Retirement and Late Retirement.  You can start this saving lark long before you’ve completed any of the activities below, whether it be firstly paying down debt in readiness or simply saving it in a high interest savings account until you know what you want to do with it.