One more year’ish

So when are you taking early retirement I hear you ask?  Before answering let me first provide some musings of how the world of somebody who has been financially independent for just shy of one year is playing out.

In short life is good, no I mean life is great and I mean really great.  We were fortunate enough to be able to spend some more time back in Cyprus and this time around it really did feel like home to the point we were quite saddened to return to Blighty.  We also think we have found the town we will first settle.  Of course we’ll first rent for 6 to 12 months just to make sure but it felt really good.  I think now there is really only one thing that will stop us from migrating to Cyprus which I’ll explain a little later.

Click to enlarge, my walking/running route from a possible Cyprus home

Click to enlarge, my cycling route from a possible Cyprus home

The stress from my work is also now an order of magnitude less making it tolerable.  This is predominantly because there is no longer a sword of Damocles hanging over me.  If I’m fired, as opposed to FIRE’d, I’ll just take my payoff and sail off into the sunset with a smile on my face.  Stress has also been reduced because I now speak very freely as again there are no repercussions of saying something that maybe others don’t want to hear.

Mrs RIT has early retired in a Mr Money Mustache kind of way.  For some time now she’s been pursuing a passion of hers which has been absorbing more and more time because of the enjoyment factor associated with it.  What’s actually a bonus is it’s also actually starting to earn beer money and importantly can be done from just about anywhere in the world.  The original plan was that we were going to FIRE together but after some RIT family discussion we decided that was a nonsense piece of planning and so she has now stepped away from the corporate world for good and now just does fun stuff.  One down and one to go...

Why I won’t be using Vanguard wrappers

Vanguard has recently announced that in addition to the ETF’s and mutual funds (OEICs) currently offered, they will now offer a selection of wrappers to hold them in.  Given one of my mantras is to always minimise investment expenses and given Vanguard’s low cost reputation this should be a great thing.  Let’s take a look.

Firstly, let’s look at my SIPPs.  I have two – one from Hargreaves Lansdown and the other from YouInvest.  Over the years, despite pushing the actively managed variety through schemes like The Wealth 150, Hargreaves Lansdown have made it unattractive from an expense perspective to hold mutual funds in a SIPP wrapper.  The first £250,000 attracts a charge of 0.45%, the next £750,000 a charge of 0.25%, the next £1,000,000 a charge of 0.1% and above that level there is no charge.  In contrast shares, investment trusts, ETF’s, gilts and bonds attract a flat charge of 0.45% but importantly it’s capped at £200 per annum.  This meant that when I first started transferring my expensive employers insurance company based Group Personal Pension (GPPP) into Hargreaves Lansdown I went straight for direct shares (REIT’s such as Hansteen, Segro, British Land, etc) or ETF’s (VERX, ISXF, VFEM etc).  I currently have a little over £250,000 worth of wealth in my Hargreaves Lansdown SIPP meaning my annual wrapper expense is capped at £200 or 0.08%.

Predicting Retirement Financial Success

One of the negatives to using a Safe Withdrawal Rate (SWR) model, such as the 4% Rule, to predict when early retirement is possible and to guide spending in retirement is that if history repeats you could leave a lot of wealth on the table.  This is because if a conservative SWR is chosen it tends to have very few historic sequence of returns that fail meaning the withdrawal rate you choose is based on some of the worst sequence of returns rather than the best.

Let me demonstrate with an example.  Let’s enter retirement with $1,000,000, a portfolio that is 75% US Equities : 25% Bonds, expenses of 0.18% and a retirement period of 30 years.  Plug that into cFIREsim and you get the following historic sequence of returns:

Click to enlarge, 4% Rule Sequence of Returns for a 75% Equity : 25% Bond Portfolio

After 30 years that $1,000,000 has in Real (ie after inflation) terms become an average of $2,027,248 and a median of $1,531,784 while the highest wealth value is $5,957,932 and the lowest is -$370,926.  So in the one extreme you’re living under a railway arch begging for food and in the other you have nearly six times what you started with.  If history were to repeat could we potentially be more precise than that?

Personal Inflation

When trying to figure out whether or not I can FIRE I’ve needed to understand just how much I spend (along with a few other numbers).  To calculate this properly I started a few years ago to track every penny that I spent.  With this data I can then also make pre to post-FIRE estimates more accurately.  For example, in my case I know I can net off work related costs and rent but I know I have to add on home maintenance costs.  This is what my spending has looked like over the past few years:

Click to enlarge, RIT monthly spending

In 2015 I spent £24,413 and in 2016 I spent £27,001.  If I did nothing 2017 could be around £26,000 but FIRE is coming (could come?) this year so my spending profile will (could?) transition from pre to post-FIRE so that’s not bankable.

The other advantage of tracking spending like this is that you start to understand what your personal inflation is actually looking like which allows you to take action if it’s starting to get out of hand.  It’s no good going into FIRE with a planned spending of £20,000 per annum, which you then plan to increase with published inflation, only to find you’re actually spending £25,000, which is then increasing at a rate greater than inflation.  That’s a road to potentially running out of wealth before you run out of life.

I can smell the sea - 2017 Q1 Review

I couldn’t have asked for a better start to 2017.  From a Mediterranean home research perspective we spent some time on the Costa del Sol exploring from just east of Marbella through to Gibraltar.  We viewed possible homes, walked/ran on the beach, soaked up some sunshine and also took a few days to put some charge back in the batteries in readiness for the final push from FI to FIRE.

All I can say about this part of Spain is that I could very happily grow old in this part of the world.  The final fight between this part of Spain and Cyprus really is on but to be honest I expect I’ll be very happy in either location.  I just feel so fortunate that this is now possible and is really about to happen.

Click to enlarge, The view from one of the properties within our budget

On the financial side of things the world is also good with savings and investment returns putting more icing on the cake by adding another £75,800 to my wealth.  Let’s look at this in a little more detail.

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 a reasonably healthy Savings Rate of 52.2% against a plan of 55.0%.

Click to enlarge, RIT Savings Rate

Saving Hard score: Conceeded Pass.  I can’t give myself a pass as I’ve missed the target but when I’ve saved £51,800 (admittedly including a very healthy bonus) and only spent £6,500 I’m also not going to beat myself up about it too much.

Keep calm and carry on

Over a lifetime of investing we’re going to see a lot of things happen.  The more obvious events will likely be the continual bull and bear markets that have occurred in the past and I wouldn’t bet on not occurring in the future.  Filter the noise by correcting for the continual devaluation of money via inflation then plot on a log chart and they’re clear to see for both the US and the UK.

Click to enlarge, Monthly real S&P500 price

Click to enlarge, Monthly real FTSE100 price

I’m not old enough to have invested through all the FTSE100 cycles shown and I’m certainly not old enough to have invested through all the S&P 500 (or it’s predecessors) cycles that are visible.  Instead I started investing seriously in late 2007 so my early days saw the global financial crisis but I’ve then been able to ride that bull wave.  Today that bull wave has resulted in valuations such as the Price Earnings Ratio (P/E) or even the Cyclically Adjusted Price Earnings Ratio (CAPE) looking high compared to history.  The P/E for the S&P 500 is 26.3 against a long run average of 16.0 and the CAPE is 28.7 against a long run average of 16.7.  The FTSE 100 is in a slightly different state, albeit measured against a data set with a different duration.  It’s P/E today is a silly 30.7 against a long run average of 17.2 while the CAPE is 15.2 against a long run average of 18.0.

Holding pattern musings

2017 so far is starting to feel like I’m in a bit of a holding pattern.  We’re starting to feel excited about the new adventures we are going to face in FIRE, I feel like a small part of me has already left my workplace yet I don’t want to go any further until my 2016 bonus is paid and a longer term incentive also appears.  Not long now.

While in that holding pattern I’ve just continued with my saving hard and investing wisely strategy which has my wealth this year already up £36,000 to £1,155,000.  More than enough to live the lives we want to live in FIRE.  There’s also been a few events and learnings over the period.  Let’s look at a few in brief.

Budget

Philip Hammond delivered his Spring Budget statement, which for people like myself, was just another chance to increase taxes.  Previously, from 06 April 2016 the dividend tax credit was abolished and a new tax free £5,000 dividend allowance was introduced to partially compensate.  Hammond has decided he wants some of that so from the 06 April 2018 will reduce the allowance to £2,000 ‘to address unfairness’.  Dividends above this level will be taxed at 7.5% if you’re on the basic rate, 32.5% if you’re on the higher rate and 38.1% if you’re on the additional rate.

If I stayed in my current grafting up state Hammond would have grabbed another £1,143 from my pocket.  But alas times are a changing.  We’ll be in the Med by late summer with that more and more looking like being Cyprus.  There I’ll use the Cyprus and UK Double Taxation Convention, the Cyprus non-domicile rules and the Cyprus tax laws to pay precisely £0 in tax.  Sorry Mr Hammond not on my watch...

Rebuilding my credit score

When we left my credit report story I had a credit score of 618 out of 710 and what I thought was a store card that had just gone into early arrears, which wasn’t even mine, but which I had disputed with noddle.co.uk.  This is how it played out.

Click to enlarge, My credit score and credit rating in September 2016

In October 2016 I received a letter from noddle stating:

“Further to our previous correspondence about case reference , we can confirm that Shop Direct Finance Company Ltd has not supplied a response to the dispute raised on your behalf.  Callcredit [this is noddle] is unable to amend an entry without the permission of the organisation responsible for supplying it and as a result, we cannot assist you further with this dispute.  We would advise you to contact Shop Direct Finance Company Ltd [the store card] directly in order to discuss this matter...”

While I was waiting for that response those early arrears became sustained arrears resulting in my credit rating falling from 618 to 572 out of 710.

Click to enlarge, My credit score in October 2016

So just who is this Shop Direct Finance Company Ltd?  Well it turns out they own very.co.uk, littlewoods.com and a few others.  They also have a dedicated identity theft team.  The first question I’m asking myself after finding this detail is if you need a dedicated identity theft team maybe as a company you need to improve your security...  Just in case it ever happens to a reader the phone number to contact the identity theft team is 0800 0151 290.

2016 In Review, Back to Plan A

My self assessment tax bill has been paid and the final dividend laggards have paid up meaning I can now financially close out 2016.  This will hopefully be the third last quarterly summary after which the format will switch from an accrual of wealth format to one focused on wealth preservation as I start to drawdown in FIRE.

If you had have offered me 2016 on the 01st January 2016 I just wouldn’t have believed you.  When both savings and investment returns are summed I’ve increased my wealth by £263,000.  Quite a staggering number and a result which enabled me to both become a millionaire and to become financially independent (FI).

2016 was also of course the year of the Brexit vote which has resulted in Sterling weakening against many currencies.  Measured in Euro’s, which I need for my Plan A, it’s a more subdued EUR134,000 increase however I’m certainly not going to turn it down.

Given that I’m also now emotionally ready to FIRE I’m going to change the structure of these quarterly reviews a little to start to focus on what’s important to me going into FIRE.

Let’s look at the gory 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 Employee 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 Employee 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 44.9% against a plan of 55.0%.  Don’t worry it wasn’t a Christmas blow out but the result of PAYE tax on my earnings (as always) combined with the added bonus of a self assessment tax bill.  Over the year my physical spending remained well in control with spending being only 8% of Gross Earnings plus Employee Pension Contributions.

Click to enlarge, RIT Savings Rate

Saving Hard score: Conceeded Pass.  I can’t give myself a pass as I’ve missed the target but given my savings rate is 92% under the traditional financial bloggers measure, which even trumps (no pun intended given yesterdays ceremony) Jacob of Early Retirement Extreme’s 75%, I’m not going to beat myself up about it.

I’m now ready to FIRE

To be able to successfully FIRE I think two things need to occur:

1. You need to be financially ready; and
2. You need to be mentally ready.

If you’ve planned well then the first one is easy to recognise and watch for as you can simply see how far away from your number you are during the accrual period.  Then it’s no more complicated than one day you’ve passed that threshold and you know you’re done.  I’ve had this one done and dusted for a while now.  I can also confirm I had no trouble recognising it.

Since calling financial independence I’ve continued to grow my wealth and if I’m honest it’s now starting to feel a bit like I’m keeping score at best and it’s my precious at worst.  Since having enough I’ve added a further £113,000 and when measured in the currency that matters to me I’ve added EUR82,000.  It’s time to start spending it and the reason I haven’t is because I haven’t been mentally ready.

Click to enlarge, My wealth continues to grow

I’ve found that the mental readiness piece is more difficult to recognise as at least for me I didn’t know I was actually ready until I’d actually passed the threshold.  Let me demonstrate by using a few recent examples.  When I became financially ready I put on a wry smile, did a mini fist pump and we had a very small family celebration.  Then on Monday morning my alarm went off at the crack of dawn and I went back to doing what I’d always done.  I did that right up until just before Christmas.

2016 HYP Review

My mature overall investing strategy is these days not much more complicated than a diversified collection of low expense, physical (as opposed to synthetic), income based (as opposed to accumulation) ETFs tracking enough indices to give me diversification across asset classes and countries held within low expense wrappers.  While this is where my journey has left me, as the best strategy for me, I’ve tried a number of different things over the years that I’m either neutral on or negative to.

A negative, for example, are actively managed investment funds.  As I’m negative on them I’ve done everything I can to move my investments away from them but even so I still have a couple that I can’t sell for tax reasons.  A neutral is my UK High Yield Portfolio (HYP) which because I’m neutral on it now just sits passively amongst my portfolio doing its thing.  It’s just completed its 5th calendar year and still contains a not insignificant £65,000 or so of my hard earned wealth.

Its original aim was to help me live off dividends only in FIRE and in that regard it’s still punching above its weight as it’s now only 6% of my total wealth but spins off 16% of my dividends.

My neutral approach mean changes to the HYP are now few and far between with changes for now only being forced by corporate events.  In 2016 there was only one of these:

• Amlin.  Bought on the 29 August 2014 with a forced sale on the 08 February 2016.  AML provided me with a total return of 59% over a little less than 18 months of holding

I’ve written and published that book

Over my 9-year journey to financial independence (FI) I’ve had a number of readers of both this blog and the fora that I frequent ask me if I’d write a book.  If the truth be told I was reticent while on my journey as I thought I would be a hypocrite for writing about how to achieve something that I actually hadn’t done myself.  That all changed in July 2016 when I achieved my financial independence goal with being a hypocrite switching to feeling empowered and ‘qualified’ to tell the story.

I also thought that I was too busy to write the book but in hindsight that was just the victim coming out in me.  Like anything in life both achievement and success is all about unrelenting prioritisation in my experience.  Without that you just don’t have a chance.  So with a focus on just work and the book (thanks go out publically to a very understanding and supportive family who’ve had to put up with it and me) I’ve been able to get it written over the past months and it’s now published.

I’ve called the book - From Zero to Financial Independence in less than 10 Years: Tools and techniques to escape the rat race quickly.  It’s currently only available on Amazon but is available in both ebook and paperback formats giving some choice.

So why write it?  A few reasons:

• I’ve found my FI journey an incredible experience both financially and spiritually.  I’ve also learnt so much, including a lot about myself, most of which will serve me well for life.  This includes a switch to focusing on quality of life rather than the far more common standard of living.  At age 44 I am also now in a position that is incredibly liberating and empowering.  I would just love others to be able to at least see what’s possible and hope the book might spread that message further than this blog.  If they then choose to stay on their current course I’m more than ok as at least they saw an alternate option and made a choice.  The book has only been live a few days and this goal is looking good so far.  It is already ranked number 4 in their retirement planning category, number 11 in their ebook personal finance category and number 24 in their ebook finance category.
• I wanted to provide the book that readers asked for.
• An unexpected reason was that I actually found the whole process incredibly cathartic.  For years I have been learning and had tonnes of information swirling in my thoughts.  By sitting down and putting pen to paper it allowed all that to be organised and filed forever freeing my thoughts for more.

Pushing pensions to the limit

I continue to find pension wrappers are a powerful tool for building FIRE wealth quickly.  Let me demonstrate with a couple of quick examples:

• Over my FIRE journey I am fortunate to have found ways to earn more which means that I am today a 45% additional rate tax payer.  On top of that I also have to pay 2% employee national insurance on the last of my earnings.  This means that if I earn £10 and I don’t salary sacrifice it into a pension wrapper I only end up with £5.30 to invest.
• My employer allows pension salary sacrifice, has a contribution match up to a certain percentage and also gives me 10% of the 13.8% employer National Insurance that they save when I contribute to the company pension.  So under these conditions if I put that same £10 into the company pension I actually end up with £21 to invest.  That’s nearly 4 times more.
• Even if I continue to contribute to the pension wrapper once the employer match is over its still favourable.  In that instance I still end up with £11 going into the pension which is more than 2 times the savings outside of the pension.

The wise among you will now being saying ‘but pensions are just a tax deferral scheme’ and that’s certainly true but let’s look at how that will play out in FIRE.  The UK in my view can almost be considered a tax haven for those with enough wealth that work is not required.  To demonstrate let’s take £20,000 from that pension pot every year.  The 25% pension tax free lump sum effectively gives one £5,000 tax free.  Then one also gets a 0% tax rate from the £11,000 Personal Allowance leaving just £4,000 subject to 20% Basic Rate tax.  That works out to be an effective rate of tax on the £20,000 of just 4.0%.

Move to the Mediterranean and it could be even more favourable.  Cyprus, for example, gives a choice of how pensions can be taxed.  The first is 0% tax until you earn EUR19,500 with the next band being 20%.  In this example our £20,000 (assumed to be EUR22,460) sees an effective tax rate of just 2.6%!  The other method favours high pension sums as the income is taxed at the flat rate of 5% on amounts over EUR3,420.  In this example one’s effective tax rate would be 4.2% so one would pick the former in this example.

Where’s the snowball – why you’d better save if you want to FIRE

You don’t have to travel far into most personal finance sites before you find the obligatory compound interest post.  Even I did one back in 2012 where I was so bold as to call it The Miracle of Compound Interest.

In brief Compound Interest, sometimes also called the snowball effect, is at its most basic just interest on interest.  A trivial example.  Let’s say you have £1 and can get an investment return of 10% per annum (those were the days).  Choose that option and after a year you’d have £1.10 which is your £1 plus ‘interest’ of £0.10.  If you reinvest that for another year you’d have £1.21 which is your £1, last years interest of £0.10, this years interest of £0.10 on your £1 but also £0.01 which is interest on your £0.10 interest from last year.  Interest on interest...

So that’s the lovely theory but as someone who is now Financially Independent and so has been there, done that, got the t-shirt, what’s my view on it.  I’d now say care is needed.  Let me demonstrate with three simple examples.  Let’s go back in time to the end of 2007 where I’m going to give each of our punters seed capital of £50,000, I’m going to assume a real (after inflation) return of 4.1% (what I’ve achieved on my portfolio of trackers after expenses) and I’m going to assume their each looking for wealth of £800,000 (which is not far off what I thought I needed back then although inflation since has ensured I now need 2 commas) before packing in the day job.  From here their journeys will vary:

• TheRIT will crack on with working hard, focus on quality of life and so annually squirrel away £58,728 per annum (which is the average annual savings I’ve achieved since I’ve been on my FIRE journey, equating to a post tax Savings Rate of 82.4%) earning a real return of 4.1% per annum (my actual real annualised return thus far).  I know that will include inflation adjusted savings but please give me a little slack here as it’s not important to the point I’m trying to make today so won’t bother with inflation adjusting.
• MrAverage will also crack on with working hard but instead focuses on standard of living.  This means he can only save 5.1% of post tax earnings which has been deliberately chosen as it’s the current UK household saving ratio according to the ONS.  Like TheRIT, MrAverage achieves a real return of 4.1%.
• MissInvestingSuperstar follows in the footsteps of MrAverage but boy does she know her stuff when it comes to picking winners.  So much so that every year that she invests she manages double the return of the others and so achieves a real 8.2% per annum.  Ask yourself how many people actually achieve that and would you be prepared to back yourself to achieve that with severe disappointment many years hence if you don’t?

Click to enlarge, My after tax Savings Rate over the long term has been 82.4% 

Herefordshire or bust?

In recent times some focus in the RIT household has now switched from A Place in the Sun to what about Herefordshire?  As with any of our crazy ideas our approach is always plenty of desk research and then boots on the ground.  All I can say is that Herefordshire is everything we remember from previous visits.  An absolutely beautiful part of the world but then again at this time of year in the UK, with the leaves yellow to red and starting to fall, ugly parts are probably the exception so some care is needed.

Click to enlarge, Kingsland, Herefordshire (source)

Of course our trips have not been all about roaming around country paths, lanes and villages  although we’ve done some of that.  They’ve also initially focused on looking at the possibility of building a modest warm home.  Don’t get me wrong, we love an old historic grade II listed home like the next man or woman, but as a FIRE’ee we don’t very much like the energy performance or maintenance costs that go with them.

9 months into 2016 – The plans they are a-changin’

With the back of 2016 now largely broken this year is fast shaping up as one of the most memorable of my FIRE journey thus far.  Personal finance wise it’s been great.  My wealth passed 7 figures, I became financially independent (FI) and the rate of change in my wealth has been like nothing I’ve ever seen before or could have imagined when I started on this journey.  To put that last point into perspective by the end of quarter 1 I had added £55,000 to my wealth, by the half year mark that had become £142,000 and by the end of quarter 3 it had become an almost unbelievable £220,000.

However, this is not what is making things memorable.  That’s coming from me slowly realising that because my FIRE strategy makes me an outlier it also makes me vulnerable and exposed rather than invincible.  This was nicely demonstrated by the Brexit vote.  As a ‘young’ retiree looking to head to The Mediterranean within a year I’m sure it doesn’t take a genius to guess that I voted Remain in the Brexit referendum.  If everyone else had have been on my trajectory that would have been the result.  Instead my demographic had no influence, as the numbers of people looking to FIRE to The Med are probably not much more than one, so democracy took over and we ended up with Leave for many other reasons.  So far that result has resulted in pound devaluation (which on its own I could have coped with) but also discussions of Hard Brexit which has turned my plans from 95% The Med to 50%.  I’m a minority affected by politics and populism and because I’m not part of a significant demographic my vote just won’t make a difference.  What if the next populist democratic step is to start taxing capital and providing relief to the indebted...  We’re almost there via interest rates anyway but what if it becomes an overt policy...

Post financial independence, post Brexit, what next

FIRE in Cyprus?

There are now literally hundreds of personal finance bloggers out there in cyberspace with many of them blogging about trying to reach financial independence.  Some are more extreme than others but I have now started to see a distinct pattern that separates them into at least two categories.  The first are those where reaching financial independence in just a few short years was a doddle and where life since early retirement has been a bed of roses with low spending, plenty of international travel, new cars, new homes and nothing ever going wrong.  Then there are those where stuff, including negative stuff, happens.  The journey to FIRE maybe takes determination, maybe their company gets bought out with redundancy coming relatively soon after, maybe their company simply doesn’t agree with their lifestyle choices causing a rethink or just maybe early retirement was not for them so they have returned to work.

I’ve started to call the first the blogs that are selling a life and the second the blogs that are living a life.  I’ve also pretty much stopped reading the former as they no longer resonate with me as my journey has and continues to be much more like the second type.  If you however prefer the first type then I’d suggest you move onto your next piece of Saturday reading as this post will likely disappoint.

I’m now coming up on 3 months of financial independence (FI) and the one thing I’ve been trying to leave via FIRE (financially independent retired early), work, has already become a very different place.  My workplace and the career I chose is one that is very focused on the financial top and bottom lines.  This means that it’s no secret that as soon as my job can be done by somebody else cheaper or more efficiently in the world then I won’t have a job.  It’s also one where if you perform well you can do well financially, and I have, but also one where even average performance will result in you quickly finding yourself without a job.  For me this has helped with my rapid progress to FI (of course it’s taken a number of other choices as well) but it’s come with the sword of Damocles always in full view.  3 months ago that sword was taken away and it’s made a big difference.  It’s firstly just simply removed a weight from my shoulders as out sourcing or average performance will now just result in a nice pay off, which I negotiated some time ago when I seriously looked to move on but was still a golden child, which will further bolster my wealth nicely and result in me simply sailing off into the FIRE sunshine.  Additionally, to ensure continuous success one technique I’ve used over the years is to work very hard which gives me extra time to drive the risk out of every decision I make.  The ramifications of this are pretty long days but it did help with surety of tenure.  Since FI I’ve started to take now take more risk as there are now no downsides personally.  So far this has me back to peak performance, having dipped for a few months following extra work load, but I’m also working slightly less hours and that 0.5 – 1 hour less work per day has put a spring back in my step.  It’s still not the place I’d choose to be Monday to Friday and FIRE is still very much in view but it’s a lot better post FI then pre.

Checking my credit report (and it’s not great news)

From the fortunate position I currently find myself it’s unlikely I’ll ever need or want to take on any form of debt ever again.  That said I’m also a plan for the worst just in case kind of guy. Incidentally, the end result of which is usually a nice upside surprise but you just never know.

So with this in mind I decided to finally, having never checked it previously, check in on my credit report and score.  I used noddle.co.uk as its ‘free for life’ but there are a few of them out there including Experian and Equifax who offer free 30 day trials.  Just don’t forget to unsubscribe with those or you could be paying up to £14.99 per month for every month you forget.  Not an insignificant amount.

If I’m being honest I was expecting a nice credit worthiness upside and the actual result surprised me somewhat.  So let’s look at what they have on me:

• Personal Information.  They have my date of birth and history of addresses.
• Financial Account Information.  They have my American Express Platinum Cashback credit card which shows a long and perfect history of repayment as I direct debit full payment every month.  They show my current account but have no record of my cash savings accounts.  Unfortunately they also show a store card with a missed payment of £4 which is not even mine.  I’ve disputed that which they say can take 28 days to resolve.  So checking my credit report has already been of value.
• Short Term Loans.  I positively get “YOU HAVE NO OPEN SHORT TERM LOAN ACCOUNTS ON YOUR REPORT.”
• Electoral Roll.  I’m showed as being registered and the details are correct.
• Public Information.  I positively get “YOU HAVE NO BANKRUPTCIES OR INSOLVENCIES RECORDED ON YOUR REPORT” and “YOU HAVE NO JUDGEMENTS RECORDED ON YOUR REPORT.”
• CIFAS (the UK’s Fraud Prevention Service).  I positively get “THERE ARE NO CIFAS WARNINGS REGISTERED AT YOUR ADDRESS(ES).”  

Rearranging my YouInvest SIPP

I have had a YouInvest (formerly Sippdeal) SIPP (Self Invested Personal Pension) wrapper since 2011.  It came about when I first started transferring expensive insurance company based Stakeholder and Group Personal Pensions across to SIPP’s to save on expenses.  Over the years this SIPP has grown steadily to become a significant portion of my wealth as it now contains circa £200,000.

Within the YouInvest SIPP I was holding the following three investment products:

• The Vanguard FTSE U.K. All Share Index Unit Trust with annual expenses of 0.08%;
• The Vanguard U.K. Inflation-Linked Gilt Index Fund with annual expenses of 0.15%; and
• The iShares European Property Yield UCITS (IPRP) with annual expenses of 0.4%.

For the privilege of using the YouInvest SIPP wrapper I was also paying annual expenses of £300 which was coming in the form of:

• A YouInvest SIPP custody charge of £25 per quarter as my SIPP value was greater than £20,000; and
• A YouInvest Funds (Unit trusts and OEICs) charge of 0.2% per annum but which was capped at a maximum of £50 per quarter

Life was good and even though I didn’t like paying the £300 per annum I didn’t do anything about it as to correct it I would have had to be out of the market and might lose significantly more than I gained.  That was until I received a notification from YouInvest in early August 2016 that they were intending to change their charging structure from the 01 October 2016 which included a great reason [sic] for the change – “We believe this will be easier to understand, whilst maintaining AJ Bell’s commitment to offering some of the lowest charges in the market.”

Can you afford to not DIY invest

Grant Thornton has completed some research (free FT link or Google “How much do you really pay your money manager?”) which concludes that someone entrusting £100,000 for 10 years to a UK financial adviser or investment manager would pay an average 2.56% annually for financial planning services and financial product expenses.  Let’s look at what that might mean during both the wealth accumulation and drawdown (assuming no annuity is purchased) phases of a typical investor.

Wealth accumulation phase

When it comes to investment return, excluding expenses, I believe that active investing is a zero sum game resulting in average performance no better than that of the market average.  Of course there will be some winners and some losers, particularly in the short term, but that’s for another day.  Today let’s therefore assume that the investment return these money managers achieve is that of the market.  Let’s look at a couple of possible portfolios.

Unfortunately, the Vanguard LifeStrategy funds have only been around 5 years or so which isn’t enough time to use for this study as I need 10 years (or so) of data.  Vanguard does however have an interesting Asset class risk tool (h/t diy investor (uk))which allows you to input a period and an asset allocation.  Let’s create a reasonably balanced portfolio with 60% stocks, 35% bonds and 5% cash and run for a period of 10 years.

Click to enlarge, 10 year time frame, 60% stocks (FTSE UK All Share Total Return Index), 35% bonds (FTSE British Govt. Fixed All Stocks Total Return Index (1983 - 2013) and BarCap Sterling Aggregate Total Return Index), 5% cash (LIBOR 3-month average over the year)

The result is an average annual investment return of 5.59%.  So with this return what does our investor have left after a few subtractions.  Firstly, let’s subtract the erosion caused by inflation.  The RPI has averaged 2.87% over the last 10 years.  Subtracting that gives us a real return of 2.72%.  Now let our money manager and the investment products s/he is peddling take their cut of 2.56%.  Oops our real return is now 0.16%.  Looking at it another way our average money manager/investment product provider is taking 94% of our real return, leaving us with 6% only, which is hardly conducive to long term wealth building.  It also gets worse as that will be before portfolio turnover costs, taxes and trading costs to name but three.  After those we’ve probably nearly done no better, or maybe even worse, than matching inflation which might mean we’re actually even going backwards.

The power of AND

Putting the scores on the doors reveals that I progressed to my Financial Independence number at a rate greater than 0.9% per month.  In hindsight this wasn’t because of any one particular silver bullet but instead was made possible by focusing on the personal finance many, rather than a few, or even the one talked about so often, investment return.  Putting it another way I focused on the personal finance AND.  Mechanically that included earning more and spending less and an appropriate portfolio and minimising taxes and minimising expenses and investment return.  Psychologically that included starting and determination and accepting I’ll make mistakes and never becoming a victim to name a few.

Over the last couple of weeks I think I’ve shown this trait again by maximising pension contributions while also minimising expenses.

I have two low cost SIPP’s (two rather than one is for risk minimisation reasons) in which I buy low cost tracker products.  This is my method of minimising pension wrapper expenses and investment product expenses.  However, even though I have these and they would enable me to defer tax if I invested in them directly I choose not to use this route.  Instead all my contributions enter pension wrappers via my employer’s expensive defined contribution old school insurance company group personal pension.  I do it this way as in addition to deferring tax like I could also do in the SIPP this maximises my contributions in a few more ways:

• My company does an employer match up to a few percent, which of course I take advantage of, however I also contribute a lot more than this for the two reasons below;
• My company allows salary sacrifice which means I get an extra 2% contribution into my pension rather than it being lost to employee national insurance contributions;
• My company adds 10% of the 13.8% employer national insurance contributions that they save if I sacrifice into the pension. 

So I’ve maximised contributions but my employer’s pension scheme then has the big elephant in the room - Expenses.  I try and keep it to a minimum by buying into their tracker funds but even this means I’m paying annual expenses of between 0.6% and 0.87% depending on fund selected.  I can do much better than that in my SIPP’s.  So the trick is to complete a partial transfer into my SIPP when the pot becomes a reasonable size.  The last time I did this it could only be described as a palaver however this time the more appropriate description would be a doddle.

Naive, a victim or just plain irresponsible

Naive (adjective) – (Of a person or action) showing a lack of experience, wisdom, or judgement. Source

Irresponsible (adjective) - not thinking enough or not worrying about the possible results of what you do.  Source

My work day generally does not afford me a lunch break.  It’s generally scoff a sandwich, but not fast enough to give indigestion, between tasks.  A couple of weeks ago after a particularly rough morning I did however break away and joined the ranks of those at the ‘lunch table’ for a few minutes.  This is normally a place of general chit-chat, of what gadgets people are buying, of the latest sports news, of what people are doing on the weekend, but today in the wake of the BHS pension scandal the topic switched to investments, pensions and retirement plans.

When it comes to saving, investing and retirement planning I am very transparent on this blog but in the office I am the definition of a grey man.  After all an environment where your employer knows you have a decent FU stash or are only a few months from FIRE is hardly one where you are going to be able to ramp earnings at a rapid rate.  So I switched on my spidey sense but didn’t dive in with ‘my view’.

The more likely scenario

My financial independence and early retirement (FIRE) planning has been a pretty negative affair so far, with me always trying to focus on the worst case what if scenarios.  I’ve done this as I wanted to have a high confidence that work in the future really would be optional and based on a want to do it and not a need to do it.  With me now over the financial independence line it’s time for me to switch from glass half empty mode to one where the glass is half full.  I’m going to try and answer the question - based on historical data (which of course is not a predictor of the future) what is the more likely outcome for my wealth?  This then enables me to think about what could happen to my spending if I so choose.

I’ve used the cFIREsim tool many times in the past and I’m going to use it again for this analysis.  The negative of it is that it is US based which means if history repeats it will likely be a bit bullish.  The positive is that its data set goes back to 1871 meaning plenty of data points including plenty of bear/bull market cycles but also that it allows you to output data in real inflation adjusted terms which is important as I want to always think of wealth in terms of what can it buy in today’s pounds.

So let’s plug in the data.  Firstly, my financial independence day wealth of £799,000, planned spending of £19,973 (2.5% of wealth),  40 year FIRE period assumption and assumed annual investment expenses of 0.27%.

Now let’s plug in my FIRE financial strategy with one exception.  CFIREsim doesn’t allow you to input REIT’s so I’ll just split my allocation here 50% to Equities and 50% to Bonds.  So that’s 60% Equities, 29% Bonds, 5% Gold and 6% Cash (assuming 0% return on the cash).