Lasts

FIRE to a Spanish Island?

Just where has 2017 gone?  It seems like only yesterday I was eating One More Year (OMY) humble pie and I now find myself nearly half way through the most difficult part of my FIRE journey to date.  The closeness to FIRE is now really starting to hit home making me wonder whether we previously weren’t quite ready and used events like Brexit as an excuse.

In recent weeks it’s become particularly real as I’ve started to tick off things that I’m doing for the last time.  On the work front it’s been about setting 2018 plans and objectives.  It’s been quite a surreal feeling knowing that I’m signing up for something that somebody else will ultimately be responsible for delivering.  What I’ve found interesting is that I’ve actually found myself fighting harder for reasonableness than ever before.  I think this is for two reasons.  Firstly, I have nothing to lose given my current FU Money position.  Secondly, I don’t to be remembered as “the b*stard that sold us out before riding off into the sunset”.

Post Brexit phase 1 - a move to the Med is go!

Paphos Forest, Cyprus

In the immediate aftermath of the Brexit referendum result my immediate thoughts were has the door to our dream been slammed shut.  An initial review suggested that it was still ok, albeit with some potential speed humps, but even though the data said we were still golden some trepidation was still there.  In particular I had three main concerns.

The first concern was being able to register and live legally in our new chosen country.  Both the EU and the UK government were always verbally saying current residents would be ok but they never spoke about new entrants since the referendum or since the trigger of Article 50.  Even as recently as September 2017 the UK would only commit to the negotiations being applicable from a date between the date of Article 50 trigger and date of exit.  The joint report published on Friday finally clears that up with the paragraph:

“The overall objective of the Withdrawal Agreement with respect to citizens' rights is to provide reciprocal protection for Union and UK citizens, to enable the effective exercise of rights derived from Union law and based on past life choices, where those citizens have exercised free movement rights by the specified date.”

A subsequent paragraph then defines the specified date as:

“The specified date should be the time of the UK's withdrawal.”

So provided we’re residing in an EU27 Member State by 29 March 2019 we’re within scope of the agreement.  Tick.

Quarter 3 2017 – Celebrating a 10 year anniversary

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

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

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

Look after the pennies...

...and the pounds will look after themselves.  A reasonably well known proverb that simply means if you focus on saving many small amounts of money you'll soon amass a large amount.  It’s also a proverb that in the circle of people I associate with both at work and in my personal life seems to not get a lot of attention.  I’m a little different and so it’s a proverb I’ve lived throughout my journey to financial independence and one I continue focusing on even as I sit here typing this post with over £1 million of wealth to my name.  Let me give a couple of examples of it in action over the past few weeks.

The financial services industry is a voracious beast that is continually trying to devour as much of its host as possible without its host noticing (all in my honest opinion of course).  I showed this previously by referencing a Grant Thornton study that concluded 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. 

In contrast to this my work defined contribution scheme extracts 0.6% in annual expenses from me.  Sounds like a great deal in contrast but in relation to what I know is possible I know it’s still expensive.  I choose to be a part of the scheme because it allows me to receive free money in the form of an employers match to my contributions up to a contribution limit.  Additionally by salary sacrificing I save on employees National Insurance and my employer saves on employers National Insurance for which they also pay some of the savings they make into my pension (I actually think it’s derogatory that they don’t pay all of the savings but that’s for another day).  Amazingly some people in my company don’t seem to be contributing to the scheme at all which is just turning down free money but the remainder I’ve spoken to seem to be happy just leaving their pension investments in that scheme which means they are losing 0.6% of their wealth every year.

Frustration

To set the scene it’s now been 14 months since I achieved Financial Freedom and it’s been 3 months since we decided to put a year between ourselves and FIRE.  Usually this blog is about the quantitative hard numbers around saving, investing and early retirement but on this occasion I’m going to go a little emotional on you because the scene we are in is definitely interesting from a psychological perspective.

On the work front I’m still putting in the long hours that I always have but I’m now starting to feel more tired at both work and when I get home.  I think this is because I used to always be so in the fight working to succeed at what I needed to achieve that I never had time for anything else.  Now I feel like I’m more watching the fight and no longer have so much skin in the gain.  I’d even say some boredom is starting to creep in which is starting to make the days and weeks drag on.

I’ve also noticed that my stress bucket has become massive and the tap that drains it is also now more like a fire hose.  Some events that I’m currently looking after that once would have been giving me sleepless nights are now having little to no effect on me.  I’ve also noticed that my bullshit bucket has become tiny and I’d go as far as saying that it’s now overflowing, flooding all over the floor and I’m slipping in it regularly.  The organisation I work for can be a pretty political beast that sets some very unrealistic expectations.  Once I would have been accepting of the situation and would have had my head down going like an idiot but now I’m speaking far more freely and it’s having both a bad and good impact.  For example recently I was asked to accept a draft plan that was set by others with more authority but less domain knowledge than me and which was completely unrealistic.  I pushed back and told them that they were being ridiculous and why they were being ridiculous.  This resulted in a number of closed door discussions about me as a person and my attitude but when it was seen that the discussion was having no effect on me and was not going to result in my acceptance it all stopped.  I’m yet to find out if the plan is staying or whether it’s being revised but either way it won’t really affect me greatly as the plan runs well past my FIRE date of summer 2018.

Improving the Safe Withdrawal Rate for UK Retirees Story

For those chasing FIRE I’m sure that the 4% Rule will be well known to most.  In short it says in your first year of retirement you can ‘safely’ withdraw 4% of your wealth with subsequent year’s withdrawals able to be increased by the prevailing inflation rate.  It of course has a few obvious failings:

• It doesn’t consider investing expenses or fees
• It is not safe at all for a couple of reasons.  Firstly, for the 50% Equities : 50% Bonds example the Rule resulted in one not running out of money in ‘only’ 96% of cases.  Not so great if you followed it religiously and was one of the 4% who ended up living under a railway arch.  Secondly, it’s based on backtesting of history and we all know history is no predictor of the future.
• It is only based on a 30 year retirement period.  That’s probably fine if you’re retiring at more typical ages such as in your 60’s or 70’s but probably not so relevant if your thinking of FIRE’ing in your 30’s or 40’s.
• It is US focused with the Equities and Bonds used plus place of residence of the retiree being US based.  Quite a leap if you’re FIRE’ing in the UK.  Also quite a leap if you’re a FIRE’ee who owns a more diversified portfolio of assets covering multiple countries.

Enter Wade Pfau who then conducted some research which helped deal with a couple of those failings:

• Considered a UK investor with 50% UK Equities : 50% UK Bonds portfolio where for 100% ‘success’ that 4% Rule became the 3.0% Rule; then
• Considered some portfolio diversification with 50% Global Equities : 50% Global Bonds portfolio where for 100% ‘success’ that 3.0% Rule improved to become the 3.2% Rule.

It was this work that helped me settle on an initial FIRE withdrawal rate of 2.5% having considered an increased retirement period than the assumed 30 years, inclusion of investing expenses and increased portfolio diversification.

Annual rebalancing Excel calculator

Over on the excellent Monevator site the following question was posed by Gregory today:

“You are an early retiree and have a portfolio of £875,000. You don’t follow the 5/25 rule but withdraw Your inflation adjusted money and rebalance Your portfolio once a year for example on Your birthday.  On Your birthday You want to withdraw £27200.  The current (£;%) and target asset allocations:
- UK equities: £70000; 8% vs. 6% target
- Developed world ex-UK equities: £350000; 40% vs. 38% target
- Global small cap equities: £70000; 8% vs. 7% target
- Emerging market equities: £96250 ; 11% vs. 10% target
- Global property: £35000; 4% vs. 7% target
- UK gilts: £192500 22% vs. 26% target
- UK index-linked gilts: £61250 7% vs. 6% target
How would You withdraw and rebalance?”

I suggested that firstly Gregory hadn’t really given us enough information:

• You say you don’t want to use the 5/25 Rule but don’t detail what rule you are using. Surely you’re not going to rebalance every fund no matter how far from nominal you are as that would incur trading costs that might not be economically sensible. I’m going to assume you’ll rebalance if an asset class deviates more than £4,000 which means in this instance you’re going to be buying/selling every asset class this time around.
• You don’t say if your assets are held in Inc or Acc products. Given you have no cash anywhere I’ll assume Acc. Inc would have made this easier during both the accrual and drawdown phases IMHO but let’s move on.

Making a difference

As each week of Financial Independence (FI) passes, particularly the last few weeks, I can feel quite a bit of change occurring within myself.  The stresses of work just seem to continue to melt away and excitingly that energy is then able to be channelled elsewhere.  One area that I’ve been thinking about is what’s important to me spiritually and how I define myself.  Interestingly, what keeps coming to mind is that in life I’d really like to make a difference to the world.  That might be a little arrogant but do bear with me...

With this in mind I’ve then been asking myself have I already made a difference and the answer I came up with is a resounding yes.  I’ve definitely made a big difference to my family but let me stay away from that to protect the innocent and talk about a few other examples.

During my work life and particularly in more recent years I have made a lot of money for the companies I’ve worked for which has then been distributed to a lot of people – both private and public owners.  That however means absolutely nothing to me as they are just rentiers living off my back.  Something I’ll be doing in FIRE so some hypocrisy here but let’s keep going.  What does mean something to me is that to make all that money I’ve had to rebuild, grow and develop teams into very high performing teams.  They are now efficient and very competent which has secured their foreseeable future in a very competitive industry not frightened to send jobs to low cost countries.  One of the reasons I started on my FIRE plan in the first place.  This means I’ve then helped secure a little bit of their families financial future.  That’s hundreds of families I’ve made a difference to and that is motivating for me.

Cyprus healthcare is changing for the better

I’ve written previously that one of the reasons I’ve decided to do one more year is because we’d like to let the dust settle a little more on Brexit and in particular how reciprocal healthcare, via say the S1, will be handled in our dotage.  In recent weeks some good news seems to be coming out of Cyprus, independent of any Brexit nonsense, that might just mean Brexit negotiations will become unimportant.  Let me explain.

For our situation there seem to be 2 ways to get into the Cyprus public healthcare system.  The first is to pay Cyprus Social insurance for a minimum of 3 years and then meet a number of other criteria.  Unfortunately, unlike countries like Malta and Spain, it doesn’t seem possible to pay these voluntarily.  You have to be either working or self employed.  This is out as I want work to be 100% optional when we move.  That’s always been my definition of Early Retirement.  The second is to reach State Pension age and apply for an S1.  This is what I’m concerned about losing as part of Brexit.

So that leaves us with the Cyprus private healthcare system.  Getting basic care seems affordable and efficient.  I was able to walk into a private clinic in Cyprus where there was absolutely no queue and have a prescription renewed for EUR10.00.  I then went to the pharmacy where said prescription cost me EUR3.47.  A visit to a GP seems to be around EUR30.00 and treatment almost seems immediate.  In contrast in my neck of the woods here in the UK I could literally die while just trying to make an appointment to see a GP let alone waiting to see one.

So far so good.  The problem for me is if it’s something more serious.  For that we’re going to want Cyprus private health insurance.  From contacts in a few of the forums I frequent we’ve been able to remotely apply to a company who apparently pay up efficiently when you’ve sought treatment.  Good news is that they’ll cover us but it comes with one exception for a pre-existing condition.  This is the problem for us.  It’s not this pre-existing condition as it’s manageable but as we age what if we pick up a few more and then at some point the insurance company says you’re now too high risk.  They then can either stop insuring or push premiums up so far that it forces us to go elsewhere.  Then where do we go particularly given all the companies I’ve found so far won’t cover you at all above a certain age unless you’re already with them.  Even if we could find someone they then won’t cover you for the reasons the first company didn’t like you which sort of defeats the purpose of having insurance in the first place.  What then?

Half 1 2017 – Some decisions made

The first half of 2017 required a few decisions to be made and we spent a bit like drunken sailors to make them.  Average monthly spending was £2,404 which is well up on 2016’s £2,250 average.  When I look at the detail the story is all holiday/relocation research where we had a monthly average spend of £544.  At least we were able to decide on Cyprus over Spain although I freely admit there is only a cigarette paper between them and this could change in the coming months.

Click to enlarge, Anyone for a beautiful quiet beach, Tarifa, Spain

Click to enlarge, How about views to die for, Akamas Peninsula National Park, Cyprus

We also decided I’d push on with work a little longer while Brexit played out a little more.  As the dust has settled on that decision we’re all a little uneasy about it.  One of the whole points of this FIRE lark was about control of our lives which includes the ability to do what we want where we want to do it and here we are letting government incompetence rule our decisions.  More on this in future posts I’m sure.

Financially, it’s actually been reasonably successful with wealth up £107,000 in the first half of 2017.  I say reasonably because while that looks pretty good it’s in a currency that less and less people seem to be wanting post the Brexit vote.  Measured in the currency that is important to us that wealth growth falls to EUR92,000.  Still admirable I think.

Click to enlarge, The famous Pound, fast becoming toilet paper 

Let’s look at the detail.

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).”