Too old or a fool and his money are soon parted

At age 45 I’m beginning to think I might just be falling behind all the cool kids.  Let’s use grocery shopping as an example.  Throughout the week as we use up (or get within about a week of using up) items we write that item down on what is usually the back of a piece of junk mail.  As the week progresses that starts to form into a grocery shopping list.  Then before we go on our weekly grocery shop we write a weekly meal plan which may require some additions or subtractions to that list.  Once in the supermarket we know which products we normally buy as we’ve already done the lowest price grocery shop but of course we also quickly scan the shelves to see if there is anything on special that week or whether any prices have changed that might alter our buying habits.  This results in minimal waste and hopefully pretty close to the lowest priced weekly shop for our tastes.

We’ve done this for many years so imagine my surprise when I discover something called a Dash Button which can do my shopping for me.  I don’t have one but as I understand it for £4.99 you get a Wi-Fi connected button (with many varieties available covering Household & Office, Food & Beverages, Health & Personal Care, Beauty, etc), which via your phone you pair with a product that you select from a particular brand tied to the Dash Button.  You then stick the button near to the place of use in your home.  So if for example you’re buying soap you might stick it near to your bathroom soap dispenser.  Then when you’re getting low or have run out just push the dash button and voila a new item magically turns up in your letter box the next day.

The Passive Investing vs Active Investing Debate

A search on Google for passive investing vs active investing yields 1,330,000 results with plenty of support on both sides of the fence.  In brief passive investing is a method where you buy an investment product that simply tracks an index.  They are commonly called index trackers and with this method you expect to do no better than the index it is tracking after expenses.

In contrast active investing is a method where you pay a financial professional higher expenses than those of a passive tracker and in exchange he or she is supposed to beat an index s/he is measured against.

Beating the index is the critical point as research I’ve quoted before shows that somebody entrusting their money to a UK financial advisor or investment manager will be paying an average 2.56% annually for financial planning services and financial product expenses.

Let’s demonstrate the effect these expenses can wreak with a simple example knowing that UK equities have ‘only’ returned a real 5.0% over the last 116 years.  Passive Punter self invests £10,000 into a UK Equity Passive Fund which sees expenses of 0.25% and then promptly forgets about it for 20 years.  Assuming that fund returns a real annualised 5.0% before expenses over that period our Passive Punter ends up with a real £25,298.  So far so good.

It’s starting to get Interesting (Part 2)

A lot of very thoughtful comment last week so I thought it might bring some value to the collective if I expand on my musings a little more.  Wandering Star I think hit the nail on the head – for me this FI (Financial Independence) moving to FIRE (Financially Independent Retired Early) lark is no longer about finances but now about psychology and so that’s where I’ll focus today.

I think The Accumulator also makes a good point with “I admire your willingness to play out your doubts in public. It is helpful on a personal level, while at the same time we, your audience, can't help but cheer, hiss, wince and cover our eyes from the galleries.”  I don’t believe I’ve ever claimed to know what I’m doing but what I have tried to always do is learn, experience and then share both the outcome and the journey.  I hope my tossing and turning proves helpful – the other option is to do that behind the scenes and then just communicate surety but I that doesn’t seem as useful from where I sit.  I guess it goes without saying that not for a second did I ever expect to find myself where I am today.  I honestly thought I’d reach FI, soon after convert that into FIRE and then ride off into the Mediterranean sunset.  So just what is going on...

It might be helpful to start with putting some backstory on the table.  I apologise to those who’ve read my book  as you’ll already know some/most of this.  I genuinely come from pretty humble beginnings which means that if I get this wrong I have nowhere to run.  This also means no top up inheritance to come should it all get a bit lean later in FIRE.  Thinking this through and for me it’s more than just a risk to manage.  I’d go so far to say it’s actually a fear.  I have seen and been part of poverty.  It’s not fun.  This is definitely having an impact despite me knowing I have enough.  Shucks, when I look at my wealth today my withdrawal rate if I went today would be less than 2.5% and that comes with knowing that additionally 47% of my spending could become discretionary if/when we see a very bad bear market.  One of the benefits of a quality of life for me costing very little.

It’s starting to get Interesting

Time since my One More Year call has passed by incredibly quickly.  In fact so quickly that if I’m to stick strictly to it resignation day is now just a few a short weeks away.  At the time of my last post this was looking to be an incredibly 100% easy call with Brexit being just over a year away as well as an employer who had apparently decided I was now Mr Average.

Enter 2 events that have shifted that to 20% work on a bit longer to 80% FIRE to the Med in 2018.

The first is the draft Brexit Withdrawal Agreement which was published on the 19 March 2018.  As somebody moving to the Med keeping my EU rights is a very important consideration.  With that in mind, if I’m reading the Agreement correctly, I now gain no advantage by being in the Med by Brexit day, the 29 March 2019, when compared with setting up my new home during the Transition Period, which is now agreed by both the UK and EU as ending on the 31 December 2020.  Brexit pressure off.

When the Stars Align

It’s not always sunny on The Med

The past few months have seen me pass through my annual work performance review, my annual salary review and a new HR initiative which seems to have been designed to suppress salaries (read suppress the salaries of the highest performers).  The results of all that for me were that despite my strong work ethic (first into the office, last out of the office and 60-70 hour work weeks) and strong results (but which fell short of very ambitious/impossible? objectives) I managed to receive the worst performance review since I entered the world of work which nicely dove tailed into an annual salary increase well below inflation.

This most definitely doesn’t fit into my Saving Hard by Earning More strategy, which in the past has resulted in healthy earnings increases.  I’m not sure what objective the company were trying to achieve but my interpretation is that it’s now time to move on.  Normally, that would have been a new job in a new company for more reward but this time around that’s not necessary as I now have another option – FIRE.  The stars really are aligning nicely.

Click to enlarge, RIT earnings improvement since saving hard by earning more

On the topic of FIRE my One More Year, after a slow and frustrating start that now seems to be passing quickly and without a worry in the world.  Financial plans between now and a summer FIRE are also synchronising nicely:

• collect one more bonus;
• maximise my pension contributions to just below the tapered annual allowance for 2018/19;
• which if my annualised returns continue as they have since starting on this journey should see me nicely just on the underside of the Pension Lifetime Allowance (LTA) by age 55; and
• then use that bonus (plus some salary) to fill my and Mrs RIT’s 2018/19 ISA allowances of £20,000.

Snakes and Ladders

Well it looks like asset prices don’t always go up.  Of course I’m not surprised by this revelation but the mainstream media did seem surprised with headlines such as “Dow loses 7 million points in the session” and “Worst market performance since dinosaurs roamed the earth” but then of course they need sensationalism as they’re attention seeking.  The market action even meant that it made the first news item on the radio for a couple of days.  It could almost be 2008 again.  It would be enough to scare people off investing if they did nothing more than listen to news sound bites.

What has really happened thus far?  I say thus far because the market can of course continue to fall...  Or it might flat line...  Or it might go up again...  By my calculations this week the S&P500 has fallen 5.2%, last week it fell 3.9% and the week before that it actually gained 2.2%.  In contrast the FTSE100 this week fell 4.7%, last week fell 3.9% and the week before that fell 0.8%.

This is what has happened to a couple of single indices and makes for great news items but how has this impacted a long term investor who buys, holds and rebalances a variety of global asset classes.  I like to think I’m one of those so let’s use my real world portfolio as a comparator.  This week my wealth has decreased by 2.3%, last week it decreased by 1.5% and the week before that it decreased by 0.4%.

2017 In Review, A Year of 2 Halves

This annual review is usually a very quantitative personal finance review and for those readers looking for that please bear with me I’ll get there I promise.  I’m firstly going to go off piste a little because for me (and really for the first time on this journey) the FIRE challenges of 2017 weren’t about quantitative finances but more about qualitative mental FIRE readiness.  You only have to look back at some of my 2017 posts to see the difficulties I’ve had:

• I came into 2017 ready to FIRE.
• Towards the end of the first quarter excitement was starting to build in the RIT household.
• But then early in the third quarter the decision was made to do One More Year.  I blamed Brexit primarily and then secondly further justified it by suggesting it would give us further fun money.  Looking back I honestly can’t tell you if that was the real reason.  I still tell myself it was but I also know that running against the herd and pulling the FIRE pin at age 44 when all those around you will work for many years more is a little scary.  Was that the real reason?  For me Early Retirement has always been defined as work becoming optional rather than I won’t ever work again.  That’s easy to say but right now I’ve also manoeuvred myself into a position where I can build wealth quite quickly and it would take a lot of effort to do that again if I decided that FIRE wasn’t for me in 5 years time.  Was that the real reason? ...
• Whatever the real reason for holding back, I guess it’s not so important in the grand scheme of things as by the end of the third quarter frustration at my faffing was clearly creeping in.
• Then phase 1 of the Brexit negotiations closed out and we again called FIRE readiness.  This time given my thinking around lasts I really do hope it was just a Brexit thing and we really are ready this time.

In contrast to that emotional roller coaster ride the quantitative financial side was a breeze with annual wealth growing by £184,000.  My second best year yet but interestingly at the same time one where performance when compared to other financial bloggers and targets I set myself a long time ago will look a little average.  I’ll make excuses for it but I’d love your views.  After all, it’s one of the reasons I stay at this blogging lark – to hold myself accountable to my plans.  Let’s look at the details.

SAVE HARD

I unapologetically continue to define Saving Hard differently than most personal finance bloggers.  For me it’s Gross Earnings (ie before taxes, a crucial difference) plus Employer Pension Contributions minus Spending minus Taxes.  Earn more and one is winning.  Spend less or pay less taxes and you’re also winning.  Savings Rate is then Saving Hard divided by Gross Earnings plus 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 42.3% against a plan of 55.0%.

Click to enlarge, RIT Savings Rate

2017 HYP Review

Back in late 2011 I started building what is known as a UK High Yield Portfolio (HYP).  It was a much talked about strategy back in the Motley Fool forum days and is still being discussed on the more recent Lemon Fool forums.  One of the aims of a HYP was as a substitute for an annuity in retirement.  This meant that the dividends spun off by the HYP needed to increase at a rate which is equal to or greater than inflation if it was to be called a successful investment strategy.  I unitised my HYP a long time ago so I know in 2017 that goal was easily achieved with dividends increasing by 20.1% which is well above the current inflation rate (RPI) of 3.9%.

The dividend increase was largely helped by the only ad-hoc event to occur in 2017 which was National Grid’s (NG.) special dividend and share consolidation.  If I net that special dividend off as many would argue that was really a return of capital it’s still done its job with a 6.7% dividend increase.

There were no buys (or sells) in 2017 as my overall investment strategy has now moved on to be a mechanically 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 SIPP/ISA/Trading Account wrappers.  This means that the HYP now only forms 5.2% of my wealth but interestingly it still delivers 14.3% of my total dividends.  This is very useful for 2 reasons:

• Along the lines of replacing an annuity its original aim was to help me live off dividends only in FIRE and in that regard it’s still punching above its weight.  In 2017 it spun off £3,929 in dividends.
• When we come to register in our new Med country as self sufficient, unlike the UK and one of the reasons we ended up with the disaster that is Brexit IMHO, we’re going to need to demonstrate sufficient income and/or capital to prove we’re not a potential burden on the state.  Those dividends are a good chunk of income to help with that.

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.