Sunday 13 October 2013

A Retirement Investing Today Review 9 Months into 2013

This is the regular quarterly feature that demonstrates the progress a person living the tools and techniques that this site details can make towards early financial independence.  It is important to note that unlike many books or other websites out there this feature is not a simulation or model.  It is my life so you can say I have plenty of skin in the game and a big incentive to get it right.

This site is all about Save Hard, Invest Wisely, Retire Early so as with the 2012 Review let’s continue to use those 6 words as a theme.


I am now into a sixth year of aiming to save 60% of my earnings, which I define as my gross (ie before tax) earnings plus any employee pension contributions.  The game is all about finding ways to Earn More and Spend Less with the difference between the two being the Save Hard that can be put to work within my investment portfolio.

During my first few years it was all about getting to that 60% savings rate but having achieved it the real challenge now is to stay there.  It really is starting to become difficult to maintain that savings position.  The main reason for this is that I measure my savings rate against gross income and I'm a 40% taxpayer.  This means that if I get a pay rise to even partially compensate for inflation I have to save all of it to keep to the 60% savings rate.  This is because of the stealth tax practised in this country known as fiscal drag which doesn't up rate tax brackets with inflation.  I therefore have to continually find ways to offset 100% of the inevitable inflation in my spending which given the current economic climate I'm sure you will agree is difficult.  Let me give just 2 simple examples, which I’ll likely expand on in subsequent posts:

  • This week we've had the announcement that SSE is to raise gas and electricity prices by 8.2%.  Last year I only used my central heating for about 4 hours so I have already minimised the elephant in the room for most people.  On top of that I still need to cook meals as it’s cheaper than eating out plus have the lights on when it’s dark but already use energy efficient bulbs (and only have the light on in the room that I am using).  Where do I go next?  Note I have a vested interest here as energy price rises hurt me but I own SSE in my HYP so I also want them to maximise profits.
  • To maximise both my better half and my savings I choose to commute a long distance to work which means I burn quite a lot of fuel and we all know fuel prices are rising.  I'm already using a fuel efficient car and always ensure tyres are correctly inflated, I'm carrying no excess weight plus have developed a very light right foot combined with the ability to coast rather than brake.  Where do I go next?  Here I actually have some ideas.  They seem to be working but I want to ensure they are sustainable before I post about them.  

Year to date my savings rate is still above target at 61%.  This might sound like I'm meeting target but I see trouble ahead given that in quarter 1 the rate was 67% and in half 1 it had slipped to 64%.  The problems are all coming from my good friends HMRC.  As I detailed 3 months ago HMRC made a large mistake which resulted in an underpayment of tax which they are now collecting but having now just lodged my tax Self Assessment I can see there is further trouble ahead.  This is coming from the fact that my net wealth is now a not inconsiderable sum with 32% of it not being tax efficiently invested (not in a SIPP, ISA or NS&I Index Linked Savings Certificate).  This means my annual tax bill on those investments is also now not inconsiderable.  By the time the underpayment is recovered and I've paid tax on those investments I can easily see my savings rate falling into the low 50%’s by year end.

Saving hard 9 months in score: Conceded Pass. Ok for now but definite trouble ahead.


My investing strategy is no secret and I have simply continued with the Retirement Investing Today Low Charge Strategy.  My asset allocations at quarter end are now:

RIT Asset Allocation
Click to enlarge

I continue to invest as tax efficiently as possible with my tax efficient holdings now consisting of:
41.0% (up from 40.8%) held within Pension Wrappers with the majority being within a SIPP.
15.4% (down from 15.7%) held within NS&I Index Linked Savings Certificates (ILSC’s).  Nothing I can do here.  New money continues to enter my portfolio while no new releases of ILSC’s come on sale.
12.1% (down from 12.2%) held within ISA Wrappers.

Tax efficiency quarter end score: Pass.  I’ve been able to stay fairly static, having gone from 68.7% tax efficiently invested to 68.5%, during a period where no NS&I ILSC’s were available.  Care is needed going forward though as while I want to keep using the tax benefits of Pensions I don’t want all my eggs in an easily tinkered with by government basket.  For me this is particularly important as retirement in my early 40’s is now starting to become a very visible and real possibility given the progress being made.

Investment expenses also continue to be treated as the enemy but I've been unable to reduce them further from 0.36% per annum.  This is really caused by my employers Group Personal Pension scheme which is now 9% of my wealth.  While it’s through an expensive insurance company I take advantage as it gives me salary sacrifice advantages.  I’d love to transfer it to my SIPP but I can’t while I'm an employee of the company.  More investigation is needed here to see if there is a loophole somewhere that will let me get my money out now.

Minimise expenses 9 months in score: Pass.  No change in the quarter but still relatively good given the employer pension scheme and some investments which I can’t sell without incurring a large amount of capital gains tax.

If Investing Wisely I should be beating (or at least matching if I was 100% Index Tracking, which IMHO is an admirable pursuit) an Index Benchmark.  For me that Benchmark remains a simple UK Equity and Bond Portfolio aligned in percentage terms with the building blocks of my own portfolio which is then rebalanced once every year.  Today that benchmark allocation remains at 69% UK Equities and 31% UK Bonds. The 2 indices I use to replicate that benchmark are the FTSE 100 Total Return (Capital & Income) Index which this quarter has returned 9.2% and the iBoxx® Sterling Liquid Corporate Long-Dated Bond Total Return (Capital & Income) Index which has returned 2.0%.  The return of my benchmark for the quarter is therefore 7.0%.

In contrast my portfolio has provided an annualised return of 7.1% and a personal rate of return of 5.3%.  This is the wrong side of what I'm working to by 1.8%.  At the half year update the difference was 1.7% so I've continued to head in the wrong direction.  Is the shine coming off my strategy?  Of course only time will tell but for now I'm staying the course as the long game detailed below shows I'm still well ahead.

Investment return 9 months in score: Fail.  I have failed to beat my benchmark.  Even though I'm hard on myself by including my portfolio expenses (fund and wrapper expenses, investment spreads, trading commissions, withholding tax on some investments and savings tax deducted at source) which I don’t account for in the benchmark it’s still a big difference and one I'm not happy with.

I need to remember this is a long game – it’s a time in the market and not timing the market game.  Thankfully the long game still looks good with the chart below tracking the performance of my portfolio, my benchmark and inflation (RPI).  Note that the chart assumes a starting sum of £10,000 which is not my portfolio balance at that time but is instead simply a nominal chosen sum to demonstrate performance.  As always I never reveal my portfolio values in £ terms as it’s irrelevant to readers as we all have different earnings, investments, risk profiles, savings rates and target retirement amounts.

RIT Portfolio Performance vs Benchmark
Click to enlarge

Since then end of 2007 the benchmark continues to beat inflation albeit by a small amount.  Inflation is growing at a Compound Annual Growth Rate (CAGR) of 3.3% with the benchmark at 4.1%.  In contrast my portfolio has increased at a CAGR of 6.7%.  In real inflation adjusted terms that’s now 3.4% (6.7%-3.3%) against a target of 4% over the long term.

Long term investment return score: Conceded Pass.  Some 0.6% from target but still 2.6% better than my benchmark.


This is what all that Saving Hard and Investing Wisely is about.  When I started this site in November 2009 I stated that my aim was to retire (which I define as work becoming optional) in less than 7 years.  Today we are nearly 4 years on and assuming I can continue to save at expected rates and can achieve that target real return of 4% going forward, I forecast that early retirement will come in about 2.5 years from today when I’ll be 43 years of age.  That will be a bit less than 7 years from waking up to what the game was all about to goal achieved.

Even though my investment return has been sub-par in the first 9 months of the year my net worth continues to grow quickly.  59% of the wealth increase year to date has come from Saving Hard with 41% coming from Investing Wisely.  You can see my progress to early retirement in the chart below.  At my end of 2012 review my Progress to early retirement was 65.2%.  By Quarter 1 2013 it had exploded to 70.0% and by half 1 it had crept to 71.2%.  It has now crept another 1.2% to 72.4%.  Annualised that’s 9.6% of the total wealth required to retire over the first 9 months of the year which is ok, not good, but ok.  Progress is defined as my Current Investment Wealth divided by My Retirement Number.

Early Retirement Indicator
Click to enlarge

Retiring early 9 months in score: Conceded Pass.  My strategy of Saving Hard and Investing Wisely still has me heading in the right direction.  I've moved 7.2% closer to retirement in 9 months.

So all in all I'm going to call a mediocre 9 months.  Progress to retirement remains acceptable but I am concerned at both a degrading savings rate and that poor investment return year to date.  How did you do?  Are you happy with your achievements?

As always please do your own research.


  • RPI for September 2013 is estimated.


  1. Do you ever calculate with hindsight how a different allocation might have worked? I ask because I'm moving to the cheerful view that the only things you can manipulate with high confidence are expenses and taxes. The other risks you simply try to reduce by diversification and prayer. Therefore I'd be curious how the following allocation strategy would have performed over the last few years, starting from (say) the First of January 2007.

    I start by assuming that what I'd view as cash, to wit money in instant access bank accounts, would constitute my emergency fund but would be part of my portfolio only if in (say) Cash ISA notice accounts awaiting expiry of the notice: as long as I have a large annual flow of money into my portfolio that's what I'd use for rebalancing, so there would be no need to keep any but the smallest cash reserve. On the other hand I'd view ILSCS, especially the wonderful old-style ones, as being honorary portfolio cash rather than bonds - you can cash them in pretty quickly, they have short maturities, they are guaranteed not to shrink in nominal terms and to grow in real terms. You don't find many bonds like that! Think of them as "supercash" if you like.

    That would leave the ISAs (12.1%), SIPPs (41.0%) and "TEs" [tax-exposed] (31.5%) for your investments in other stuff. Here I'd be tempted by three less-conventional assets for the TEs. First I'd take a plunge into Gold - preferably as Sovereigns or Britannias that I'd lock up in a few safety deposits. No VAT to pay, no income tax (of course) and no CGT. If you wanted some of your gold out of the easy reach of HMG, you could use ETFs and other stunts to park it in Canada, Australia, Zurich and Singapore: CGT would then be payable but that might be easily avoided using your CGT allowance and your wife's. Anyway, suppose you bung 10% into gold.

    You're left with 21.5% to cope with, and for this I'd consider two tricks. First, stick 11% into the B shares of Investors Capital, an investment trust. You'll see when you read up on it that it pays not dividends but "capital distributions" that are, bless 'em, free of income tax. The shares are exposed to CGT but you can manage that, especially if your gold is in coins rather than ETFs. This leaves 10.5% which I propose you build up towards by annual new investments in VCTs. You get back £30 of rebated income tax for every £100 you invest, and the dividends and capital gains (if any) are tax-free: these wonders accrue (if memory serves) as long as you keep them for five years.

    And then you choose your shares and bonds investments within your ISAs and Pensions to give you a diversification of risks that you think you can tolerate (and you'd also attend to the money not yet used in getting your VCT holdings up to 10%, since you'd be investing say 3.5% p.a. (since you expect only ca. three more years of high earnings) and then holding each for five years. After five years you'd reconsider anyway, especially since you might want to move the moolah into ISAs (if they're not capped - see this morning's Telegraph).

    Now then; would this have done any better? (Ideally you'd incorporate the better deal on VCTs that was available some years back, but the effect would be pretty small.) To be fair it's asking you to investigate, or more realistically perhaps to contemplate, the effect of both an attempt at tax reduction and adoption of a different allocation at the same time - but then tax reduction demands a different allocation, and then the question is whether it's a more attractive allocation anyway. For me, it might be: I reckon that the 25% allocation to gold in the Harry Browne Permanent Portfolio is probably higher than most investors have the stomach for, but 10% might be easily tolerable, especially since I can assure you that our own best investment in recent years has been a kindred investment in a silver ETF.

    1. Thanks for the very detailed response. Some excellent food for thought that I'm going to take away and digest over the coming weeks. Let me pop down some initial contrarian thoughts in the spirit of challenging each other:

      - I 100% agree with you on the expenses and taxes. As you know they are 2 pillars that I pursue with vengeance.

      - Other than my benchmark I don’t tend to really crunch many other scenarios. When I started out I did all my research and looked at plenty of other portfolios (including the permanent portfolio which I admit did show promise). I now don’t stray too far in this area as I don’t want to be distracted by the next new shiny thing. As many over at Bogleheads would say – Stay the Course.

      - My portfolio targets a 5% allocation to gold. In the end I went with the ETF PHGP. Why didn't I buy Sovereigns or Britannias? The buy/sell spreads are large and given the volatility of gold I expected to need to buy and sell relatively often to rebalance. The rebalancing hasn't had to occur anywhere near as often as expected but it is the most volatile of my assets so I was partially right. I have them both inside and outside my ISA. So far I've been able to sell when required without being hit with CGT. The storage costs were also a consideration.

      - Investors Capital B Shares. An interesting concept but back to your and my first point. I don’t find Ongoing Charges of 1.15% a particularly attractive proposition when you might only be getting a real 4% return. That’s 25% of the real return. I should have probably highlighted in my post that I have tax problems now while I’m a 40% tax payer but that won’t last. As soon as I “retire” I’ll be back to 20% (or living abroad) and then all those non-tax efficiently invested (but lovely) equities (including my HYP) are taxed at effectively 0%.

      All of the above said I’m not going to write any of your suggestions off until I do a lot more research particularly when it’s all neatly packaged as you suggest. I just hope you haven’t laid down a challenge that can beat my analytical skills :-)

    2. When I first invested in Investment Trust in the late 80s, I reckoned as follows. Suppose that per share there are £100 of assets that yield 5%, at management cost of 1%, leaving £4. Let it be a year when all the income is distributed, and let us ignore tax. But we can't ignore discount: suppose the trust shares sell at £90. Then the dividend yield is (£4/£90) x 100% = 4.444%. It's as if the management costs are reduced by 0.44% to 0.56%. Suppose further that I buy the shares in an Inv Trust investment scheme that's essentially zero-charge. Then 0.56% would be my total costs.

      Compared with say a modern ETF with costs of 0.25% on a platform with costs of 0.25% there's not much in it. (There's a bigger difference while yields and discounts are smaller than they were in the late 80s, but those conditions might not persist.) If the Inv Trust route should happen to get you into a favourable tax regime, then it might well be the more profitable.

      Since we are in the position that all our money is in ISAs and pensions rather than TEs, it won't matter much to me, but I would preach it to our younger generation if only I could distract their minds from house prices and the guaranteed riches they bring.

  2. And another thing: when I calculate hour portfolio, not only do I ignore our emergency cash, I multiply anything in pensions by 0.85 so that the comparison with ISAs and ILSCs is valid.

  3. Wow, just wow! I'm truly impressed with your ability to increase earnings, but more so with the huge amount put into savings!

    I thought I was doing well saving 33% of my NET income (I never think about gross because of our mutual friends at the HMRC).

    How do you plan to retire before 55 if 41% of your net worth is inside a pension? Presumably drawdown a larger proportion from the non-pension until 55?

    I'm much more paranoid than you - I only save what my employer contributes into a pension. The rest goes into ISAs. I was disappointed that, during my short working career (10 years so far), the government has already changed the age at which I can access my pension from 50 to 55.

    PS - dearieme - good to see someone else mention Harry Browne's Permanent Portfolio. This is my current choice of asset allocation, albeit 20% in physical gold and 5% in physical silver.

    1. the answer is in your own question

      if you put your money into a pension scheme you wouldn't pay any tax upfront (up to a limit)

      also some employers match contributions (up to a limit) and share the employers NI that they dont have pay on pension contributions

      so its feasible as a higher rate tax payer to make double the initial contribution to a pension that you would make to an isa

    2. Thanks for the compliment. I'd also say that a 33% NET savings rate is also not to be sniffed at. It's probably better than 95% of the UK population is achieving. I certainly started with a number much lower than that.

      That said if you want to improve on it make sure you keep pushing and innovating in both directions. That is, continually find ways to both earn more and spend less. My experience says you need to do both and can't forget about one.

      Yes I intend to drawdown from my non-pension assets plus play a few tricks with the mortgage I don't yet have. I've detailed the whole strategy in this post which might be of interest.

  4. Achieving a 4% real rate of return over the long run is pretty speculative. Rollover rate for IL NS is 0.05%. That's a guaranteed 3.95% below target. Cash ISA rates are minimal and well below inflation even for term deposits. That means the equity portion of the portfolio is having to make up the difference and its not going to be able to do it without taking pretty big risks. I'm assuming a real rate of 1% on my portfolio.

    1. I remember when Nigel Lawson issued ILSC paying RPI +4%

      This was about 25-30 years ago now

      A lot can change over time

      Your rate is quite prudent and you might well do better

    2. Is 4% speculative or your 1% to conservative? I honestly don't know what the future holds so I wouldn't like to guess either way but the past suggests that over the long term my portfolio would have returned about 4% after expenses. Of course I also know that the future is not a predictor of the future.

      My plan. Stay flexible and adapt. If it works out to be less than 4% then I'll work a few months longer which given my young age really won't be too much of a trauma. That's the beauty of my strategy. My large contributions mean that I get to "retirement" before compound interest really gets to do its work. I have just run a very quick simulation by knocking 1% return off every one of my assets projected returns. It shows retirement in about 3 years rather than 2.5 years.

      Given my young age this really wouldn't be too much of a trauma which is the beauty of my strategy IMHO. Its certainly a lot better than the person who banks on a real 4% return over a 30 or 40 year period to build that retirement nest egg. In that situation I agree with you that he/she is in trouble.

      Full disclosure: I am not banking on using 4% as my SWR. SWR's are a very different topic to projected portfolio returns during the accumulation stage.

  5. Anon, I don't know whether you've seen this Credit Suisse report.

    Their guess for the next 20-30 years is average annual real returns of: cash, negative 0.5%; bonds, 0%; equities 3%.

    So if RIT went for Harry Browne he might reasonably expect, say, Sovs 0%, cash (as ILSCs), 0%; bonds, as long duration I-L Gilts, 0%; equities 3%. On the face of it that suggests a return of 0.75% overall. But I've seen estimates of the effect of so-called "volatility harvesting" - the effect of re-balancing - in the range 1.66% to 2%. Call it 1.75%: then you're looking at 2.5% overall. If a young whippersnapper like our blogger reckons that, at his age, he'd like more equity and less in the way of cash, bonds or gold, then he might (say) aim for the Harry Browne rebalancing limit of 35% equity, with one or more of the others reduced accordingly. There's more than one way to skin a cat; as I implied above my own aim would be to reduce tax and then to find some well-diversified portfolio compatible with that: the main lessons I draw from Mr Browne are (i) diversify (preferably to include gold), and (ii) rebalance.

    1. "a young whippersnapper like our blogger" LOL. I haven't been called one of those in a very long time.

      Good point on "volatility harvesting". As I'm sure you know already I've set my rebalancing bands to be whenever the relevant asset class deviates by 25% from the target. For example I target a 5% holding for gold. If it gets to 6.25% I sell.

    2. "As I'm sure you know ": alas, my memory is too erratic to bet on such knowledge.

  6. Hi RIT,

    When you calculate your savings rate do you include your investment earnings as income? My reason for asking this is because it appears that you include tax on investment earnings as an expense, but there is no mention of investment earnings in your post. I admit that I haven't given this a lot of consideration, but my initial thoughts are that tax on investment earnings can't be separated from the earnings themselves, so either both should be included in the calculation or neither. What do you think?


    1. Hi Dave

      No I definitely don't include investment earnings as income. Gross income is only my day job plus my employers pension contribution. The investment earnings equal the personal rate of return (PRR) of 5.3%.

      As for tax it actually ends up a bit of a half way house. As mentioned in the post deducted at source interest, withholding tax on overseas investments etc (ie anything that is taken from my return before it is given to me) I don't include in the PRR calculation and so shows under performance of my investments. Remaining tax on interest as I'm a 40% tax payer, UK dividends and tax net of withholding tax on overseas investmnents etc (ie anything that is then collected/billed through my annual Self Assessment by HMRC) I consider spent money from my income (ie my savings rate takes a hit because of it).

      I could clean this up but the question becomes how do you account for tax on investments when you're measuring your own performance? If you take it from the investment return, which you rightly suggest is really the way it should be done, then you're really underselling your investment performance compared to a benchmark which isn't taxed.

      As it is it means I understate both investment performance and savings rate by a 'bit' each which is conservative. It both pushes me that little harder to improve both Save Hard/Invest Wisely and importantly makes tracking all my metrics much easier. I better not add any more complexity into what I do as my better half already questions whether it's all adding value...


    2. Hi RIT,

      I can understand the desire to keep things simple, it just seems a bit odd to me that a good investment performance should make it look like you are falling behind on your savings rate, and even more odd that you could end up showing an improved savings rate when the only thing that has changed is a reduction in taxes due to a poor investment performance! If you are aware of the issues and prepared to live with them then I guess it's okay.


  7. Wow, so detailed. We are so alike in some ways, but in this we're very different -- I don't really track budgeting at all!

    One thing that might be worth considering is how sustainable/realistic your early retirement plan is in the face of these escalating costs? If you're struggling to hit the 60% because of things like an 8% energy cost hike or other cost of living increases, have you stress tested your retirement assumptions?

    Another area I think you need to look at is being taxed on investments. Are you making full use of your CGT allowance every year? (Google my site for defusing CGT if not). You could switch some of your yielding investments outside of ISAs and SIPPS to no-yield investments, and then harvest the CGT gains every year.

    You may already be doing that but thought worth a mention if not.

    Good luck -- you're doing well and are nearly there!

  8. Great post - really detailed explanation. I would say that you are doing better than "ok".

    This has inspired me to set some more specific goals and to post regular updates on my own site each month. I'm sure that accountability was a contributing factor in your reaching 60% of gross income saved!