Saturday 27 February 2016

12 Months to Go?

12 months ago I suggested that I might only have 18 months to go before FIRE (financially independent retired early).  The caveat placed on this bold statement was “from here if I can save 55% of gross earnings consistently and receive a real 4% investment return then I am exactly on target to be able to retire in 18 months”.  Since that post:
  • I've struggled to save 55% of gross earnings but this has been more than made up for with earnings increases which were subsequently saved; and
  • Mr Market decided to go all bearish with my Vanguard FTSE All Share tracker still down 10.6% and my Vanguard Developed Europe tracker down 8.8%.  My Vanguard S&P500 tracker also took a dip but has today recovered to a positive 1.9%.  

None of these market gyrations or savings disappointments bothered me.  Instead I have just kept saving as much as I can, which is then used to save for a family home and continually passively rebalance my portfolio by investing into the worst performing asset classes.  Updating my portfolio this morning resulted in the following chart staring back at me:

Path Trodden Toward Financial Independence
Click to enlarge, Path Trodden Toward Financial Independence

A new record level of wealth at £880,000 and importantly if I look at what I should be able to save over the next 12 months, assume a 4% investment return and compare that to my FIRE target of £1 million, I now only have 1 year to FIRE!

This was a target set a long time ago and some 4% Rule believers might even suggest it’s a little conservative, but given I'm going to be FIRE’d for a long time I have no problem with a bit of conservatism.  With this in mind I thought it prudent to at least have a relook at my probability of success if I was to pull the FIRE’ing pin today.  After all you are a long time dead.

A Mediterranean home, which I expect will cost us EUR350,000, is still very much at the top of the list of requirements.  Allowing for purchase costs and converting at today’s exchange rate would result in my pocket being lightened by £288,000.  That leaves me with £592,000 to live off for the rest of my life.  My expected annual spend is looking like being EUR25,000 which includes car depreciation plus home wear and tear estimates as well as plenty of fun money.  That gives me the opportunity to slow/defer spending when Mr Market has hissy fits in the future.

With a large portion of my wealth tied up in £’s and my spending looking like being predominantly in Euro’s I need an exchange rate.  For that I've gone back and looked at average annual exchange rates since the Euro’s inception then picked the most unfavourable.  That was in 2009 where the exchange rate averaged 1.123 so my £592,000 just turned into EUR665,000.

Now to my asset allocations.  In FIRE I still want to live off the dividends so want 3 years of expenses in cash which is 11%.  Additionally I'm settling on 5% Gold, 10% Property (which I’ll assume for the purposes of later simulation will return somewhere between equities and bonds over the long term), 24% Bonds and 50% Equities.  Expenses should run to no more than 0.27% per annum.  I’ll also assume a 40 year retirement period.

As always I'm going to assume I’ll get no State Pension with it forming nothing more than an insurance policy in my planning.

Plugging all of the above numbers into the excellent cFIREsim, which admittedly is US centric so might also be a little bullish if history were to repeat, and I end up with the following:

cFIREsim Simulation Cycles with starting wealth of EUR665,000 and spending of EUR25,000
Click to enlarge, cFIREsim Simulation Cycles with starting wealth of EUR665,000 and spending of EUR25,000

If I was to retire today and cFIREsim history were to play out for me I’d only have a 75% chance of FIRE success.  Bummer.  Push on and get total wealth from today’s £880,000 to £1,000,000 and that 75% turns into 100%.

cFIREsim Simulation Cycles with starting wealth of EUR800,000 and spending of EUR25,000
Click to enlarge, cFIREsim Simulation Cycles with starting wealth of EUR800,000 and spending of EUR25,000

It looks like I’m still turning up to work on Monday and will be for another 12 months...

As always DYOR.


  1. Another interesting post. In practice, how quickly do you think you will stop working entirely once you reach your goal? Do you think the temptation will be there to work "just one more year" to make things a little more safe?

  2. With market fluctuations similar to 1 year's pay, it is so tempting to do that extra year. £1m is a good target, and I was past it, but the recent falls have put me under again. If instead of thinking of the extra year as caution money, but pure 'fun' money, it helps motivate. A full salary is a lot of pints of real ale...

  3. Good post. Run, do not walk, from the UK. You know it's going to get *a lot* worse.

  4. @mwpt and John B
    The one more year (OMY) problem is an interesting one. From where I sit today I am bullish that as soon as my Saturday financial update shows £1,000,000 a resignation letter will be presented the following Monday. The interesting piece for me is that I also see on personal finance fora a lot of people who are doing OMY's. It's one of the reasons I keep at this blog. It keeps me in the game and thinking every week which hopefully will enable me to be confident come FIRE day. The next 52 weeks are for sure going to be interesting.

    @Ben F
    Please don't misunderstand me. I have great love and fondness for this (once) great country. It's just when I weigh up location Pro's / Con's and can remove the 'work opportunity' Pro a lot of other locations rise above the UK.

  5. Thanks RIT. I would find myself in the one more year camp. I'm too risk averse and perhaps a little cynical to not take opportunity for the extra risk mitigation. But the big caveat there would be the balance between how much the effort and toll taken by the extra year is vs the reward (further security, a little extra lifestyle).

    I happen to enjoy my work, but it does sound like the sacrifices you've made to earn the extra dosh would be taking a toll, so can quite understand wanting to resign as soon as you reach FIRE.

    1. I should say that I don't actually dislike my work. I spend a lot of my time there so it's important that I do get satisfaction from it. It's more about the other choices I have available to me if I don't work. I've done what I do for a while now and I'd really like to try something new.

  6. Hi RIT,

    @ 27/2 23:27 you say It's one of the reasons I keep @ this blog "

    What can we expect to happen to your blog after FIRE ? - is it something you already have some ideas about ?

    Clearly weekly would almost certainly be too often , once things are stabilised and settling down .

    I am sure a lot of us would like to know your thoughts on this .

    1. Hi stringvest

      An interesting question and one I don't really have an answer to. So to give a reasoned answer let me show both sides of the coin.

      Why wouldn't I? If I look at some of the blogs I've followed where the author is working towards FIRE I've noticed that when they hit the target their posting slows considerably or even stops. Two examples would be Living a FI where he is now posting very infrequently and more about lifestyle than FI mechanics. Brave New Life in contrast just stopped after he announced he'd bought a smallholding and was about to live happily ever after.

      Why would I? Here I need to think about why I blog in the first place. I've mentioned one above. Some others:
      - I learn a lot from this blog and not just from my own research. While I don't reply to every comment, time is to short these days, I do read every one and they all help. For example some comments from your good self have given me plenty of food for thought. Some have not been appropriate for me but some I've definitely acted on albeit admittedly in my own way. That is a very good reason to keep at it as it gives benefit and I also happen to enjoy it. I hope it does the same for others.
      - My PF views (at least I think) are quite different and contrarian to those presented in the mainstream media. I've now written 432 posts on my FIRE journey and why I think it's right compared to others. I'm no activist but I think I at least 'owe' readers an ending to the story.
      - The blog holds me very accountable to my thinking. I have nobody around me on a similar journey and advertising/'the media' are very much in opposition to me view. Writing about it keeps me true to my approach and prevents me falling back into 'bad habits'.
      - I think the journey post FIRE is going to still require plenty of thought, albeit of a different type. There is I think still a story there.

      So having written this reply I think there is a good chance you'll have to put up with me for a little while yet...

  7. Did you read the new yorker profile on mr money moustache?

    How fair do you think the piece is?

    1. No I didn't read that one. In all honesty I don't find MMM so relevant any more so I've sort of tuned out.

      What was your view of the piece?

  8. Consider an American couple in the spring of 1929. They've realised a heap of capital by selling their business. They decide to live off that capital, and to diversify their investments between land in Florida, shares on Wall St, and cash in local banks. Ruin follows. Maybe it would have followed anyway if they had never sold the business but such episodes must surely be frightening?

    I know an American couple that lost most of their College savings fund in 2000 and had to turn to grandparents to pay for the children to go to university. The couple are still wondering how, where, and when they can afford to retire. How grandpa and grandma are doing financially I don't know. If the old folks are still well off maybe the couple are hoping for an inheritance to save the day. How dismal.

    It must be awfully tempting to wait until the forthcoming crash has happened before quitting the day job. People say you can't do market timing, but I'm a contrarian. And retiring in middle age seems to me potentially to require market timing in spades.

    1. Im personally a big fan of "one more year" for this reason

    2. A poor sequence of returns early in FIRE is one of the biggest risks I've found out there. It's why I've written about sequence of returns, modelled living off of dividends in bad bear markets (historically dividends have been less affected than capital) and why my portfolio is (to some) conservative but at the same time hopefully less volatile in the bad times.

      The cFIREsim models I've run above include 1929 as a start year. Interestingly even if I was to retire now it is one where over a 40 year period I would have been ok with a positive end result. The worst result actually comes from a start year of 1966.

      The problem with waiting for the forthcoming crash is that it might not be forthcoming, might not be serious enough to cause irrepairable damage or the 'big one' might be so far off in the future that it also doesn't cause irrepairable damage. In the other corner you're a long time dead.

    3. Of course you can always go back to work. Your skillset might atrophy so it would be hard to get back into your old haunts but you should be able to get other work to cover a shortfall. Soldiers who leave the services in their early 40s do well with second careers topped up with their early pensions.

      A lot depends on whether you are a high earner now, so the gap with mean wages is large, or have funded an expensive first few years of retirement. I'd certainly want to do lots of exotic travel while I was fit, which goes against a dividend limited early retirement, with capital drawdown only occurring when I'd become more sedentary.

      FIRE can always be FIDOS - Financially Independent, Do Other Stuff

    4. I hope you're careful in Malta.

  9. Hi RIT et al,

    Yes- hopefully you will avoid what has happened to many who have recently retired and decided against an annuity - with their funds remaining invested ( drawdown ). Your predicted withdrawal rate is low - and you think you may be able to forgoe withdrawal in a serious market downturn .

    You also have a bit of a safety net / buffer in that you have discounted receiving ANY State Pension - a reasonable guess that might be about £6K in today's money.

    But NB you would be better off ending up in a country where you would be entitled to annual uplifts of this pension.

    And then there are the risks from BREXIT. If UK leaves EU there will be many UK expats currently living in EU countries who will find that they are no longer entitled to free access to healthcare as the reciprocal agreements will become nul and void. Even the full cost of drugs can be frightening - let alone having to cope with the full cost of medical and dental care.

    So -I suggest you at least wait for the outcome of the June referendum before you decide where you are going to move to .

  10. Similar position - older - more modest property aspirations and smaller target. Also my particular way of earning a decent living - as an IT contractor should - in theory - allow me to dip in and dip out of employment until I'm 60.

  11. Having just reached the theoretical 18-month-to-go stage myself, I'm following your posts with interest. There are some opposites - I'm currently an "economic migrant" working in the eurozone, and intending to return to the UK to retire. BREXIT could be bad news for you (no right to live in EU countries, worse exchange rate, difficulty accessing UK financial services and a surprising number of complications in everyday life). As a fair percentage of my future income depends on euro state pensions, BREXIT is also a risk for me (non-EU citizens need more years of contributions than I have to be entitled to a pension in the two countries concerned), and the other uncertainty I have is that the euro itself may not survive, affecting my pension income.

    I've come to the conclusion that the cFIREsim numbers are too optimistic - not just for the generally higher US growth, but because longer simulations have a high % of runs which include the post-war boom years, which for demographic and resource reasons are unlikely to repeat. Add in exchange rate volatility, and you also get a much wider range of outcomes. I'm therefore inclining towards a lower anticipated real-terms return than you - maybe less than 2%. I need to tie that in with a re-thought sequence-of-returns simulation and given that and the above uncertainties I may well opt for "just one more year", assuming I still have the right to live here! But a lot of this will become clearer after June.

  12. remember for all these worse case-scenarios being pointed out that you still have a bunch of human capital left to deal with them. Totally different to someone doing the same thing aged 65.

    There is nothing outlined here that should trouble someone who has proven themselves to be a top 0.5%er and had the brains to figure out how to duck out of the rat-race in their early 40s

  13. What has interested me reading this is the use of a specified capital sum as being the number to FIRE from, ie the £1m in the author's case. With any significant exposure to equities, having a savings pot of £1m on retirement in 1999 versus having a savings pot of £1m on retirement in 2009 would clearly lead to very different outcomes for the retiree.

    Whilst timing the markets is not sensible necessarily, I think that having an appreciation of where you stand when considering retirement allows you to make some kind of judgment on sequence of returns risk, ie if the indexes you are invested in are trading at p/e of 40 then the risk is high, if they are trading at bargain basement levels the risk must be lower.

    The inverse of this "risk must be lower" statement is that maybe you could actually consider retiring with less money if you know that, by historical standards, you are retiring at a market low, where the expected future returns are therefore higher. Clearly the opposite holds for someone retiring when markets are high by historic standards, implying lower future returns.

    I think Wade Pfau in the US has done some work on this theme.

    Not sure how you make this thought actionable though, which may be why people prefer to stick to a capital pot size that they can judge definitively!

  14. hi rit
    well done you have done so well in 10 years.
    what is your actual age now?
    im banking on state pension when im 67 of just under £8,000
    im 51 at present and i will have all my stamps in place. as i plan on working another 6 years.
    you say your not relying on state pension is that because your much younger than me and you wont have worked the 35 ish years to pay all your stamps,?