Saturday 2 September 2017

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.

Saturday 12 August 2017

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.

Saturday 5 August 2017

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.

Saturday 29 July 2017

Cyprus healthcare is changing for the better

Cyprus Ministry of Health
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?

Sunday 16 July 2017

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.

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

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

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

Let’s look at the detail.