The June distribution laggards have now paid up so let’s take a pause to validate whether the tools and techniques from this site actually work in the real world. This is achieved by my living the Save Hard, Invest Wisely, Retire Early mantra. I'm a real life guinea pig putting my own money where my mouth is. A mistake in one of my concepts could affect not only me but also my family greatly.
In addition this half year saw HM Revenue and Customs change tune and make some aggressive demands for a tax error that they made in the 2012/13 tax year which enabled me to regularly save in the high sixties/low seventies.
Saving hard first half score: Conceded Pass. Without the HMRC recovery, which I’d already saved in previous periods, the savings rate would have been held. Since sorting this the new 55% savings rate has been sustained.
I continue to invest as tax efficiently as possible with my tax efficient holdings now consisting of:
Tax efficiency quarter end score: Pass. At the end of Half 1 2013 I was 68.7% tax efficiently invested. I’ve increased that slightly to 68.9% during a period where no NS&I ILSC’s were available. I also believe I am maximising all of the tax efficiency opportunities made available to me so far this year. Of course in theory I could pile more into my SIPP or Employers Expensive Defined Contribution Pension Scheme but I need to also consider:
Investment expenses also continue to be treated as the enemy. I've been able to reduce these further from 0.36% per annum in H1 2013 to 0.32% this half. 0.04% doesn't sound like much but put it in hard currency and it’s £200 more in ones pocket for a wealth pot of £500,000. Some wouldn't worry about that but I’ll take that.
Minimise expenses quarter end score: Pass. A good improvement given I also know where the large fees are coming from:
If I'm Investing Wisely I should be able to beat (or at least match 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 is 68% UK Equities and 32% 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 4.1% and the iBoxx® Sterling Liquid Corporate Long-Dated Bond Total Return (Capital & Income) Index which has returned 3.8%. The return of my benchmark for the half is therefore 4.0%. In contrast my portfolio has also provided a return of 4.0%.
Investment return quarter end score: Pass. I've matched my benchmark. So why a pass I hear you ask? My benchmark doesn't carry any costs where my portfolio sees expenses including fund and wrapper expenses, investment spreads, trading commissions, withholding tax on some investments and deducted at source tax on savings interest.
In the scheme of a lifetime of investing 6 months is an insignificant time period. My strategy is all about time in the market and not timing the market. So zooming out a little and the long game also still looks good with the chart below tracking the performance of my portfolio, my benchmark and inflation (RPI) since starting on this DIY investing journey. 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.
Since the end of 2007 the benchmark continues to beat inflation with Inflation growing at a Compound Annual Growth Rate (CAGR) of 3.0% compared with the benchmark at 5.1%. In contrast my portfolio has increased at a CAGR of 6.7%. In real inflation adjusted terms that’s now 3.7%. My whole investment strategy since 2007 has been to generate a Real Return of 4% over the long term and so I’ve fallen behind that target. Will it improve? Who knows what Mr Market is going to throw up so only time will tell.
Long term investment return score: Conceded Pass. Not at my long term real return target of 4% but better than my benchmark.
In addition to the 4% investment return my total net worth gained 3.3% from Saving Hard.
As I write this post I have now accrued 72.1% of the wealth I will need to Retire Early. You can see my progress to early retirement in the chart below.
Retiring early score: Conceded Pass. No longer on target for 7 years from blog start up but my strategy of Saving Hard and Investing Wisely still has me heading in the right direction. I’ve moved 8% closer to retirement in 12 months.
A reasonable 6 months with progress to retirement continuing nicely. How has your first 6 months been financially? Are you happy with your achievements?
As always please do your own research.
Assumptions:
SAVE HARD
It’s now my sixth year of aiming to save 60% of my earnings, where earnings are defined as my gross (ie before tax) earnings plus any employee pension contributions. Changes over the past six months mean that this target is now out of reach and a revision to a 55% target is needed. Before you start flaming me I confirm that I haven’t been a hypocrite and started a consumerist lifestyle. Instead the change has been caused by a healthy salary increase which is taxed at the 40% Higher Rate plus 2% National Insurance making 58% the most I could save from this new money. Additionally, to keep my better half and I on the same financial independence trajectory this increase means I now need to cover all of the household costs as well as direct some of my savings to my better half’s investment portfolio.In addition this half year saw HM Revenue and Customs change tune and make some aggressive demands for a tax error that they made in the 2012/13 tax year which enabled me to regularly save in the high sixties/low seventies.
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Saving hard first half score: Conceded Pass. Without the HMRC recovery, which I’d already saved in previous periods, the savings rate would have been held. Since sorting this the new 55% savings rate has been sustained.
INVEST WISELY
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:
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I continue to invest as tax efficiently as possible with my tax efficient holdings now consisting of:
- 43.6% held within Pension Wrappers with the majority being within a SIPP
- 14.6% held within the no longer available NS&I Index Linked Savings Certificates (ILSC’s)
- 10.7% held within a Stocks and Shares ISA.
Tax efficiency quarter end score: Pass. At the end of Half 1 2013 I was 68.7% tax efficiently invested. I’ve increased that slightly to 68.9% during a period where no NS&I ILSC’s were available. I also believe I am maximising all of the tax efficiency opportunities made available to me so far this year. Of course in theory I could pile more into my SIPP or Employers Expensive Defined Contribution Pension Scheme but I need to also consider:
- the risk that governments will continually change the pension rules; and
- financial independence and hence the option for early retirement is expected to arrive prior to age 45 at which time I won’t be able to access my pensions.
Investment expenses also continue to be treated as the enemy. I've been able to reduce these further from 0.36% per annum in H1 2013 to 0.32% this half. 0.04% doesn't sound like much but put it in hard currency and it’s £200 more in ones pocket for a wealth pot of £500,000. Some wouldn't worry about that but I’ll take that.
Minimise expenses quarter end score: Pass. A good improvement given I also know where the large fees are coming from:
- I'm choosing to salary sacrifice large amounts into the “expensive” insurance company pension fund offered by my employer. This enables me to take advantage of an employer contribution match up to a certain point plus my employer also contributes a portion of the employers NI saved. For me it means I end up with more wealth even after the higher fees. As soon as I get the chance it will of course be transferred into my Youinvest SIPP.
- I refuse to expose myself to unnecessary taxes in the hunt for expense minimisation. It’s all about minimising expenses and taxes not expenses or taxes.
If I'm Investing Wisely I should be able to beat (or at least match 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 is 68% UK Equities and 32% 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 4.1% and the iBoxx® Sterling Liquid Corporate Long-Dated Bond Total Return (Capital & Income) Index which has returned 3.8%. The return of my benchmark for the half is therefore 4.0%. In contrast my portfolio has also provided a return of 4.0%.
Investment return quarter end score: Pass. I've matched my benchmark. So why a pass I hear you ask? My benchmark doesn't carry any costs where my portfolio sees expenses including fund and wrapper expenses, investment spreads, trading commissions, withholding tax on some investments and deducted at source tax on savings interest.
In the scheme of a lifetime of investing 6 months is an insignificant time period. My strategy is all about time in the market and not timing the market. So zooming out a little and the long game also still looks good with the chart below tracking the performance of my portfolio, my benchmark and inflation (RPI) since starting on this DIY investing journey. 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.
Click to enlarge
Since the end of 2007 the benchmark continues to beat inflation with Inflation growing at a Compound Annual Growth Rate (CAGR) of 3.0% compared with the benchmark at 5.1%. In contrast my portfolio has increased at a CAGR of 6.7%. In real inflation adjusted terms that’s now 3.7%. My whole investment strategy since 2007 has been to generate a Real Return of 4% over the long term and so I’ve fallen behind that target. Will it improve? Who knows what Mr Market is going to throw up so only time will tell.
Long term investment return score: Conceded Pass. Not at my long term real return target of 4% but better than my benchmark.
RETIRE EARLY
This is what all the Saving Hard and Investing Wisely is about. When I started this site in November 2009 I stated that my aim was to retire (which at the time I defined as work becoming optional) in less than 7 years. We are nearly 4.75 years on and assuming I can continue to save at expected rates while achieving a real return of 4% I forecast that financial independence will arrive about 2.5 years from today at the grand old age of 44 years. That will be a bit more than 7 years from waking up to what the game was all about to goal achieved. So behind plan but if I’d been offered to be well on the way to financial independence in less than 10 years back when I went DIY in 2007 I’d have definitely said yes.In addition to the 4% investment return my total net worth gained 3.3% from Saving Hard.
Click to enlarge
As I write this post I have now accrued 72.1% of the wealth I will need to Retire Early. You can see my progress to early retirement in the chart below.
Click to enlarge
A reasonable 6 months with progress to retirement continuing nicely. How has your first 6 months been financially? Are you happy with your achievements?
As always please do your own research.
Assumptions:
- RPI for June 2013 is estimated.
Surely the benchmark should be a world index. That's what a pure indexer would be holding as they shouldn't be showing home bias. Look at the historic variance of country specific returns to see why.
ReplyDeleteGood point although I'm also conscious that my strategy and the benchmark were set a long time ago and I want to stay true to that over my whole wealth creation phase if possible. It is however probably worthwhile adding a World Index for Equities with UK Bonds as an additional benchmark at my next update to ensure I'm not kidding myself performance wise.
Delete"How has your first 6 months been financially?" Expensive - Bank of M & D duties, joiner, plumber....
ReplyDeleteAnd potentially soon a new car (well, eleven years old, but our current one is eighteen years old).
Ouch, sounds expensive...
DeleteThanks for the update RIT - good to see the original plan is working more or less as planned and that FI is not too far off. The ability to stick to 55% - 60% savings from income is absolutely amazing - well done.
ReplyDeleteI personally think a target for real return of 4% is possibly a bit on the high side - maybe 3 to 3.5% may be more realistic in the current climate.
Good luck with reaching your goal - be interesting to see what you decide to opt for when the target is reached!
Hi John
DeleteThanks for the wishes. For completeness my real return target of 4% was set based on historical returns of all my asset classes over long periods combined with expected asset allocations. Most of the data came from Hale's book. At the moment because of CAPE valuations I am underweight US, UK, Europe, Japan and Australian Equities. My current allocation suggests that if history should repeat then I'm staring at a real 3.8%. Dividends and Interest should be 2.5% of that.
Cheers
RIT
"maybe 3 to 3.5% may be more realistic in the current climate." An internet wag says that the answer is easy as pie. Assume 3.14159%.
ReplyDeleteHi, I think if you are taxed 40%, the first ~31000 are still taxed at 20%. So with that added on the NIC, you would have far more than 58% available to save.
ReplyDeleteI hope all readers with high income know that there is so called Form 17 which would enable significant tax savings on income if your wife is not taxed at 40%. This covers saving accounts too.
ReplyDeleteI missed this tricked for a couple years and lost a lot :(
Hi RIT,
ReplyDeleteThanks for the update. I have two questions on the savings rate you use.
First, does it include your employer's contribution to the pension or just your own?
Second, is there any particular reason you use gross earnings rather than net earnings?
I ask as there isn't really much out on the web about the standard way the 'savings rate' is calculated.
1. Yes it includes employers contribution. It is included in both the gross earnings and savings numbers.
Delete2. I went with gross earnings as it forces me to also think about how much is being thrown away in taxes thereby encouraging me to minimise them.
Thanks for the reply RIT.
DeleteI went out and calculated my savings rate including tax. It is frightening.
Why was it frightening?
DeleteI was just a bit shocked as I didn't expect my partner's and I combined savings rate to fall so much. It went from well above 50% to well below 50%. So clearly come more work to do.
DeleteA helpful lesson to pay a bit more attention to my taxes (IT, NIC and Student Loans). It has made it quite clear to me how big of a drain they are.
I individually think a focus on for actual come back of 4% is probably a bit on the great part - maybe 3 to 3.5% may be more genuine in the present environment.
ReplyDeleteI don't know what the future holds but if history repeats then my portfolio as it sits today should return circa 3.9% in real terms.
DeleteThank you for this update. I am very impressed by the charts but am having a hard time replicating them in excel or understanding the calculations behind them (particularly the last one). Could you be so kind to provide some guidance? Thank you again for the great blog.
ReplyDeleteThe last chart is built as follows:
Delete- The numerator is the earnings that I believe my portfolio could currently generate reliably.
- The denominator is the earnings that I believe I require to live a happy and fulfilling life without the added costs associated with needing to work.
I find it difficult to translate all this into reality without knowing the capital sum you are aiming for as sufficient to retire on. You say you will get there in 2.5 years and assuming a compound growth rate of 4% lets roughly assume an investment return of 8% leaving 19.9% to come from your savings. In very rough terms it looks as though you intended to save 10% of your goal amount per year over 7 years. Assume a goal pot of £500,000 that is a saving rate of £50,000 pa, a £1m pot equals a saving rate of £100,000 pa etc. maybe I am greedy but I wouldn't feel comfortable with a goal pot of less than £2m plus house owned mortgage free. If your goal pot is more modest, which I suspect it is, that would certainly be useful to know and why.
ReplyDeleteApologies for that and good question. I deliberately try and stay away from hard numbers as I'm conscious that everybody is different in this world. My concern is that if I started on £'s and pence then we would quickly descend into discussions like I'm never going to be able to earn that much, you need far more than that to retire or I can't believe you eat 'value brand baked beans'.
DeleteAs an example of how easily this could occur let me use your example. I have no intention of accruing anywhere near the £2M plus mortgage free house you mention. Why? If history repeats then assuming a sensibly diversified portfolio with modest expenses then IMHO you could probably draw £50k from that wealth and never run out. That would put you in the top 10% of UK earners and the vast majority of those are probably also paying off a mortgage and saving something. It might be right for you but I don't believe it's right for me. My preference is to go earlier with a less expensive lifestyle. Of course we all need to DYOR as you might be proved to be right.
Instead of getting into this detail we all win if we think of and share techniques to:
- maximise earnings either in current job, current company, new company, new career, own business or 'side hustles'.
- spend the least amount to give the standard of living that we as individuals desire.
- build a diversified investment portfolio that meets our own personal risk profile.
- minimise expenses and taxes that eat into the return that you see from that portfolio.
- ensure we have enough for secure financial independence without going over the top.
Of course it might also just be my British conservatism and reluctance to talk about earnings and wealth :-)
Thank you for the full reply. I have set various retirement targets in the past, achieved them and yet continue to work. Do I enjoy my work? No. I have incredibly demanding clients and work very long hours. If I am very honest I think what I and many others fear is divorce. This is little mentioned but I have seen colleagues' and friends' plans blown to smithereens by divorce, with 10 years plus added to their retirement plans. Another factor has been university fees. I am covering these for my 2 children and the annual cost with maintenance is eye-watering, but nothing compared to the iniquitous burden otherwise landed on the current student generation.
DeleteThanks for adding a bit more flavour to the discussion. I have no idea how good your relationship is but divorce is but one risk. I personally am not baking it into my risk assessment but I do have others in there such as the risk of being hit by a bus (insert any other serious event) just before or just after retirement.
DeleteI'm wondering if it is about divorce risk or simply One More Year syndrome (OMY)? Jacob over at Early Retirement Extreme (http://earlyretirementextreme.com/one-more-year-before-comfort.html) has had a bit to say about it as well as the good folks at early-retirement.org (http://www.early-retirement.org/forums/f29/handling-the-just-one-more-year-syndrome-20091.html). I know that personally I'm still a little way off and already I can feel myself getting a little edgy. It's something I'm going to start working on well before financial independence day to hopefully give me more courage to move into early retirement.
I will be impressed if you do it. Better than covering off every risk but then having no time to enjoy retirement. Of course the other point of view is never to retire but just keep on doing something you enjoy.
DeleteGetting to financial independence is I suspect going to be the easy part of the journey. Going all the way and entering early retirement at such an early age is I suspect going to be difficult and take some real courage. I have a few years to prepare and build the courage with this blog helping a lot.
Delete