There are many variables that go into a FIRE (financially independent retired early) plan or strategy – earnings now, what can I earn, spending during accrual, spending during drawdown, attraction to consumerism, investment types, investment returns, investment expenses, taxes now, taxes in the future, investment landscape changes, investment product changes, government changes, how much is enough, is it really enough... I think this is why, for me at least, I've struggled a little to understand exactly when I started on my FIRE journey because it’s not one of the situations where everything is in play on day 0. Instead it’s a gradual process of continual learning while in parallel incorporating and changing these variables into the mindset and plan.
All of that said I am a very quantitative person and so to hold myself accountable I need a start date. I've previously locked in October 2007 as the date meaning today’s review is not only 2015 year to date progress but also represents 8 years of my FIRE journey with 6 years of it (next month at least) having been shared on this blog.
So with that out of the way let’s get into the nitty gritty. As always I like to reinforce that unlike some who talk the talk but don’t walk the walk what you see here is my real life shown in financial terms. Behind every number are real life personable compromises/decisions, for example higher earnings for me have meant more body stress and less family time, and mistakes. It’s also one way, my way, of showing how financial decisions are shaping what’s important to myself and my family – a life not burdened by the need to work for The Man but instead one able to focus 100% on what’s important to us. Is it right or wrong? I think it’s neither. It’s right for us but probably not right for anyone else in its entirety but I’d like to think different elements gel with different people and maybe even help others which is one of the reasons (along with holding myself accountable) I still continue with this blog after 6 years.
As always we’ll focus on and score the three areas that I believe are essential to get over the Financial Independence line - Save Hard, Invest Wisely and Retire Early.
This quarter I've again been able to squeeze a small Gross Earnings increase in exchange for yet more responsibility and work. Over the years I've been able to manage a high workload with high stress well, which has helped me increase my earnings by a factor of 7 in real terms, however I'm now starting to feel that even I'm getting towards peak earnings because of body capability limitations (I'm a 1% inspiration, 99% perspiration type of person). It is still too early to call but for now for the first time that inkling is there.
Spending remains very much in control even though late Q3 saw a big blowout in spending. For me a key element of my spending is Total Spending minus Rent minus Work Costs as these two expenses will disappear in FIRE (of course replaced by some new ones like a car running costs and home maintenance). 6 months into 2015 and that spend was averaging £611 per month and today it’s blown out to £672! Analysing the data and its all (and a bit more) down to a FIRE location research trip, some might call it a holiday, and I’m ok with it. It’s real of course and will happen again so it goes into my FIRE model.
Crashing Earnings, Spending and Taxes together results in a Savings Rate for the quarter of 50.1% against a plan of 55%. This is worse than last quarter’s 53.8% and also worse than Q3 2014’s identical 53.8%. This looks bad until I look at the pounds, shillings and pence. Looking at those and Savings are twice what they were at the equivalent time last year.
Saving Hard score: Conceded Pass. While not achieving a plan of 55% in pound terms I’m still a long way above 2014. Savings have also added 9.6% to my net wealth in the first 9 months of the year – a surreal amount given I’m towards the back end of my Financial Independence Retire Early (FIRE) journey combined with me now channelling a large portion of my savings to my better half, rather than the wealth I report here, to help synchronise our FIRE journeys. Full disclosure: for numerous reasons I won’t go into here we run 2 FIRE pots. Mine is to cover all family outgoings and my own discretionary spending. My better half covers their discretionary spending only. The wealth you see reported here is therefore very much the lions share.
My investing strategy continues largely in line with that developed at the start of my DIY journey except for 2 tweaks (mentioned a few times previously) that are now necessary given my relative closeness to Financial Independence.
The first is to increase cash and cash like holdings to give the option of a family home purchase and to ‘ensure’ I can live off dividends alone in FIRE. If we settle in Spain then a home could cost EUR300k to EUR350k, Malta a little more at EUR350k to EUR400k and if we stay in Blighty then that could easily increase to £400k. Adding on stamp duty of £10,000 and a living off dividends cash stash of £49,000 results in a worst case cash holdings requirement of up to the thick end of £460k! Wow. In contrast my cash holdings move from a midyear 10.1% of total wealth to 10.5% today. That’s £86,000. Add on my NS&I Index Linked Savings Certificates which I’ll also liquidate and that jumps to £192,000. Much more work to do here me thinks...
The second has been to increase total wealth less cash dividends to 3% with that number coming from a decision to drawdown at 2.5% after expenses which then leaves a little for reinvestment to ‘safeguard’ the living off dividends idea. This is well in control now with an improvement from 3.1% at midyear to 3.4% today. In monetary terms I expect dividends to just about surpass £20,000 in 2015 with £15,000 already in the bag. In fact I think it’s so in control that I'm going to slow down the High Yield Portfolio (HYP) additions within the UK Equities portion of my portfolio to try and bring some more diversification into play. More on that in a subsequent post.
For completion my current asset allocations are:
I continue to invest as tax efficiently as possible with my tax efficient holdings now consisting of:
Investment expenses also continue to be treated like the enemy. In 2014 I took these from 0.36% to 0.31% and then by midyear 2015 I’d further reduced these to 0.27% by finally being able to transfer my live company defined contribution pension into a SIPP. 9 months in I've been unable to make a further dent and they remain at a stubborn 0.27%.
Minimise expenses score: Fail. What can I say but no progress...
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. My benchmarks are continually challenged by readers but at least for now my Benchmark here 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 67% UK Equities and 33% UK Bonds. The 2 indices I use to replicate that benchmark are the FTSE 100 Total Return (Capital & Income) Index which in the first 9 months has returned -3.5% and the iBoxx® Sterling Liquid Corporate Long-Dated Bond Total Return (Capital & Income) Index which has returned -0.9%. The total return of my benchmark is therefore -2.6%. In comparison my -1.6% (-2.2% annualised) return means, unlike at the midyear point, I’m beating my benchmark.
Investment return score: Pass. I’m back to beating my benchmark. I’m particularly happy with this as I also know that my benchmark doesn’t carry any investment 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 9 months is an insignificant time period. My strategy is all about time in the market and not timing the market so as always let’s zoom out and look at my performance since I started down this DIY road. This looks good compared to my benchmark with the chart below tracking the performance of my portfolio against 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.
Since the end of 2007 the benchmark continues to beat inflation with Inflation growing at a Compound Annual Growth Rate (CAGR) of 2.8% compared with the benchmark at 4.0%. In contrast my portfolio has increased at a CAGR of 5.6%. In real inflation adjusted terms that’s now 2.8%. My whole investment strategy since 2007 has been to generate a Real Return of 4% and so I’m well behind plan. It really is fortunate that I've been able to increase salary and hence increase £ savings at a faster rate than planned over this journey or my rapid FIRE journey might have been in trouble.
Long term investment return score: Fail. Ahead of long run benchmark but well behind plan.
Savings and investment return have allowed total wealth to increase 8.0% in the first 9 months of 2015. A reasonable combined amount with poor investment returns being yet again rescued by savings. Two charts demonstrate the effect of this.
Firstly, if I stopped work today my earnings would have to come from drawing down from my investment wealth. The chart below shows on a month by month basis what that drawdown rate (so that’s current Spending divided by Total Wealth) would be as against my current living costs. My target of 2.5% is shown and importantly while the monthly actuals are pretty noisy that trend line is now well below 3% and trending nicely towards 2.5%. It’s important to note that if I was accepting of the 4% Rule I’d be well and truly FIRE’d now.
Secondly, I look at it in terms of how much wealth I currently have compared to how much I need to accrue (so that’s future expected Spending divided by 2.5% plus a home purchase for my family) to be able to drawdown at a rate of 2.5%. As I write this post I have now accrued 81% of the wealth I need. In £ terms that’s wealth of £825,000 against a target of a little over £1 million. Charted the journey looks like the below:
Retiring early score: Conceded Pass. Off target for 7 years from blog start up but less than 10 years from going DIY. In the 9 months of 2015 I’ve accrued a further 7.1% of the wealth I need for FIRE.
2015 is proving to be an interesting year. While my Savings Rate in % terms doesn’t look so healthy I’m more than happy with my Spending and Absolute Savings. I’m a little disappointed that my investments are lagging and in all honesty have lagged what I expected all through this journey so far. That said when I take a step back and look at the bigger picture FIRE is really not that far away. If it happens as planned I’ll be 44 years of age which really IMHO isn’t too shabby an effort.
How is your year to date performance progressing? Are you happy with your achievements?
As always please do your own research.
All of that said I am a very quantitative person and so to hold myself accountable I need a start date. I've previously locked in October 2007 as the date meaning today’s review is not only 2015 year to date progress but also represents 8 years of my FIRE journey with 6 years of it (next month at least) having been shared on this blog.
So with that out of the way let’s get into the nitty gritty. As always I like to reinforce that unlike some who talk the talk but don’t walk the walk what you see here is my real life shown in financial terms. Behind every number are real life personable compromises/decisions, for example higher earnings for me have meant more body stress and less family time, and mistakes. It’s also one way, my way, of showing how financial decisions are shaping what’s important to myself and my family – a life not burdened by the need to work for The Man but instead one able to focus 100% on what’s important to us. Is it right or wrong? I think it’s neither. It’s right for us but probably not right for anyone else in its entirety but I’d like to think different elements gel with different people and maybe even help others which is one of the reasons (along with holding myself accountable) I still continue with this blog after 6 years.
As always we’ll focus on and score the three areas that I believe are essential to get over the Financial Independence line - Save Hard, Invest Wisely and Retire Early.
SAVE HARD
Unlike most of my fellow personal finance bloggers Saving Hard is defined as Gross Earnings (ie before taxes, a crucial difference compared to others) plus Employee 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.This quarter I've again been able to squeeze a small Gross Earnings increase in exchange for yet more responsibility and work. Over the years I've been able to manage a high workload with high stress well, which has helped me increase my earnings by a factor of 7 in real terms, however I'm now starting to feel that even I'm getting towards peak earnings because of body capability limitations (I'm a 1% inspiration, 99% perspiration type of person). It is still too early to call but for now for the first time that inkling is there.
Spending remains very much in control even though late Q3 saw a big blowout in spending. For me a key element of my spending is Total Spending minus Rent minus Work Costs as these two expenses will disappear in FIRE (of course replaced by some new ones like a car running costs and home maintenance). 6 months into 2015 and that spend was averaging £611 per month and today it’s blown out to £672! Analysing the data and its all (and a bit more) down to a FIRE location research trip, some might call it a holiday, and I’m ok with it. It’s real of course and will happen again so it goes into my FIRE model.
Click to enlarge, Retirement Investing Today 2015 YTD Average Monthly Spending
Crashing Earnings, Spending and Taxes together results in a Savings Rate for the quarter of 50.1% against a plan of 55%. This is worse than last quarter’s 53.8% and also worse than Q3 2014’s identical 53.8%. This looks bad until I look at the pounds, shillings and pence. Looking at those and Savings are twice what they were at the equivalent time last year.
Click to enlarge, RIT Savings Rate
Saving Hard score: Conceded Pass. While not achieving a plan of 55% in pound terms I’m still a long way above 2014. Savings have also added 9.6% to my net wealth in the first 9 months of the year – a surreal amount given I’m towards the back end of my Financial Independence Retire Early (FIRE) journey combined with me now channelling a large portion of my savings to my better half, rather than the wealth I report here, to help synchronise our FIRE journeys. Full disclosure: for numerous reasons I won’t go into here we run 2 FIRE pots. Mine is to cover all family outgoings and my own discretionary spending. My better half covers their discretionary spending only. The wealth you see reported here is therefore very much the lions share.
INVEST WISELY
Investment returns at the end of quarter 1 were a healthy 5.8%, by midyear they had fallen back to 1.1% and 9 months in (03 January 15 to 03 October 15) they’ve now gone negative at -1.6%. These returns yet again reinforce just how important Saving Hard is to my FIRE journey. In 7 out of 8 periods savings continue to make a greater contribution to my wealth than investments. This continues to the most surprising learning of my entire journey so far. Just where is that miracle of compound interest?
Click to enlarge, RIT Year on Year Change in Wealth
My investing strategy continues largely in line with that developed at the start of my DIY journey except for 2 tweaks (mentioned a few times previously) that are now necessary given my relative closeness to Financial Independence.
The first is to increase cash and cash like holdings to give the option of a family home purchase and to ‘ensure’ I can live off dividends alone in FIRE. If we settle in Spain then a home could cost EUR300k to EUR350k, Malta a little more at EUR350k to EUR400k and if we stay in Blighty then that could easily increase to £400k. Adding on stamp duty of £10,000 and a living off dividends cash stash of £49,000 results in a worst case cash holdings requirement of up to the thick end of £460k! Wow. In contrast my cash holdings move from a midyear 10.1% of total wealth to 10.5% today. That’s £86,000. Add on my NS&I Index Linked Savings Certificates which I’ll also liquidate and that jumps to £192,000. Much more work to do here me thinks...
The second has been to increase total wealth less cash dividends to 3% with that number coming from a decision to drawdown at 2.5% after expenses which then leaves a little for reinvestment to ‘safeguard’ the living off dividends idea. This is well in control now with an improvement from 3.1% at midyear to 3.4% today. In monetary terms I expect dividends to just about surpass £20,000 in 2015 with £15,000 already in the bag. In fact I think it’s so in control that I'm going to slow down the High Yield Portfolio (HYP) additions within the UK Equities portion of my portfolio to try and bring some more diversification into play. More on that in a subsequent post.
Click to enlarge, RIT Annual Dividends
For completion my current asset allocations are:
Click to enlarge, RIT Asset Allocations
I continue to invest as tax efficiently as possible with my tax efficient holdings now consisting of:
- 45.2% held within SIPP's
- 12.7% held within the no longer available NS&I Index Linked Savings Certificates (ILSC’s)
- 9.7% held within a Stocks and Shares ISA.
Investment expenses also continue to be treated like the enemy. In 2014 I took these from 0.36% to 0.31% and then by midyear 2015 I’d further reduced these to 0.27% by finally being able to transfer my live company defined contribution pension into a SIPP. 9 months in I've been unable to make a further dent and they remain at a stubborn 0.27%.
Minimise expenses score: Fail. What can I say but no progress...
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. My benchmarks are continually challenged by readers but at least for now my Benchmark here 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 67% UK Equities and 33% UK Bonds. The 2 indices I use to replicate that benchmark are the FTSE 100 Total Return (Capital & Income) Index which in the first 9 months has returned -3.5% and the iBoxx® Sterling Liquid Corporate Long-Dated Bond Total Return (Capital & Income) Index which has returned -0.9%. The total return of my benchmark is therefore -2.6%. In comparison my -1.6% (-2.2% annualised) return means, unlike at the midyear point, I’m beating my benchmark.
Investment return score: Pass. I’m back to beating my benchmark. I’m particularly happy with this as I also know that my benchmark doesn’t carry any investment 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 9 months is an insignificant time period. My strategy is all about time in the market and not timing the market so as always let’s zoom out and look at my performance since I started down this DIY road. This looks good compared to my benchmark with the chart below tracking the performance of my portfolio against 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.
Click to enlarge, RIT Portfolio Performance vs Benchmark vs Inflation
Since the end of 2007 the benchmark continues to beat inflation with Inflation growing at a Compound Annual Growth Rate (CAGR) of 2.8% compared with the benchmark at 4.0%. In contrast my portfolio has increased at a CAGR of 5.6%. In real inflation adjusted terms that’s now 2.8%. My whole investment strategy since 2007 has been to generate a Real Return of 4% and so I’m well behind plan. It really is fortunate that I've been able to increase salary and hence increase £ savings at a faster rate than planned over this journey or my rapid FIRE journey might have been in trouble.
Long term investment return score: Fail. Ahead of long run benchmark but well behind plan.
RETIRE EARLY
Combining Saving Hard and Investing Wisely should eventually give Early Financial Independence and the option of Retiring Early. 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. I am now nearly 6 years into that journey and assuming I can continue to save at expected rates while achieving a real return of 4% I forecast that financial independence will arrive in about 18 months. Importantly since I opened my mouth 7 months ago I've gone absolutely nowhere. If it happens that will then be a few months over 7 years from waking up to what the game was all about to goal achieved. It will however still mean financial independence in less than 10 years from when I went DIY in 2007.Savings and investment return have allowed total wealth to increase 8.0% in the first 9 months of 2015. A reasonable combined amount with poor investment returns being yet again rescued by savings. Two charts demonstrate the effect of this.
Firstly, if I stopped work today my earnings would have to come from drawing down from my investment wealth. The chart below shows on a month by month basis what that drawdown rate (so that’s current Spending divided by Total Wealth) would be as against my current living costs. My target of 2.5% is shown and importantly while the monthly actuals are pretty noisy that trend line is now well below 3% and trending nicely towards 2.5%. It’s important to note that if I was accepting of the 4% Rule I’d be well and truly FIRE’d now.
Click to enlarge, RIT Withdrawal Rate
Secondly, I look at it in terms of how much wealth I currently have compared to how much I need to accrue (so that’s future expected Spending divided by 2.5% plus a home purchase for my family) to be able to drawdown at a rate of 2.5%. As I write this post I have now accrued 81% of the wealth I need. In £ terms that’s wealth of £825,000 against a target of a little over £1 million. Charted the journey looks like the below:
Click to enlarge, RIT Path Trodden Towards Financial Independence
Retiring early score: Conceded Pass. Off target for 7 years from blog start up but less than 10 years from going DIY. In the 9 months of 2015 I’ve accrued a further 7.1% of the wealth I need for FIRE.
2015 is proving to be an interesting year. While my Savings Rate in % terms doesn’t look so healthy I’m more than happy with my Spending and Absolute Savings. I’m a little disappointed that my investments are lagging and in all honesty have lagged what I expected all through this journey so far. That said when I take a step back and look at the bigger picture FIRE is really not that far away. If it happens as planned I’ll be 44 years of age which really IMHO isn’t too shabby an effort.
How is your year to date performance progressing? Are you happy with your achievements?
As always please do your own research.
Impressive analysis RIT, as always it's obvious that you're completely in control, know exactly what's happening with every aspect of your financial journey and have all the angles covered.
ReplyDeleteWhat's even more impressive is your progress towards goal. The very best of luck with the last steps.
(What I find interesting is how you seem to be saying that you've increased your earning power through sheer application of will and drive and that this is why you've managed to move at the speed you have. (i.e. promotion and commission based increases in salary?) I was trying to apply this to the environments that I have worked in but couldn't really see how someone would be able to increase their earning power as quickly as you have done without gaining experience or extra qualifications which all takes time. I've never worked in a commission based job though so maybe that's where the difference comes.
All power to you. I'm really looking forward to reading the final few reviews - you're so close now. :-)
Hi Cerridwen
DeleteOne thing I did bring to my FIRE journey was a solid STEM education (qualifications that while not being as glamorous as some of my competitors position me well enough in interview to not be eliminated while also positioning me well in the world of work, IMHO of course). I was also very career focused for about the 5-7 years prior to starting my journey which enabled me to learn a lot that I can now exploit (experience as you say).
There are some posts on it but in 2011 I found myself unemployed. By this time I was on the rapid FIRE train and so when I looked for employers among my considerations were:
- A company where my efforts could be rewarded financially which meant private sector, no salary bands and a larger company who had cash.
- I'm not in a commission type role but a company which took annual objectives seriously and had a bonus structure that rewarded objective achievement rather than attendance.
My qualifications and experience enabled me to eventually (it took nearly 6 months) get access to that type company. As you've probably seen from previous posts they (and I guess I as it's who I am) expect a lot but if you deliver (which is an important word because effort gets you 0) you can do well financially.
Cheers
RIT
"My better halves cover their discretionary spending only." I hadn't realised that you were a polygamist. That makes your saving even more meritorious.
ReplyDeleteI'm a bit dubious about according any sort of equality to targets that are (largely) in your hands - e.g. expenditures - and targets that really aren't e.g. investment returns. You know perfectly well that stock markets might fall 40% in the next two years - what possible point could there be in cursing yourself for failing to meet your target then?
A more over-arching point (though you may view it as merely arch): are you confident that your personality will let you fund your retirement by running down your capital?
One better half is more than enough for me :-) Typo therefore quickly corrected. Thanks.
DeleteOn the topic of investment return scoring. Yes I agree that I'm fully exposed to the nuances of Mr Market. More where I'm going is that I'm thinking that I've missed a trick (or three) given my sub real 4% return in a market where for example the US S&P500 has for instance gone from high 600's in 2009 to 2,000's today. Of course I'm not going to change anything as who knows if my strategy having 'potentially under performed' so far might be the one to have next year.
You're right I'm not confident my personality will let me fund retirement via capital run down. It's for that reason I'm trying to position myself to 100% live off dividends.
Clothes £3/month. I used to be like that before I met my better half. Thanks for the useful post, as always, RIT.
ReplyDelete