2018 Quarter 3 Review, Readying for FIRE

Latchi, Cyprus at dusk

With my work notice period now nearing completion I’m actually a little surprised at the calm in the RIT household.  Hopefully this means we believe we are reasonably well prepared and probably more importantly means that we still believe we are doing the right thing.

At work we’re just completing 2019 plans and I’m not excited by any of it which is a new feeling for me.  I’ve put this down to a couple of things.  One of the main objectives is something I’ve personally done on a larger scale twice previously so I would expect few challenges if I was leading the activity.  This might be a contributor but I suspect the real reason is that FIRE now just feels 100% like the right next step combined with feeling well prepared for what we’re walking into.  Not even Mr Market taking £72,000 from my wealth since its peak in mid-August and £58,000 in the last 3 weeks has made my think twice.  I guess that means I’m ready.

Our readiness for our Med move is also calmly progressing.  We have the removal company booked with them moving us in 2 stages for only an additional 5% cost.  This was our suggestion and I was surprised at the small delta cost meaning it was the lowest total move cost option we came up with.  The rationale is that the shipping time to Cyprus is about 4 weeks so what we’ll do is split our stuff in half meaning we’ll be able to stay in our current UK rental flat right up until the night before our flight and then in Cyprus we’ll only book a short term rental for 2 weeks which should be time enough to find a long term rental.

On the financial side we’ve also taken some precautions like opening additional current accounts with new banks as that will be almost impossible to do once we’re non-resident and banks have form of closing non-resident accounts when they decide it’s best for them.  For example Barclays has form with residents of Cyprus being specifically targeted for closures.  We’ve also opened up new UK savings accounts for a fresh 12 months bonus interest by which time we should hopefully be putting those cash funds to work on a home purchase.  The best I came up with here was the new Goldman Sachs Marcus account which is giving me 1.5% annualised.

We’re also starting to think about what we’re going to need to purchase in Cyprus for our new lives and making sure we can get access to that cash quickly.  We’ve therefore opened up a competitive international currency transfer account as well.  One of the things I’ve decided I’ll ‘need’ very early on is a new road bike.  Requirements are a relatively good price vs weight bang for buck, suitable for plenty of miles in the saddle, suitable for hill/mountain ascending/descending plus the flats and good enough that when I get dropped on club rides it’s because I’m a ‘fat unfit b*stard’ not because I’m riding something that weights 30kg.  The best I’ve come up with is this:

Click to enlarge, Canyon Endurace CF SL Disc 7.0

Do any readers have any better road bike ideas?

With the move now just weeks away this makes this quarterly update the last that shows how I’ve accumulated my wealth.  The next update will switch to how I’m managing drawdown.  Accumulated wealth is quite a loose term in this case given since the start of the year my wealth has actually reduced by £14,000 or -1.1%.  Let’s look at the details.

SAVE HARD

I unapologetically continue to define Saving Hard differently than most personal finance bloggers.  For me it’s Gross Earnings (ie before taxes, a crucial difference) plus Employer 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 Employer 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.  I finished the quarter with a reasonable Savings Rate of 49.3% against a plan of 55.0%.

Click to enlarge, RIT Savings Rate

This low’ish rate is a bi-product of me now being towards the end of my accrual journey.  I’m at peak earnings which includes taxes at 45% (the Additional Rate) plus 2% national insurance as well.  On top of that I’m also seeing peak tax on my non-tax efficient investments.

The bit I can control, my spending, is well in check.  Year to date, excluding work and rent costs, that’s a reasonable £650 per month.  It’s been helped by us not paying for a summer holiday or summer FIRE location research as we decided to just keep our heads down over the summer but it does include our one-way flights, removal deposits, night before flight accommodation and some private health checks we wanted to get done before we head off.

Click to enlarge, RIT Spending 

Saving Hard score: Pass.  Well below the target of 55.0% that I set many years ago but when I net off taxes that leaps to 84.5%.  It’s also only 4% more than we were spending in 2015 and we’ve seen plenty of inflation since then indicating we’ve actually continued to reduce costs as we continue to focus on quality of life and treading lightly on this fragile planet.  That’s good enough for me.

INVEST WISELY

2018 9 months in (06 January 2018 to 06 October 2018) investment return closed at -1.4%.

Investment wise I continue to morph the portfolio from one focused on accumulation to one preparing me for drawdown in FIRE.  This means:

• Cash and cash like holdings (NS&I Index Linked Savings Certificates predominantly) for the non-mortgaged home purchase but also to give me a few years of cash buffer as I enter FIRE continued to improve.  At the close of 2017 that stash was sitting at £334,000 and is £342,000 today.  Plenty for what we’re trying to do as we enter wealth drawdown and I’ll share that in subsequent posts.
• I’m also trying to ‘ensure’ I can live off dividends alone in FIRE.  2017 total dividends were £27,384 and this year is now looking like a very modest increase to something around £27,844.  For a while now I’ve been working with a forever assumed Euro exchange rate of 1.123 (which of course may prove to be a mistake given the continued slow motion Brexit omnishambles but I’m continuing to stick with it for now) which would make my 2018 dividends EUR31,269.  In contrast my latest proliferate Med FIRE spending, a budget where 47% of spend is for fun, is expected to run to EUR27,593 giving me spending cover of 1.13.  Given how much I can wind back spending in a severe bear market this continues to look healthy which may be one of the reasons I’m now so relaxed about my financial position.  

Click to enlarge, RIT Annual Dividends

For completeness this is what my asset allocation looks like today.

Click to enlarge, Current RIT Asset Allocations

I continue to invest as tax efficiently as possible with my tax efficient holdings now consisting of:

• 43.4% held within SIPP's
• 8.8% held within the no longer available NS&I Index Linked Savings Certificates (ILSC’s)
• 14.6% held within a Stocks and Shares ISA.  

Tax efficiency score: Pass.  At the end of 2017 this was 66.3% and half way through 2018 it’s now 66.8%.  This is also helped by all new money that can’t be tax sheltered now being passed directly to the already FIRE’d, so low taxed, Mrs RIT for investing in her fun money portfolio.

Investment expenses also continue to be treated like the enemy.  2017 finished with expenses at 0.23%.  Today they are at 0.22% helped by a partial pension transfer earlier in the year and by not making previous investing mistakes like buying expensive active funds hat I can’t currently sell given my current earnings as they don’t have UK Distributor/Reporting Status.

Minimise expenses score: Pass.  A reduction by taking some conscious actions throughout the first half of the year.  0.01% doesn’t sound like much but given my current wealth that’s £135 a year staying in my pocket.  I’ll take that.

In the scheme of a lifetime of investing this year is insignificant.  I’m all about time in the market and not timing the market so let’s zoom out and look at my performance since I started down this DIY road.  My long run nominal is 6.5% which is a real (using RPI) return of 3.5%.  The chart below tells the story.  Note that the chart assumes a starting sum of £10,000 which was 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

Long term investment return score: Conceeded Pass.  My whole investment strategy since 2007 has been about generating a long term real return of 4%.  3.5% is below that but has been good enough to help me achieve Financial Independence in under 9 years and FIRE in 11 years.  The question now is are we just starting to head into the next bad sequence of returns right as I enter FIRE?  It’s a question that shouldn’t matter to me provided the future sequences I’m about to experience are no worse than what we’ve seen in the past - which has included world wars, depressions and periods of high inflation - as back testing my strategy leads to 100% success.

RETIRE EARLY

I’ve proven that combining Saving Hard and Investing Wisely gives Early Financial Independence and the option of Retiring Early.  Both the theory and my personal experience says that if you want FIRE it’s the first of those that is the priority.  This is the contribution I’ve personally seen from each element.

Click to enlarge, RIT Contributions from Saving Hard and Investing Wisely

I’ve now been on this journey for nigh on 11 years and all that Saving Hard and Investing Wisely adds up.  My progress to FIRE now looks like this:

Click to enlarge, RIT Progress Towards Retirement

Wealth today sits at £1,295,000.  Continuing to look backwards and I’m still pleased that I did my One More Year(s).  That extra buffer feels really good and it allows me to do some silly things throughout FIRE like buying a new carbon ride bike on FIRE day 0 when a second hand aluminium one would I’m sure do 99% of the job.

This wealth has come from nothing more than hard graft, considered spending and taking some time to focus on some selected investment fundamentals.  Netting off the home purchase, converting to Euro’s and now with proliferate spending in the FIRE calculation that’s a starting withdrawal rate of 2.3% against a planned 2.5%.  It still doesn’t get much better than that...

How is 2018 progressing for you?

As always please do your own research.