Q1 2016 – Rocket boosters lit and then stayed lit

Quarter 1 has been what can only be described as one where the rocket boosters fired and subsequently propelled my personal finances forward at a rapid rate of knots.  I passed the one year to FIRE (financially independent retired early) mark during the quarter and then finished the quarter with wealth addition of some £55,000!  To put that into perspective that is more than half of what I achieved through the whole of last year.  Positively both my Saving Hard and Investing Wisely approaches made strong contributions:

Click to enlarge, RIT Year on Year Change in Wealth (Saving Hard + Investing Wisely)

SAVE HARD

I define Saving Hard a little differently than most personal finance bloggers.  For me it’s Gross Earnings (ie before taxes, a crucial difference) 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.

Even with a large portion of my bonus going to those better able to spend it, including HMRC, I was still able to save some £31,000.  This was possible by once again keeping spending nicely in control.  In fact my personal rate of inflation (ex taxes) compared to Q1 2015 was actually -7%.  An interesting dynamic has developed here.  With FIRE being so close my better half and I seem to have just sub-consciously battened down the hatches as we can see the finish line which is then self-fulfilling.

Combining Earnings, Spending and Taxes together results in an average Savings Rate of 48% for quarter 1 against a plan of 55%.  Sounds like a pretty poor effort until I also mention HMRC took 47%, including some back taxes, with us living off the remainder.

Click to enlarge, RIT Savings Rate

Saving Hard score: Conceded Pass.  I yet again missed my savings plan of 55% but against a back drop of back taxes I’ll take it.  Savings were also still able to add 3.6% to my wealth, which is not to be sniffed at, even at this late stage of my journey.  Savings also continues to make the biggest contribution towards my wealth accumulation with 67% now having come from savings and only 33% from investments.  Compound interest is still not really firing on all 4 cylinders.

INVEST WISELY

Investment return for Q1 2016 (02 January 16 to 02 April 16) was a healthy 2.8%.  In 7 out of the last 8 years savings has made a greater contribution to my wealth than investments.  That theme has continued into quarter 1 with my investments contributing £24,000.

The decision that cost me £95,000

Back in late 2007, at about the same time as I was starting to think about saving hard and investing wisely, I seriously considered buying a home in London.  We were still planning to live well below our means and not be greedy but even so the small home we found would have still resulted in a big mortgage.  As I do with everything I did my own research and came to the conclusion that property in London was overvalued.  It was charts like the below that gave me that view, with at the time London first time buyer house price to earnings ratio’s having averaged 4.4 since 1983, while they were now at record highs of 7.1.

Click to enlarge, London first time buyer gross house price to earnings ratios

So as the type of person who tries to avoid buying anything that is overpriced I signed another Assured Shorthold Tenancy Agreement (AST) for our compact flat and we waited it out.  Roll forward to today and we can see what has happened to London house prices since that fateful period.

Click to enlarge, London historic house prices

Errors everywhere but I did get one thing right

My early personal finance records are sparse at best; however I was undertaking a bit of (pre)spring cleaning this week and came across an early retirement planning spreadsheet that was last updated in November 2007.  That’s just a month or so after I started on my FIRE journey.  It made for some interesting reading given my current FIRE position, so much so, that I thought it worth sharing particularly in view of some of the comments here.

On my FIRE journey so far I've found that Saving (Earning minus Spending) has been one of the most powerful accelerators towards FIRE.  To demonstrate to the end of February 2016 68% of my wealth creation has come from Saving while only 32% has come from Investment Return.  Looking at the 2007 spreadsheet I thought I could save £16,000 per annum and I wasn't planning on it increasing through my journey.  To contrast that assumption in 2015 I saved nearly £100,000.  Errors included thinking my Earnings had peaked and that I wouldn't be able to spend less than I was at the time.

I thought my investment expenses would run to 0.75% per annum.  Now ‘way back then’ Vanguard in the UK didn't exist but even so in 2015 they were down to 0.27%.  I also I thought my investments could achieve a real annualised 4.3% after expenses over the long term.  So far I've only achieved 3.4%.

I thought that in Early Retirement a safe withdrawal rate would be the 4% Rule – 4% of my wealth on retirement day increasing with inflation annually.  Today I think 2.5% is more appropriate.  That is a big error.  For a person wanting to FIRE on £20,000 it represents an extra £300,000 of wealth that needs to be accrued which is a big chunk of change.

I thought that the UK would be home and that I would need £28,000 of earnings per annum to live well in FIRE.  Today I think I’ll need closer to EUR25,000 and we’re now 99.9% Continental Europe bound.

Crashing all those numbers above together plus putting some home considerations into the mix made me think I’d need a little over £700,000 to FIRE which included some mortgage payments.  Today I think I’ll need £1,000,000 which includes paying cash for a home early into FIRE.

Another pension’s consultation begins just as the last consultation ends

There were plenty of articles in the mainstream media this week musing about the potential changes that were coming to private pension’s in this month’s budget.  Would Osborne introduce a pension’s ISA, would he introduce flat relief on pension contributions, would he abolish salary sacrifice or would he just cut allowances?  As is so often the case with budget’s these days it looks like we don’t have to wait until budget day for the answer.  Osborne has apparently decided that “There won’t be any changes to tax relief at all in the Budget” (free FT link or Google Osborne scraps pension tax relief shake-up).  So it looks like for now I can just continue with Plan A which predicted no pension tax changes for ‘high earners’ in the 2016/17 tax year.

While all these articles were getting attention it was actually this article (free FT link or Google State pension review begins with John Cridland as head) that has had me more concerned.  This was the announcement that another review of state pension ages has kicked off, from which recommendations will be made in May 2017.  ‘Experts’ are predicting that millennials joining the workforce today might be waiting until their mid-70’s before they can retire.

Now for me it’s not the potential state pension age change itself that worries me, as all my FIRE (financially independent retired early) planning never includes the state pension.  This is because I never wanted to be held to retirement age gun-point by our ever tinkering government with any state pension I might (I actually believe I may never receive any as for example it will end up means tested) receive being an insurance policy only.

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:

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!