Further Exploration of Safe Withdrawal Rates (SWR) for UK Investors

If you’re like me and don’t have a Final Salary Pension waiting in the wings, rich parents (which might include an inheritance), intention to buy an annuity and don’t want to be raiding bins for food scraps in old age then the amount of wealth you accrue before calling yourself financially independent, allowing early retirement is a critical number that you really can’t afford to get wrong.  Retire with too little wealth and you could expend it all before parting from this fair land making life in old age very difficult.  Be too conservative and fall into the “one more year of work” syndrome and well all I can say is you’re a long time dead.  So we’re looking for a Goldilocks amount of assets.  Let’s try and figure out what that amount might be for a UK resident.

Given the seriousness of the topic I must give the following Wealth Warning before we move on.  I’m just an average person on a DIY Investment journey to Financial Independence and am certainly not a Financial Planner.  The content of this post is for educational purposes only and is not a recommendation of any type.

We've looked at Safe Withdrawal Rates previously.  In that post we focused on the 4% Rule or 4% Safe Withdrawal Rate (SWR) which in brief works on the principle that if in your first year of retirement you withdraw 4% of your portfolio, then yearly up rate your withdrawals (your “Gross Earnings” plus any investment expenses) by inflation, the end result will be that you won’t exhaust your portfolio in your lifetime.  If you dig a little deeper what it actually says is that using past market performance (which we of course we know does not necessarily predict future market results) for a 50:50 Stocks : Bonds portfolio then you have a 96% of not expending your portfolio in a 30 year period.

Real Life Portfolio Performance

As I sit here writing this post the Excel spreadsheet that I use to track my wealth and portfolio performance tells me that I have accrued 76.1% of the wealth that I require for Financial Independence (and Early Retirement if I should choose to retire from work).  If there is one thing I've learnt over the 7 and a bit years that I've been accruing that wealth it is that if you want to be the person who retires by 40, who makes early retirement extreme work or who reaches financial independence in 10 years and not the one who retires when the government tells you to then you need to not only be tenacious and not blow with the wind but also rigorously PDCA (Plan, Do, Check, Act).

When I say this I'm not saying to continually alter your investment strategy to today’s new fad.  That’s just going to lead you astray and hinder your wealth creation.  Instead it’s going to have to be far more subtle and purposeful than that but it’s important because I can guarantee, if my example is anything to go, that a large portion of both your life and investments are going to be different from what you originally planned.  Therefore to reach your goal some course correction is going to be required.  Let me maybe demonstrate the principle with some personal examples:

• When I first went DIY in 2007 I was naive and really in a state of investment strategy flux as I learnt.  By 2009 the foundation of my strategy was built but it actually took until late 2011 to reach maturity with the addition of a High Yield Portfolio (HYP) portion.  As I move quickly forward to Financial Independence then I can see some more subtle change as I work to build regular income streams from areas like extending the HYP portion of my portfolio.
• When I started out Vanguard didn't exist in the UK.  They were of course big in the US but didn't actually come to the UK until 2009.  Vanguard funds and ETF’s now form a cornerstone of my portfolio lowering my investment costs.
• By 2010 I had cottoned onto the need to save hard, by both maximising income and minimising spend, and was regularly saving 60% of my gross earnings plus employee pension contributions.  That quickly moved to 2011 when I was without work.  Onto today and my family life has changed such that to maximise the benefit to the family I am paying all the family bills meaning over the last 15 months my savings rate has now fallen to an average of 50%.  Within this 50% I'm also making significant contributions to help my better half’s wealth (not detailed on Retirement Investing Today) to grow as quickly as my own meaning my wealth growth rate will also slow from what was planned.  To keep to plan I've had to work hard to continually increase earnings but also reduce costs through these changes. 
• In recent times we've seen and are seeing a lot of post Retail Distribution Review (RDR) change within the investment world.  It looks to now be stabilising and while I've generally not come out of it all too badly I am considering a shift away from Youinvest for my SIPP to again lower investment costs.
• The market moves and I respond with rebalancing according to my strategy as well as continually buying the most under performing asset class with new money.

Valuing the Property of England and Wales at County Level – Year 2

This time last year I introduced a house valuation metric that went beyond the usual whole of United Kingdom or England and Wales discussion carried by the mainstream media.  Instead I dissected both the salaries and house prices of England and Wales to prepare a valuation covering each County.  It showed some interesting results including nearly a factor of four between the best valued and the most over valued County.  Additionally, there was an obvious North and Wales to South divide when it came to house values.  We are now 1 year on so today let’s look at what’s changed.

To Value the market we will stay with our previous definition which is a simple Price to Earnings Ratio (P/E).  For House Prices we will stay with the Land Registry House Price Index.  As a reminder this index uses repeat sales regression on houses which have been sold more than once to calculate an increase or decrease.  As it analyses each house and compares the latest buying price to the previous buying price it is by definition mix adjusting its data also.  This is then combined with a Geometric Mean price which was taken in April 2000 to calculate the index.  It is seasonally adjusted and covers properties from England and Wales.  It covers buyers using both cash and mortgages.  We are using the latest published data which comes from March 2014.  The analysis is arranged according to the Regions and County’s defined by the Land Registry and is shown in the Table below.  Unlike the mainstream media we are going to call high house prices bad (the County with the highest house price is London at £414,490 and is shown in dark red) and low house prices good (the County with the lowest house price is Merthyr Tydfil at £59,041 and is dark green) with all other prices shaded between red and green depending on house price.

For Earnings we just move the dataset on one year and today are using the 2013 Annual Survey of Hours and Earnings (ASHE) which provides information about the levels, distribution and make-up of earnings and hours paid for employees within industries, occupations and regions in the UK.  To ensure that our Earners and Houses are located within the same County we’ll stay using the Earnings by Place of Residence by Local Authority.  This dataset presents weekly Earnings at both median (the middle point from each distribution) and mean (the average) levels which we have arranged into each Land Registry Region and County in the Table below.  We then multiply the data by 52 weeks to convert it to an annual salary.  We are calling low earnings bad (the lowest average earnings are £16,999 in Blackpool and are dark red) and high earnings good (the highest average earnings are £36,956 in Windsor and Maidenhead and are dark green) with all other earnings shaded between red and green depending on earnings.

Earn More by "Asking for More"

So where have I been I hear many of you asking?  Let me start from the beginning...

Regulars will know that my strategy is to retire as soon as possible.  To be more specific I'm actually still on the fence as to whether I will actually Retire Early, leaving paid employment altogether, or only go as far as Financial Independence, leaving the high stress day job and side hustling some pocket money doing something I love.  At current run rate I’ll be presented with the FIRE (Financial Independence and Early Retirement) option before my 45th birthday which will see retirement in about 10 years from when I woke up, started to do my own research and settled on Early Retirement way back in 2007.

To achieve this I'm of course living the motto of this site - Save Hard, Invest Wisely to Retire Early.  With data from 2008 my first chart shows that while both Saving Hard and Investing Wisely are both having a big impact on my annual wealth growth it’s actually Saving Hard that seems to have its nose in front even after accounting for the Miracle of Compound Interest.  Saving Hard can be achieved by Earning More and/or Spending Less and given its contribution to my financial plans is something I am unrelenting in trying to improve.

Click to enlarge 

My Property is My Pension (because of Leverage)

Within this great country of ours we have what appears to be an eye watering level of debt.  We learnt this week that household debt in the UK, including mortgage debt, has now grown to £1.43 trillion or £28,489 for every adult. We however need to be careful when digesting this type of information as what really matters for the Average Joe is actually Wealth which is the market value of all assets minus those debts.

The Office for National Statistics Wealth and Assets Survey, published on the 12 July 2012, tells us that the total Wealth (including private pension wealth but excluding state pension wealth) of all private households in Great Britain was £10.3 trillion.  That’s £373,000 of wealth for the Average Household and even if we switch to Median values, to try and remove some of the extreme Wealth held by the 1%, it’s still £210,000, making the debt seem a little less serious on the average (I acknowledge that the poorest probably have no wealth and a lot of debt with the richest having lots of wealth and little debt but that’s for another day).  32.9% of this wealth is Net Property Wealth which is the value of the property held minus the value of mortgage liabilities and equity release.  Not everyone is lucky enough to own a property but for those that do the Average Net Property Wealth is £195,000 and the Median is £148,000.

With so much Wealth tied up in Property it’s no wonder I still hear and read of people using the My House is My Pension statement.  This is in my humble opinion is a statement from someone who really hasn’t quite understood how they have generated all that housing Wealth they now possess.  Have they really stopped to understand how with average earnings of £474 per week and a property Compound Annual Growth Rate of 5.4% since January 1995 (Land Registry data) so much Wealth has been generated by property.  There are of course a number of ways this has occurred including the more obvious time in the market and riding the rapid rise in property values between the mid 90’s and 2007 but there is also another method that all those with a mortgage are employing which I don’t think the vast majority even understand.  This is Leverage or Gearing which is a financial technique used to increase gains or losses by giving the investor the return on a larger capital base than the investment personally made by the investor.  In home owning speak the investment is the house deposit and the capital base is the purchase price of the house.  The leverage is achieved by taking on a mortgage.