... and that concludes the 8th year of my FIRE journey

I wandered aimlessly in the consumerist, save 10% of your earnings for the future, let compound interest do its magic (great post on this by ermine this week), with others taking care of my financial future giving me time to spend the rest, world for some 12 years before I woke up and realised I wasn't really getting anywhere from a personal finance perspective.  Sadly, early on that even included a stint in debt for a new’ish car because “I was worth it”.

Avoiding Tax via a not so well known Tax Haven

Think of a tax haven any tax haven.  Where did you come up with?  I bet many of you immediately thought of that fabulous tax haven for the rich - Monaco.  Some of you probably also came up with tax havens such as Andorra, The Bahamas, The Cayman Islands, Costa Rica, Panama and even Switzerland.  Did you think of any others?  How about the United Kingdom?  Now before you go spitting back into your tea bear with me here for a minute.

If you go out and work hard for a living as an Average PAYE Joe then I'm firmly with your current scoffing.  These guys and girls are I agree taxed heavily here in the UK.  20%, 40% and 45% are the well known tax rates.  On top of this you have the less well known effective 60% tax rate that is in play once you earn a £100,000 until you've lost all your personal tax-free allowance.  We also shouldn't forget about 12% employee and 13.8% employer national insurance contributions which are just taxes via another name and which add onto those well known tax rates.  It’s a very tax hungry country for a worker.

Let’s however now enter the world of FIRE (financially independent retired early) or even just Retired.  What can you now ‘earn’ and not pay tax on (of course these rules also apply to PAYE workers):

• From 06 April 2016 the personal tax-free allowance for earnings will be £10,800.  The Tories have also stated that they will increase this to £12,500 by April 2020.  Only after that are we into the 20%, 40% and 45% tax discussion.  Our retiree's pension drawdown will be considered earnings so will be taxed according to this.
• From 06 April 2016 the current Dividend Tax Credit will be replaced by a new £5,000 Dividend Allowance meaning you will be tax-free on the first £5,000 of your dividend income no matter what non-dividend income you have.  So let’s say our retiree has non-tax sheltered shares that are giving 4% in dividends per year.  They could have share wealth of up to £125,000 outside any tax shelter and be tax free on all the dividends.
• Similarly from 06 April 2016 a tax-free Personal Savings Allowance of £1,000 (or £500 for higher rate taxpayers) on the interest that you earn on your savings will come into play.  At current interest rates that allows a lot of capital in savings accounts outside tax shelters before tax comes anywhere near.  Perfect for somebody like myself who intends to live off the dividends in FIRE and needs a cash buffer.
• On top of this you can also take whatever you've accrued within your ISA’s tax free.  This could be a substantial sum.  I started investing in ISA’s late and even though I’ll FIRE relatively early I still expect my ISA pot to be £150,000 or so at the point of FIRE.  Take 4% in dividends/interest/capital from there and you have another £6,000 or so of ‘income’.
• If you need to do any non-tax sheltered tinkering then also don’t forget about the capital gains tax-free allowance.  That’s another £11,100 for tax year 2015/2016.
• Then finally the icing on the cake.  Our retiree is not exposed to National Insurance contributions but they can get free healthcare at the point of use.

A Retirement Investing Today 9 Months Into 2015 Review

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.

The Lending Works Experiment (2 Months On)

It’s been 2 months since I started the Lending Works experiment.  As a recap Lending Works are a peer-to-peer lending platform and at the time I published my original post I had opened an account, deposited £300 and was in the queue to get into the lending market.  I also promised to update you in 2 months so time for an update on what’s happened since then?

Firstly, I'm now successfully in the Lending Works lending market.  At the time of my last post I had £78,430 queued ahead of my £300 and indications were that it would take 8 days to get my money into the market.  With P2P lending it’s of crucial that you minimise time out of the market as until your money is actually lent you’re earning no interest.  As it turns out I didn't have to wait 8 days with money starting to be lent after 5 days and fully lent after 6.

When I signed up £12 million had been lent into the market and the reserve fund was £211,470 meaning 1.7% of loans by value would have had to be missed or fall into arrears before I started taking a loss.  Today lending is now £14.7 million with a reserve fund of £252,031 meaning that protection is stable at 1.7%.

Living off the Dividends in Early Retirement

The number one fear of any early retiree (or any retiree living of investments for that matter) must nearly be a bad sequence of returns early in retirement.  I can only imagine the emotional rollercoaster of watching a stock market fall in value by more than 80% in real terms (like the US market did during the Great Depression), rebalancing into it continuously, while knowing that you’re no longer working so ‘can’t’ replenish and then on top of that then being forced to sell down capital to live off.

Click to enlarge, US Market Percentage Falls from Real New Highs

With this in mind and for some time now I’ve been trying to build my portfolio in such a way that I can live off less than the dividends received at FIRE (financial independence retired early), which will allow a little for reinvestment during the good times, while providing some protection during periods of falling dividends.  The methods I've used to do this have included the addition of a High Yield Portfolio (HYP) and moving from accumulation funds within an expensive work insurance company defined contribution pension to income funds within my own SIPP.

With this in mind I’m today going to conduct a little thought experiment.  Will I have enough dividends spinning off in FIRE to avoid selling down wealth during a severe bear market?

Now before I go on I’m of course aware that past performance is not a guide to future performance.  To keep it simple I’m also going to use the US market as a proxy for my ‘global’ equities portfolio which of course is not 100% accurate but I have a good dataset for the US (unlike other countries).  Hopefully it will give a bit of steer as we do know global equities have a high correlation with each other plus this is just an order of magnitude thought experiment and I’m not chasing perfection here.

At time of writing this is how I’ve managed to increase my dividends over the years:

Click to enlarge, RIT’s Dividends Received by Year