Am I an outlier or could most people do it?

I don’t think there would be much argument that millennials have it pretty tough financially with their plight now starting to make it into the mainstream media (FT link or search “Why millennials go on holiday instead of saving for a pension”).  After all:

• They’re graduating with big chunks of student debt that their grey haired work colleagues didn't have to contend with, while their even greyer haired fellow countryman are being protected with triple lock state pensions;
• They’re unlikely to receive anything better than a defined contribution pension with no hope of a defined pension; and
• They’re graduating into a housing crisis where houses are today priced in such a way that ownership, particularly in the South East, is almost beyond reach.

While this is going on as a Generation X’er I'm starting to get comments that my current personal financial approach has become a little extreme.  To me it doesn't feel like it but I'm also conscious of the boiled frog analogy.

So with both of these in mind I thought today I’d run a simulation to see if a millennial graduating today, who didn't want to be as extreme as I am, but also didn't want to roll over and be a victim could still FIRE (financial independence, retired early)?  So a Saving Hard'ish, Investing Wisely, Retire Early simulation.  In short the uncomfortable maths suggests that the answer is yes...

Click to enlarge, A millenials journey to financial independence

Let’s look at the story in detail.

Good-bye Amlin, thanks for your contribution

Amlin was added to my High Yield Portfolio (HYP) back in August 2014.  At the time I purchased 963 shares at a price of £4.4986 paying £34 in stamp duty and trading fees for a total investment of £4,366.

When the mainstream media get excited about stock market rises and falls they always seem to conveniently omit mentioning those lovely things called dividends.  From purchase Amlin provided me with £485 of those, they were growing dividends year on year and I was a very happy camper.

Then on the 08 September 2015 Mitsui Sumitomo Insurance Company (MSI) swooped in and made a cash offer for the company.  The rest, as they say is history, with the end result being £6,452 in cash hitting my account on the 08 February 2016.  Totting that all together and Amlin for the short period held provided me with a total return of 59%.  So while I'm sad to see Amlin go I'm not too sad...

So with cash, including some new money, burning a hole in my pocket what to buy?  Market falls have resulted in the UK Equities portion of my portfolio being underweight but not yet enough for active rebalancing so I’ll just passively rebalance for now.  My strategy to build enough dividends to live off in FIRE is also still well in control so I don’t need to add to the HYP.

Click to enlarge, My Annual Dividends

I therefore purchased £8,000 worth of Vanguard’s FTSE250 ETF Tracker, VMID, to continue my plan of further UK Equity diversification.  My UK equity split now looks like:

Victims

In my travels I regularly come across 2 types of people.  The first are those that will set themselves a stiff challenge and then go for it.  The second are those that won’t because it’s not possible for some reason or another.  This second group I call the VICTIMS and I have little time for them.  Note here I am not talking about people who look at a goal, look at what it will take to achieve it and decide it’s not for them.  That is a conscious decision and admirable.

This week I saw the victim card being played on a couple of forums as a reason why the Save Hard, Invest Wisely and Retire Early strategy that we follow here wasn't possible:

“Forgive me if I am wrong, but isn't your entire savings strategy based on earning a top 1% income? Not possible for the other 99%.”

“Retirement Investing Today is probably the one to read if you're a captain of industry, he's very 'on' when it comes to reducing tax, expenses and coping in a high cost of living area. That said, he does have a fairly chunky salary from memory (£90k?) which makes everything flow a bit more smoothly.”

These comments frustrated me a little so what follows is a bit of rant.  If you’re not into rants I’d encourage you to move on to your next piece of regular Saturday reader.

So somebody believes that ‘my entire savings strategy is based on earning a top 1% income’.  The implication then being that because 99% don’t, the strategy can’t work for them, so they’re not going to try it.  A victim if ever I saw one.  Let’s clear this one up shall we.  The top level objective that I set myself way back in 2007 was simply that I wanted to Save Hard which would be achieved by both Earning More and Spending Less.  In the interests of full disclosure if I look back at my earnings when I started this journey and compare to some national statistics I can see that I was in the top 7% of earners in the country.  I therefore freely admit that I wasn't poorly rewarded but I was also a long long way from being in the top 1% of earners as I am today.  My strategy has allowed me to become an earnings 1%’er rather than my strategy becoming possible because I am a 1%’er.  A significant difference.

Orders of Magnitude

When it comes to spending I sweat the small stuff.

I’ll never buy a National Lottery ticket, even the £2 minimum, as I know that the probabilities say that I’m more likely to win significantly more by investing it rather than buying the ticket.  Even if there is a ‘£20.9M Rollover plus a guaranteed raffle millionaire’ tonight.  During the FIRE (financially independent retired early) accrual phase investing that £2 a week turns into nigh on £1,300 after 10 years (assuming a real 4% annualised return).  During the drawdown phase not feeding a weekly lottery habit, even a £2 a week one, means one needs £4,160 less (assuming a 2.5% withdrawal rate) wealth before FIRE becomes a possibility.  I know how hard I have to work to save £4,160.

Unlike many of my colleagues I also don’t pay to participate in a daily morning caffeine fix.  I was travelling on the company dime recently and purchased a coffee at one of these new fangled remote Costa stations.  Cost £2.10.  To feed a workday daily habit like that one is going to be spending £568 per year.  Take the free work supplied coffee; invest the money saved and all of a sudden you’re £6,800 closer to FIRE after 10 years.  Keep the habit up in FIRE and you’d need additional wealth of £21,840 (less a small amount of wealth to make one at home) before calling oneself FIRE’d.  I value earlier FIRE rather than an expensive cup of daily brown but I of course appreciate others might be different as they value it where I don’t.  Having different values is after all one thing that makes the world interesting after all.

I also sweat the small stuff when it comes to investing expenses.

Navigating the Never Ending Changes to Pensions

In recent years it feels like every Spending Review, Autumn Statement and Budget presented by our wonderful government includes pensions tinkering which is usually detrimental to what I and many others are trying to achieve.  I'm now at the point where prudence means I have to run some simulations to ensure I don’t fall foul of some new rule or other.  This has forced me to do some research and so in the spirit of sharing here goes.

Wealth warning.  I am not a pensions expert nor a financial planner.  I've also made investment mistakes in the past and will certainly make them in the future.  I also don’t know every pension rule and regulation out there.  I dread to think how long it would take someone to learn all of those.  Therefore this is not a recommendation of any type but instead hopefully provides some terms and tit bits that you the reader may not be aware of which will then encourage you to do some research like I have been.

At their heart defined contribution pensions are nothing more than a tax deferral scheme.  The deal is that you agree to lock up your money for the future and agree to follow the (continually changing) terms and conditions.  In exchange the government (currently) allows you to not pay tax on it now but rather when you unlock it in the future.  I agree to participate as for me it has the potential to be quite beneficial to wealth building as my current effective tax rate is now 47% (45% additional rate + 2% national insurance) and in the future that tax rate could be:

• 0% and maybe a bit of 20% if we stay in the UK.  On top of that current rules will allow 25% to be taken as a tax free lump sum (TFLS);
• 0%, 15% and 25% if we head to Malta; or
• 0%, 19.5% and 21.5% if we head to Spain

That is a big enough incentive for me to use pensions as part of my overall investment strategy.  To maximise the benefit I want to get as much into my pension wrapper as possible while ensuring I keep enough outside of the wrapper to cover all costs and government tinkering between early retirement and my private pension access age which is currently age 55.  I think the first is an easier thing to calculate than the second given current government form.