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!

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.