Quarter 3 2017 – Celebrating a 10 year anniversary

10 years ago I took a step back and looked at where my life was going.  Family life was great for which I was and remain incredibly fortunate.  However when I looked at my career I saw an industry that was being hollowed out, was being outsourced to the lowest cost country and where all the stuff that was fun was slowly being weighed down by stuff I disliked.  I was also 34 years of age and by that time had been working for 12 years across the globe yet when I looked at how that work had helped build our financial future I saw limited progress with the vast majority of the money I had earned having ‘disappeared’.

I was at a turning point, some might call it an early mid-life crisis, and clearly had to do something different.  Stay the course and I was looking at having to work until the nice government would let me retire but the risk I ran was finding myself without a career before that period.  So I started to think about retraining to do something different.  I’d also heard of people retiring a little earlier (this was before the millions of personal finance blogs appeared on the scene) and so I spoke to some financial planners about how they might be able to help me bring retirement forward a little. One of my strengths is quantitative analytics which meant I was able to work my way through their sales pitch which led me to the conclusion that while that route would help me bring retirement forward I would also be helping to bring their retirement forward as well.

In tinkering with those spreadsheets I also discovered something quite amazing.  If I could modestly increase my earnings, modestly decrease my spending, invest averagely and just not give my wealth accrued away to the financial services industry or tax man I could possibly bring my retirement forward  a long way.  I also thought I could do that myself and so in October 2007 I built a spreadsheet and a plan that would see me retire by age 50, a period of only 16 years.  I thought it also meant I didn’t need to retrain and instead just had to get my head down and run the plan I had built.

Look after the pennies...

...and the pounds will look after themselves.  A reasonably well known proverb that simply means if you focus on saving many small amounts of money you'll soon amass a large amount.  It’s also a proverb that in the circle of people I associate with both at work and in my personal life seems to not get a lot of attention.  I’m a little different and so it’s a proverb I’ve lived throughout my journey to financial independence and one I continue focusing on even as I sit here typing this post with over £1 million of wealth to my name.  Let me give a couple of examples of it in action over the past few weeks.

The financial services industry is a voracious beast that is continually trying to devour as much of its host as possible without its host noticing (all in my honest opinion of course).  I showed this previously by referencing a Grant Thornton study that concluded that someone entrusting £100,000 for 10 years to a UK financial adviser or investment manager would pay an average 2.56% annually for financial planning services and financial product expenses. 

In contrast to this my work defined contribution scheme extracts 0.6% in annual expenses from me.  Sounds like a great deal in contrast but in relation to what I know is possible I know it’s still expensive.  I choose to be a part of the scheme because it allows me to receive free money in the form of an employers match to my contributions up to a contribution limit.  Additionally by salary sacrificing I save on employees National Insurance and my employer saves on employers National Insurance for which they also pay some of the savings they make into my pension (I actually think it’s derogatory that they don’t pay all of the savings but that’s for another day).  Amazingly some people in my company don’t seem to be contributing to the scheme at all which is just turning down free money but the remainder I’ve spoken to seem to be happy just leaving their pension investments in that scheme which means they are losing 0.6% of their wealth every year.

Frustration

To set the scene it’s now been 14 months since I achieved Financial Freedom and it’s been 3 months since we decided to put a year between ourselves and FIRE.  Usually this blog is about the quantitative hard numbers around saving, investing and early retirement but on this occasion I’m going to go a little emotional on you because the scene we are in is definitely interesting from a psychological perspective.

On the work front I’m still putting in the long hours that I always have but I’m now starting to feel more tired at both work and when I get home.  I think this is because I used to always be so in the fight working to succeed at what I needed to achieve that I never had time for anything else.  Now I feel like I’m more watching the fight and no longer have so much skin in the gain.  I’d even say some boredom is starting to creep in which is starting to make the days and weeks drag on.

I’ve also noticed that my stress bucket has become massive and the tap that drains it is also now more like a fire hose.  Some events that I’m currently looking after that once would have been giving me sleepless nights are now having little to no effect on me.  I’ve also noticed that my bullshit bucket has become tiny and I’d go as far as saying that it’s now overflowing, flooding all over the floor and I’m slipping in it regularly.  The organisation I work for can be a pretty political beast that sets some very unrealistic expectations.  Once I would have been accepting of the situation and would have had my head down going like an idiot but now I’m speaking far more freely and it’s having both a bad and good impact.  For example recently I was asked to accept a draft plan that was set by others with more authority but less domain knowledge than me and which was completely unrealistic.  I pushed back and told them that they were being ridiculous and why they were being ridiculous.  This resulted in a number of closed door discussions about me as a person and my attitude but when it was seen that the discussion was having no effect on me and was not going to result in my acceptance it all stopped.  I’m yet to find out if the plan is staying or whether it’s being revised but either way it won’t really affect me greatly as the plan runs well past my FIRE date of summer 2018.

Improving the Safe Withdrawal Rate for UK Retirees Story

For those chasing FIRE I’m sure that the 4% Rule will be well known to most.  In short it says in your first year of retirement you can ‘safely’ withdraw 4% of your wealth with subsequent year’s withdrawals able to be increased by the prevailing inflation rate.  It of course has a few obvious failings:

• It doesn’t consider investing expenses or fees
• It is not safe at all for a couple of reasons.  Firstly, for the 50% Equities : 50% Bonds example the Rule resulted in one not running out of money in ‘only’ 96% of cases.  Not so great if you followed it religiously and was one of the 4% who ended up living under a railway arch.  Secondly, it’s based on backtesting of history and we all know history is no predictor of the future.
• It is only based on a 30 year retirement period.  That’s probably fine if you’re retiring at more typical ages such as in your 60’s or 70’s but probably not so relevant if your thinking of FIRE’ing in your 30’s or 40’s.
• It is US focused with the Equities and Bonds used plus place of residence of the retiree being US based.  Quite a leap if you’re FIRE’ing in the UK.  Also quite a leap if you’re a FIRE’ee who owns a more diversified portfolio of assets covering multiple countries.

Enter Wade Pfau who then conducted some research which helped deal with a couple of those failings:

• Considered a UK investor with 50% UK Equities : 50% UK Bonds portfolio where for 100% ‘success’ that 4% Rule became the 3.0% Rule; then
• Considered some portfolio diversification with 50% Global Equities : 50% Global Bonds portfolio where for 100% ‘success’ that 3.0% Rule improved to become the 3.2% Rule.

It was this work that helped me settle on an initial FIRE withdrawal rate of 2.5% having considered an increased retirement period than the assumed 30 years, inclusion of investing expenses and increased portfolio diversification.

Annual rebalancing Excel calculator

Over on the excellent Monevator site the following question was posed by Gregory today:

“You are an early retiree and have a portfolio of £875,000. You don’t follow the 5/25 rule but withdraw Your inflation adjusted money and rebalance Your portfolio once a year for example on Your birthday.  On Your birthday You want to withdraw £27200.  The current (£;%) and target asset allocations:
- UK equities: £70000; 8% vs. 6% target
- Developed world ex-UK equities: £350000; 40% vs. 38% target
- Global small cap equities: £70000; 8% vs. 7% target
- Emerging market equities: £96250 ; 11% vs. 10% target
- Global property: £35000; 4% vs. 7% target
- UK gilts: £192500 22% vs. 26% target
- UK index-linked gilts: £61250 7% vs. 6% target
How would You withdraw and rebalance?”

I suggested that firstly Gregory hadn’t really given us enough information:

• You say you don’t want to use the 5/25 Rule but don’t detail what rule you are using. Surely you’re not going to rebalance every fund no matter how far from nominal you are as that would incur trading costs that might not be economically sensible. I’m going to assume you’ll rebalance if an asset class deviates more than £4,000 which means in this instance you’re going to be buying/selling every asset class this time around.
• You don’t say if your assets are held in Inc or Acc products. Given you have no cash anywhere I’ll assume Acc. Inc would have made this easier during both the accrual and drawdown phases IMHO but let’s move on.