2016 In Review, Back to Plan A

My self assessment tax bill has been paid and the final dividend laggards have paid up meaning I can now financially close out 2016.  This will hopefully be the third last quarterly summary after which the format will switch from an accrual of wealth format to one focused on wealth preservation as I start to drawdown in FIRE.

If you had have offered me 2016 on the 01st January 2016 I just wouldn’t have believed you.  When both savings and investment returns are summed I’ve increased my wealth by £263,000.  Quite a staggering number and a result which enabled me to both become a millionaire and to become financially independent (FI).

2016 was also of course the year of the Brexit vote which has resulted in Sterling weakening against many currencies.  Measured in Euro’s, which I need for my Plan A, it’s a more subdued EUR134,000 increase however I’m certainly not going to turn it down.

Given that I’m also now emotionally ready to FIRE I’m going to change the structure of these quarterly reviews a little to start to focus on what’s important to me going into FIRE.

Let’s look at the gory details.

SAVE HARD

I unapologetically continue to define Saving Hard differently than most personal finance bloggers.  For me it’s Gross Earnings (ie before taxes, a crucial difference) plus Employee Pension Contributions minus Spending minus Taxes.  Earn more and one is winning.  Spend less or pay less taxes and you’re also winning.  Savings Rate is then Saving Hard divided by Gross Earnings plus Employee Pension Contributions.  To make it a little more conservative Taxes include any taxes on investments but Earnings include no investment returns.  This encourages me to continually look for the most tax efficient investment methods.  I finished the quarter with an uninspiring Savings Rate of 44.9% against a plan of 55.0%.  Don’t worry it wasn’t a Christmas blow out but the result of PAYE tax on my earnings (as always) combined with the added bonus of a self assessment tax bill.  Over the year my physical spending remained well in control with spending being only 8% of Gross Earnings plus Employee Pension Contributions.

Click to enlarge, RIT Savings Rate

Saving Hard score: Conceeded Pass.  I can’t give myself a pass as I’ve missed the target but given my savings rate is 92% under the traditional financial bloggers measure, which even trumps (no pun intended given yesterdays ceremony) Jacob of Early Retirement Extreme’s 75%, I’m not going to beat myself up about it.

INVEST WISELY

2016 (02 January 16 to 07 January 17) investment return closed at 16.8%.  Now before any haters (since publishing my book a few of these seem to have appeared) jump in and say that a Slow and Steady Passive portfolio returned 25% so you’re sh*t (one hater has a bit of a toilet paper obsession) it’s important to note that my investing strategy is now transitioning from one focused on accumulation to one preparing me for drawdown in FIRE which is resulting in some portfolio performance drag.

The biggest drag is my continuing to build cash and cash like holdings (NS&I Index Linked Savings Certificates predominantly) quickly for a non-mortgaged home purchase and to give me a few years of cash buffer as I enter FIRE.  At the close of 2015 that stash was sitting at £203,000 and is £267,000 today.  At today’s exchange rates I now have enough for the Mediterranean home purchase (Yay!) and in the run into FIRE it’s now all about building a few years of cash buffer which is tight but doable.

I’m also trying to ‘ensure’ I can live off dividends alone in FIRE.  2016 total dividends were £20,131.  For a while now I’ve been working with a forever assumed Euro exchange rate of 1.123 (which of course may prove to be a mistake) which would make my 2016 dividends EUR22,607.  In contrast my Med FIRE spending is expected to run to EUR21,439 giving me spending cover of only 1.05.  Even with the cash buffer mentioned above I’d like more to ride out the inevitable corrections or crashes and there’s still time.

Part way through 2016 I switched from OEIC’s that pay dividends annually to ETF’s that pay quarterly which will self correct in 2017.  Additionally, I’ve been buying equities and bonds all through 2016 by both filling my Stocks & Shares ISA and completing a partial transfer from my expensive work pension which doesn’t pay dividends into a SIPP.  All of these changes will spin off additional dividends throughout 2017.  I haven’t given it to much thought but I wouldn’t be surprised to see dividends exceed £22,000 in 2016 which would increase that cover to 1.15.  Of course I’d like more than that but I’m also conscious that you’re a long time dead.

Click to enlarge, RIT Annual Dividends

This is what my asset allocation looks like today.

Click to enlarge, Current RIT Asset Allocations

I continue to invest as tax efficiently as possible with my tax efficient holdings now consisting of:

• 45.0% held within SIPP's
• 9.6% held within the no longer available NS&I Index Linked Savings Certificates (ILSC’s)
• 11.2% held within a Stocks and Shares ISA.  

Tax efficiency score: Conceeded Pass.  At the end of 2015 this was 67.0% and one year on it’s now 65.8%.  At this stage of my journey this is now largely what it is and not really able to be influenced.  Before I FIRE to the Med I’ll make sure my and Mrs RIT’s £20,000 2017/18 ISA allowances are used.  Other than that post FIRE I’ll close down my employer’s pension and transfer that to a SIPP to save on expenses but that won’t help tax efficiency.  Once I’m FIRE’d and if it’s Cyprus I’ll first spend down my non-tax efficiently invested wealth assuming UK residency (in Cyprus I’ll pay little/no tax) which will allow the ISA to compound up.  This will be easy as they have no capital gains tax on equity/bond gains.  Spain, if we go that way, does so it would need a more thoughtful approach.  This would likely include spending the dividends that are coming from the wealth within my ISA to ease the tax burden somewhat.  This is all about staying as UK tax efficiently invested as possible for the first few years just in case we decide to return to Blighty.

Investment expenses also continue to be treated like the enemy.  A so so year in 2016 with expenses being reduced from 0.27% to 0.25%.

Minimise expenses score: Pass.  A reduction by taking some conscious actions throughout the year.  0.02% doesn’t sound like much but given my current wealth that’s £222 a year staying in my pocket.  I’ll take that.

In the scheme of a lifetime of investing this year is insignificant.  I’m all about time in the market and not timing the market so let’s zoom out and look at my performance since I started down this DIY road.  I’m happy with my long run nominal 6.9% which is a real (using RPI) return of 4.3%.  The chart below tells the story.  Note that the chart assumes a starting sum of £10,000 which was not my portfolio balance at that time but is instead simply a nominal chosen sum to demonstrate performance.

Click to enlarge, RIT Portfolio Performance vs Benchmark vs Inflation

Long term investment return score: Pass.  My whole investment strategy since 2007 has been about generating a long term real return of 4%.  4.3% is nicely above that but in the back of my mind I’m also starting to wonder if this bull market is becoming a bit long in the tooth.  For now I’ll take the glory and do the victory lap.

RETIRE EARLY

I’ve proven that combining Saving Hard and Investing Wisely gives Early Financial Independence and the option of Retiring Early.  Both the theory and my personal experience says that if you want FIRE it’s the first of those that is the priority.  This is the contribution I’ve personally seen from each element.

Click to enlarge, RIT Contributions from Saving Hard and Investing Wisely

I’ve now been on this journey for a little over 9 years and all that Saving Hard and Investing Wisely adds up.  My progress to FIRE looks like this:

Click to enlarge, RIT Progress Towards Retirement

That’s £1,113,000 of wealth that has come from nothing more than hard graft, considered spending and taking some time to focus on some selected investment fundamentals.  Netting off the home purchase, converting to Euro’s and with considered spending in FIRE continuing that’s a starting withdrawal rate of 2.2% against a planned 2.5%.  The battle and war look well and truly won.  Thanks 2016.

How was 2016 for you?

As always please do your own research.