Retirement Investing Today

[TheRIT]

With a board name like Retirement Investing I might just have found my new home.

A bit about me. I was "GK11" over on the TMF Boards but I always found the whole Unthreaded, Threaded, or Collapse All palaver cumbersome. I'm also "wish I could afford one" on the HPC forum but over there anything to do with investing, the markets or my favourite topic, early retirement, tends to get relegated to a sub-forum where it quietly dies.

I reached financial independence just a few months ago. It took me in 9 years and am now age 43 but am yet to take early retirement. For many my journey was pretty rapid as I managed to accumulate 0.95% of the wealth I needed to make work optional per month. Even though it was pretty quick what I did was actually nothing special:
- Built a strategy that helped me earn more (Earning More)
- Instead of ramping my standard of living to match my increased earnings I focused on living well below my means (Spending Less)
- By Earning More and Spending less I was able to average a Savings Rate of 52% of my gross earnings
- I then invested my Savings into a Balanced Portfolio of Tracker Funds (plus some others) as Tax Efficiently as possible.
- My Balanced Portfolio covers cash, P2P lending, NS&I Index Linked Savings Certificates, UK Index Linked Gilts, Global Corporate Bonds, UK Equities, Aus Equities, US Equities, Europe Equities, Japanese Equities, Emerging Market Equities, Gold and Commercial/Industrial Property.
- I picked Tracker Funds as my research led me to believe that expenses matter and that after expenses I had the best chance of maximising returns with Trackers
- I maximised tax efficiency by filling my ISA annually and using SIPP's/Work Pension's for a portion of my wealth. I didn't pile to much into the Pension's as I could retire as soon as age 44 and will need wealth until I can access my pension. I also didn't want all my eggs in one basket as pension's of late have tended to be the plaything of government.
- I called myself Financially Independent, with the option of Early Retirement, as soon as my planned retirement spending equalled Wealth times 2.5%.
- I also started, stayed determined for the 9 years, used the power of AND and never became a victim.

Are there any other like minded lemonfool's out there?

[fireblade909]

Nice post RIT, it makes my objectives sound even more achievable!

Can you elaborate on what you mean by your last bullet point?

[mickeypops]

Hi RIT, I'm also a fan of your blog. Welcome aboard!

[TheRIT]

Nice post RIT, it makes my objectives sound even more achievable!

Can you elaborate on what you mean by your last bullet point?

Hi fireblade909

Sure, happy to elaborate as the psychological pieces are just as, if not more, important than the financial ones:
- Start. If I look back at my original plan just about every assumption I made was wrong however I still achieved the goal. So don't get analysis paralysis. Instead do some reading, do some thinking and make a start. Then with time you'll learn and get better at every element.
- Determination. This is about staying at it which sounds easy but at times in can be a pretty boring and lonely existence. Chucking large sums of money every month into index trackers month in month out for many years is not the most exciting of investing strategies. Also if I look at my friends and family I am very different. While they were ramping their standard of living with new homes, cars, general things and nice holidays I was buying trackers and figuring out how to shave 0.1% of my expenses. Every time I tried to start a discussion about personal finance or similar eyes quickly glazed over. I've lost friends over it although you could argue they weren't true friends in the first instance. That can be lonely at times and is why boards like this (and maybe even my blog) help so much as you know others are out there meaning you're not mad.
- AND. It's not about just one thing but about doing them all. Just being the best investor, unless you are very very good, won't get you to early retirement quickly. You need to earn more AND spend less AND not give it all away in expenses AND not give it all away in taxes AND ...
- Victim. This is the person who blames others or other things as an excuse for not doing something or for something not working. I can't invest now because the market is too high. I've never learnt how to buy shares so can't invest. I can't earn more money. You have to set a plan then start figuring it out and as soon as you play victim you lose.

The above might sound negative but if given my time again I would do exactly the same thing again. It really has been truly liberating.

Would you be prepared to share your objectives?

[TheRIT]

Hi RIT, longtime reader of your blog. No idea you were a fellow Fool, though I believe there was a HYP discussed on the blog for a while. I am following in your footsteps and strategy albeit I am many years away from my FIRE date, and will probably do several more extra years owing to my Puritan guilt about not working...

Glad to see you here, and many thanks for the blog. That photo of a desert island you have has sustained me through many a dark day at the job!

Regards

Ap8889

Hi ap8889

Yes I still have my HYP which is currently 16 shares but is now only 6% of my total portfolio. It did its job though which was to enable me to secure enough dividends that I could just live off the dividends in early retirement.

Any variations on the themes above or new ideas for how to do it better? Always trying to learn more.

[TheRIT]

Hi RIT, I'm also a fan of your blog. Welcome aboard!

It's great to be aboard. Hoping this board really takes off with many like minded individuals.

[MrDoppleGanger]

Hi TheRIT,

I'm another follower of your blog. Congratulations on your recent FIRE - well done.

I'm similarly following in your footsteps.

MrDG

PS The thing that first made me read your blog - the beach picture!

[TheRIT]

Hi TheRIT,

I'm another follower of your blog. Congratulations on your recent FIRE - well done.

I'm similarly following in your footsteps.

MrDG

PS The thing that first made me read your blog - the beach picture!

That's two posters that have now liked my deserted beach picture. I was thinking of actually changing it as I've been staring at it for a few years now and a change is as good as a holiday. You've now made me reconsider as it's made me remember why I chose that image in the first place.

[TheRIT]

Hi RIT,

I am in a slightly different position to you as I am locked in to a workplace final salary pension which if I keep my nose to the grindstone for 5 more years will meet my basic needs. I am pretty much at my earnings peak, without risking more by leaving my employer for the perils/delights of self employment, which I am happy to do but only once the pension prize has been bagged.

I have a few rental properties that I plan to keep running until I keel over (despite the tax changes) which have a good deal of accumulated equity.

Where I have fallen down in the past is to a small degree on the discipline on spending in my twenties (kids, marriage, exotic holidays, new motors), and to a massive degree my tax planning. Up to two years ago my overall tax bill was an absolute shocker, a significant 5 figure amount each year. This year I am destroying that with better planning, mainly via the use of a SIPP, and expending more on the maintainance of my rentals to a good standard. ( This will be a long term boon but a short term deductible.)

I am now at the point where my (stupidly low) carried forward SIPP contribution allowances are near maxed out, the ISA will be filled. Next move for me is maxing the wife and kids SIPPs and ISAs, and I think that will see this year out without recourse to the more exotic VCTs etc. My target tax amount is as little as is legal...

FIRE is a long way away, but actually the process of personal saving is reassuring for a worry wart like me, and the frugal stuff is pretty much my style in my thirties.

All being well, I should be FI at the living standard I want before 50, but as I get a lot of validation from my work which is allconsuming and don't have much outside it barring close family, I think I will keep plodding on, just at a reduced, less money driven, ulcer burning pace. My wife wants me out of the house apart from anything...

Ap8889

I was never fortunate enough to have a Defined Benefit Pension but I understand why you don't want to surrender it. In the modern world their akin to winning the lottery.

Like you I lost my twenties as I didn't get on the Early Retirement bandwagon until age 34. Hopefully I've proven that it's never too late to start though. Be asleep at the wheel until 41 and someone could still do age 50 if my history was able to be repeated.

I'm with you on the pension malarky as I'm also in the pension allowance tapering zone and am burning up carry forward at a rapid rate. Right now I'm 'negotiating' with my employer to try and improve this situation as to reduce contributions to what I will need to going forwards will result in me starting to lose company match which is just giving money away. Once that's done I'll be sure to put up a post covering the whole story as I'm sure there are others out there with similar issues.

[YeeWo]

"I have a few rental properties that I plan to keep running until I keel over (despite the tax changes)"

"Where I have fallen down in the past is to a small degree on the discipline on spending in my twenties (kids, marriage, exotic holidays,"

It's good to have a balanced normal home life. Reading the points above though, it did make me wonder: -

Would it not make sense from a Tax perspective to involve The Kids in ownership of Rental Properties? i.e. Parents collect the rent while Children hold the long term asset/debt?

[TedSwippet]

I'm with you on the pension malarky as I'm also in the pension allowance tapering zone and am burning up carry forward at a rapid rate. Right now I'm 'negotiating' with my employer to try and improve this situation as to reduce contributions to what I will need to going forwards will result in me starting to lose company match which is just giving money away. Once that's done I'll be sure to put up a post covering the whole story as I'm sure there are others out there with similar issues.

Nice to see you here, RIT. I'll be interested to read your account of how this goes.

Last year I was in a similar position with my employer, not over the taper zone but rather over the lifetime allowance. Let's just say our 'negotiations' did not proceed smoothly -- is it negotiation at all if one side doesn't budge a single inch?! -- and I was left with the choice of forgoing the entire company match and sal sac NI uplift forever more, or taking a one-time £63k hit from the lifetime allowance reduction of April last. Neither appealed, so I used this as the trigger for taking retirement instead. I'm a touch more than a decade older than you, so not too hard a decision to make.

Continual pensions meddling from the government is hard to put up with. Hopefully your employer will prove to be more accommodating than mine. Good luck!

[TheRIT]

Nice to see you here, RIT. I'll be interested to read your account of how this goes.

Last year I was in a similar position with my employer, not over the taper zone but rather over the lifetime allowance. Let's just say our 'negotiations' did not proceed smoothly -- is it negotiation at all if one side doesn't budge a single inch?! -- and I was left with the choice of forgoing the entire company match and sal sac NI uplift forever more, or taking a one-time £63k hit from the lifetime allowance reduction of April last. Neither appealed, so I used this as the trigger for taking retirement instead. I'm a touch more than a decade older than you, so not too hard a decision to make.

Continual pensions meddling from the government is hard to put up with. Hopefully your employer will prove to be more accommodating than mine. Good luck!

My relatively young age in retirement terms and relatively large pension pot also has me starting to project pension pot amounts vs lifetime allowances and I'm now watching those projections like a hawk. I'm still ok but not for much longer. It's almost like I planned this whole FIRE thing perfectly

In all honesty I'm not sure how the negotiations will end up but I'm probably only a couple of weeks from a conclusion. In my favour I have a reputation for being a pretty good negotiator and I'm also still a company 'golden boy' at this point. Against me my employer is not the best at employee relations and can be pretty hard nosed.

Either way because of my closeness to FIRE it won't make a great deal of difference if I look at what I'll lose as a percentage of my wealth. That said I also never want to leave anything on the table as one of my pillars that has worked so well for me has always been that many small amounts become large amounts.

Sounds like your company not negotiating helped you though It would also give me a good 'excuse' for taking Early Retirement...

[Dod1010]

I have read this thread with interest because an ambition to take early retirement in your 40s has always intrigued me. For most people that is just when their career is taking off and they are entering their maximum earning regime. I do not understand the references to the amount required for early retirement by the OP either, but all I will say is it had better be a lot because he is looking at a potential life expectancy of at least 40 years, probably more like 45 years. Who knows what will happen in that time?

I was given early retirement at 53. With a large chunk of money already under my belt and a good settlement I was financially secure but I would have sought a consultancy on my terms (that is what financial freedom gives you) had my first wife not been in indifferent health. She died just short of 60 years. Not only that, but my second wife, much younger than me died just over the age of 60. I can assure you that that experience rather changes your outlook on life. Life is for living and scrimping and saving for the first 20 odd years of a working life for the benefit of an early retirement seems very odd to me. I, having been retired for around 20 years, still miss the commercial imperative and I find it odd that people have the ambition to retire in their mid 40s. To have financial freedom is one thing but to give up work?

[TedSwippet]

Either way because of my closeness to FIRE it won't make a great deal of difference if I look at what I'll lose as a percentage of my wealth. That said I also never want to leave anything on the table as one of my pillars that has worked so well for me has always been that many small amounts become large amounts.

Perhaps not a large percentage of wealth lost, but you might be surprised at the percentage of income crimp caused by losing access to pension saving. I was.

Up until I retired I was putting the full £40k/year into pensions. Between the loss of employer match, the loss of NI uplift from salary sacrifice, and the loss of tax arbitrage from 40-60% on the way in down to 20% on the way out, I calculated this could equate to a near 25% reduction in effective compensation for working. Given that I'd only intended to work four or so more years anyway, working all four out but only being paid for three -- actually less than that after factoring in large commuting costs! -- just seemed like one final kick in the pants that I could do without.

My employer was not unsympathetic; not so much hard-nosed as just inflexible. Direct line managers and HR took on the cause, but higher-ups (in a foreign country, so not themselves affected) said no, and that was that. From some angles one might have been able to stretch to construe this as age discrimination, but that's not a direction I'm personally interested in pursuing.

Anyway, again good luck with all of this.

[TheRIT]

I have read this thread with interest because an ambition to take early retirement in your 40s has always intrigued me. For most people that is just when their career is taking off and they are entering their maximum earning regime. I do not understand the references to the amount required for early retirement by the OP either, but all I will say is it had better be a lot because he is looking at a potential life expectancy of at least 40 years, probably more like 45 years. Who knows what will happen in that time?

I was given early retirement at 53. With a large chunk of money already under my belt and a good settlement I was financially secure but I would have sought a consultancy on my terms (that is what financial freedom gives you) had my first wife not been in indifferent health. She died just short of 60 years. Not only that, but my second wife, much younger than me died just over the age of 60. I can assure you that that experience rather changes your outlook on life. Life is for living and scrimping and saving for the first 20 odd years of a working life for the benefit of an early retirement seems very odd to me. I, having been retired for around 20 years, still miss the commercial imperative and I find it odd that people have the ambition to retire in their mid 40s. To have financial freedom is one thing but to give up work?

A thoughtful post Dod1010. This has at least been my experience/thinking which then makes it of course anecdotal:
- One of the reasons I started to pursue FIRE was that I saw the writing on the wall for the discipline I work within in my industry. In particular I could see it being gradually outsourced to low cost countries, I could see salaries in developed countries such as the UK being driven down for the worker bees and also saw first hand that for those left there was zero job security. Under that I concluded that anybody thinking 40 years of gainful employment was naive and I had a choice. Either I could look at retraining and start again or I could go for FIRE. I chose FIRE.
- You suggest that I am scrimping but TheRIT household doesn't see that at all. We critically thought about what we wanted and in doing so dropped the concept of Standard of Living and instead concluded that what we wanted was actually Quality of Life. A significant difference which for us also meant that our level of consumption dropped through the floor which as a benefit also helps the planet (a little). We've also only been doing it for 9 years and from where I was we are now in far better place non-financially than we were.
- Also when I say Early Retirement what I really mean (and for many years said on my blog) is work becomes optional. It is unlikely I'll work for the next 5 years but I'm not going to say I'll never work again. I will however do exactly what I want, when I want and how I want. It might be consultancy as you suggest but it could also be voluntary work at the local dog shelter.
- In my industry peak earnings comes far earlier than your thinking. At my current age of 44 I am at peak earnings and in a few years will be at burn out point. There are very few 50 year olds in my peer group.
- In reference to the amount required. As I sit today after netting of a home purchase I have 40 times my expected annual retirement spending and my portfolio is paying an annual dividend yield of 2.6%. Back testing worst case market sequence of returns suggest that's enough. I have not counted any State Pension in that as I'm assuming it won't exist for my ilk or will be means tested so will keep paying Class 3 NI contributions as an insurance policy against it all going a bit wrong.
- I still have a few months before I actually retire which should give me a little more yield buffer in case of dividend dips. My plan is to go into FIRE with 3 years of expenses in cash, live off less than the dividend yield, build up the cash reserves during during the good times with the difference being out into cash reserves and then spend those down in the bear markets.

Would value your thoughts given the clarifications?

[TheRIT]

Either way because of my closeness to FIRE it won't make a great deal of difference if I look at what I'll lose as a percentage of my wealth. That said I also never want to leave anything on the table as one of my pillars that has worked so well for me has always been that many small amounts become large amounts.

Perhaps not a large percentage of wealth lost, but you might be surprised at the percentage of income crimp caused by losing access to pension saving. I was.

Up until I retired I was putting the full £40k/year into pensions. Between the loss of employer match, the loss of NI uplift from salary sacrifice, and the loss of tax arbitrage from 40-60% on the way in down to 20% on the way out, I calculated this could equate to a near 25% reduction in effective compensation for working. Given that I'd only intended to work four or so more years anyway, working all four out but only being paid for three -- actually less than that after factoring in large commuting costs! -- just seemed like one final kick in the pants that I could do without.

My employer was not unsympathetic; not so much hard-nosed as just inflexible. Direct line managers and HR took on the cause, but higher-ups (in a foreign country, so not themselves affected) said no, and that was that. From some angles one might have been able to stretch to construe this as age discrimination, but that's not a direction I'm personally interested in pursuing.

Anyway, again good luck with all of this.

I agree with all of this. I think part of the difference is that with a fair wind I'm now less than 8 months from FIRE so the pain won't be so high. I do agree that by being forced to reduce my contributions from a max of £40k to a max of £10k I'll effectively lose 75% of what I can no longer sacrifice (taxed at effectively 47% (tax + NI) plus loss of employer match). The government during the budget was very specific that they wanted 50% of that for themselves. I'm trying to save the 25% that my employer would keep by not matching.

The funny thing with all of this is that as my tax paid per annum fast approaches 6 figures and the government tries squeezing even more it will actually end up with the opposite effect in my instance. I'll simply opt out of UK tax by moving overseas (still Plan A despite some current non South East UK investigations) and my current job will be 100% off shored when I leave. So UK PLC will go from 6 figures of tax to £0. I guess not my problem...

[tramrider]

- In reference to the amount required. As I sit today after netting of a home purchase I have 40 times my expected annual retirement spending and my portfolio is paying an annual dividend yield of 2.6%.

- My Balanced Portfolio covers cash, P2P lending, NS&I Index Linked Savings Certificates, UK Index Linked Gilts, Global Corporate Bonds, UK Equities, Aus Equities, US Equities, Europe Equities, Japanese Equities, Emerging Market Equities, Gold and Commercial/Industrial Property.

Hi, RIT.

It seems that your general policies are working well. However, the dividend yield of 2.6% sounds a little low to me to cover all your future living expenses. I expect this is because the bulk of your investment must be in the cheap trackers. I would be inclined to try moving a little new investment into the higher dividend, income style ITs to give your dividend yield a boost. Also, the total return on the trackers should be a lot higher than just the yield, giving you a bit more spending confidence of being able to cash in a bit of the growing capital.

But you have done very well to reach this stage and to have developed a moderate standard of living as well.

Tramrider

[pbarne]

Hi RIT,

I'm (yet) another keen follower of your blog - I'm basically quite close to your FI pot level so I've been tracking your progress and despite my best efforts I'm always trailing just behind (although I do own my own home). I'm 52, still at work but possibly stopping next year after I can get hold of a bunch of shares in the Firm as a final boost...

I've picked up one or two ideas from how you analyze your progress - one being how you record the difference in "saving hard" and "investing wisely" (by the way I've also seen that saving is a far bigger contributor to progress than the investing side).

Cheers,
P

[TheRIT]

Hi, RIT.

It seems that your general policies are working well. However, the dividend yield of 2.6% sounds a little low to me to cover all your future living expenses. I expect this is because the bulk of your investment must be in the cheap trackers. I would be inclined to try moving a little new investment into the higher dividend, income style ITs to give your dividend yield a boost. Also, the total return on the trackers should be a lot higher than just the yield, giving you a bit more spending confidence of being able to cash in a bit of the growing capital.

But you have done very well to reach this stage and to have developed a moderate standard of living as well.

Tramrider

Hi tramrider
My investing strategy has been largely Modern Portfolio Theory meaning a critical element is country and asset type diversification. I hold some gold which of course pays a yield of 0% and also my bonds are not the greatest yielders at the moment but for me that's a price worth paying. As you rightly highlight things like my FTSE250 tracker are also not helping much on a yield of 2.8%.

The way I'll actually make up for it is build some more capital over the next 8 months which is actually equivalent to 7% more 'FIRE journey work time' which should mean, providing Mr Market behaves, at retirement my spending will be less than 2.5% of capital.

For full clarity the 2.5% spending plan has not actually been arrived at by looking at dividend yield. Psychologically I've just wanted to spend dividends only if possible. It's been arrived at by looking at historic total return sequence of returns. You may have heard of the 4% rule? My research suggests that is far to aggressive in my instance and I've actually gone for a 2.5% rule.

[TheRIT]

Hi RIT,

I'm (yet) another keen follower of your blog - I'm basically quite close to your FI pot level so I've been tracking your progress and despite my best efforts I'm always trailing just behind (although I do own my own home). I'm 52, still at work but possibly stopping next year after I can get hold of a bunch of shares in the Firm as a final boost...

I've picked up one or two ideas from how you analyze your progress - one being how you record the difference in "saving hard" and "investing wisely" (by the way I've also seen that saving is a far bigger contributor to progress than the investing side).

Cheers,
P

Hi pbarne
That chart that you refer to and agree with is just one reason why I absolutely say that it requires an AND approach. I fully appreciate that because of my pace to FIRE that saving would be important however I never expected it to be quite so important when I started out. Additionally, if we stay in a low yield world for a long time saving is going to become even more important and I don't think many people appreciate that yet. This morning I've just updated my monthly total returns and it's confirmed that over the past 9 years:
- 'only' 38% of my wealth has come from investment return; while
- 62% has come from savings
What do your saving vs investing percentages look like?

I've for a long time (and it's also been discussed on some other blogs) suggested 'I'm hardly done by' because compound interest never really gets a chance to reach the snowball effect stage however recent work suggests that compound interest is certainly there but another big effect seems to have just got in the way. It's just my pace to FIRE that has caused it and if I was looking at 40 years to retirement it could very well reverse. Some more work to do and as always I'll write it up in detail for comment from the collective.

As an aside quite a few lemonfoolers have now said they follow my blog. In the spirit of continuous improvement would you (or anybody) be prepared to say why you don't comment on the blog itself? When I set it up in 2009 one of my hopes was that it would be an area where an experience was presented (maybe even from other readers with time) and then readers could then discuss with other. A bit like a forum but just that the first post is quite detailed. It really didn't turn out like that.

Good luck with the run in to retirement.