FIRE Journey - Inviting portfolio inspection

[jakinvegas]

Hello All,

Sharing an update on my FIRE journey for constructive critique. Curious if any of the experts out there have opinions on current strategies or spot opportunities for cost efficiencies.

Age:42, no kids, tech salary 123k.
Desired asset allocation: 100 % stocks aiming to move towards global exposure. Will look at rebalancing when I get closer to 50.

Goals:
Aiming for a fire target of ~900k based on the 4% rule. Current projections get me there in about 5 years, although in likelihood, I’ll purchase a larger family home before this so won’t actually retire at 47. Age 55 is a more likely scenario. Aiming to have high-risk investment posture that prioritises long-term growth and tolerates short term fluctuations.

Current Total Net Worth is ~490k.
Cash: 20k
ISA: 100k
SIPP: 192k
Australia Pension:124k
House Equity: 20k
LISA: 10K




Because of the tax efficiency, my investment priorities are SIPP, LISA, then ISA. Salary sacrifice is the greatest contributor to wealth creation over the last few years. I’m keeping salary well under 100k and take advantage of the carry forward allowance. This is the last year I’m playing catch up of the 40k additional amounts from 3 previous years. I understand that annual allowance has now gone up to 60k, so could continue to max this out this year and next. There’s additional benefits to salary sacrifice as employer pays in Employers NI (about £774 a month on a 50% sacrifice). Periodically transferring WGP from Scottish Widows into Vanguard SIPP to reduce fees and to have more investment control. Choose index trackers rather than limited to SW funds, and vanguard fees are lower. It’s a way off yet, but thinking about how to best use the pension pot to generate retirements income. Annuity, lump sump extraction, etc. I appreciate there’s some tax implications here to consider. SIPP is majorly in the Vanguard Global Small-Cap Index Fund which tracks the MSCI World Small Cap Index. (IE00B3X1NT05)

Have a regular £100 direct debit going into the ISA. Most likely will use this as a bridge between stopping work and potentially taking pension at 55. In reality this is also acting as my emergency fund. While Scottish Mortgage, and Edinbugh Worldwide are down, I’m planning to hold on these and expecting a recovery over 5-10 years. Where I need to pull money out of the ISA to support cashflow for pension salary sacrifice and house renovations, I’m liquidating the investments that are up, and in general moving away from FTSE UK All Share, and towards the Global index trackers for more balance.

State Pension:
Ensuring the national insurance contributions are going in.

SIPP - ~192k - Interactive Investor (fixed broker fee 120 per year)

• 50% MSCI World Small Cap Index - IE00B3X1NT05 - OCF 0.29 Vanguard: Global small cap
• 50% FTSE Global all cap index GB00BD3RZ582 - OCF 0.23 Vanguard: FTSE Global All Cap Index Fund

LISA - ~10k - AJ Bell - (Broker fee of 0.25%)
100% - MSCI World Index - OCF 0.12 - GB00BJS8SJ34 - OCF Fidelity Index World Fund

ISA - ~100k - Interactive Investor - (Fixed broker fee of 143.88 per year - 11.99 per month)

• ISA Index (0.32) L&G Global Technology 41,192.50
• ISA Fund (0.34) Scottish Mortgage 9,535.80
• ISA Fund (0.72) Edinburgh Worldwide 562.36
• ISA Index (0.13) HSBC FTSE ALL WORLD 10,591.90
• ISA Index (0.23) Vanguard FTSE Global All Cap (VAFTA) 37,124.90
• ISA ETF (0.22) Vanguard FTSE Emerging Markets UCITS VFEM 5,614.38

Thank you for reading if you got this far. Any observations are greatly appreciated.

[JohnB]

Salary sacrifice was my best friend when working in IT, and I used to pull pension stuff out of Scottish Windows into Hargreaves Lansdown to get a better fee structure.

You can get lower OCF index trackers if you are less specialist, I think 0.07% is my best one.

I'd put more into the ISA, given you are 15 years away from getting back the SIPP stuff.

[DrFfybes]

House Equity: 20k
LISA: 10K

You can't put much into your LISA, but topping it up is a good idea.

Your Net Worth adds up to £466k, not 490.

But the big thing not addressed here is where you live.

You don't say what your mortgage rate is, but with £20k equity either you live in a Salford Terrace or you've got quite a large mortgage. Paying that off means a tax free return which at your tax rate returns equivakent of about 1.6x the interest rate on the loan risk free. Also when did you value your house? - That £20k equity can quickly turn negative and dent any hopes of upsizing. I'm assuming children aren't in the plan, even though you're planning to upsize the "Family home"?

Otherwise all is looking good, but if you are planning to retire on £40k or so income then really the house needs to be paid for.

I must admit we did it the other way around, focussed on paying off the mortgage and just filling ISAs. But the ISA limit was a lot lower and the interest rate was between 8% and 6% back then, and Pension Freedoms hadn't been announced, so a different approach.

Paul

[jakinvegas]

About 108k remaining on the mortgage, £600 monthly. I’m at 2.14% until March, when I’ll need to remortgage. Living in an affordable rural area. Putting a fair bit of cash into the renovation at the moment, but considering these one-off fixed costs, and paying attention to what will increase property price for an eventual sale (perhaps in a 3-4 years). Bought at 130 two years ago in march, valued at 151 on Zoopla (haven’t updated equity based revaluation, but don't anticipate that it will move to negative). I'm thinking about how to best address the remortgage, and whether it is better to continue with the salary sacrifice on the pension, or switch tact and focus on actively paying off the mortgage.

[moorfield]

Because of the tax efficiency, my investment priorities are SIPP, LISA, then ISA.

I think that's the right order. On a £123k salary you want to be putting at least £23k into a pension to claw back your personal allowance, and ideally the full £40k. Then the LISA £4k to claw back another £1k.

About 108k remaining on the mortgage, £600 monthly. I’m at 2.14% until March, when I’ll need to remortgage.

If you have an offset mortgage, I would seriously consider moving all of that £100k ISA into it to reduce your borrowing down to £8k. Higher interest rates are here to stay, quite possibly until you are 55 yourself. If you don't, apply for one next March. Don't underestimate how good this feels if you are planning for an early retirement, or downsizing work. I offset my mortgage last year to zero from ISAs but still have the borrow back facility for another 9 - best decision I've made watching interest rates climb and climb.

Once you've done that, look into start using some of your VCT allowances (30% income tax relief).

The Aus/UK split pensions are interesting, clearly you have spent some time living/working there? I imagine you'll need to make a decision about where you live eventually and transfer accrdingly.

ISAs and LISAs aside, you have just about enough in the pensions to provide a decent income. £316k total at 7% yield, say, will give you £22k/year currently. A run-of-the-mill HYP or IT basket reinvesting dividends should be able to roughly double that for you in a decade - £54k/year by the time you are 55, inflation aside. But keep contributing to the SIPP.

[JohnB]

Draining the ISA to pay off the mortgage will taken 5 years to refill. They key thing the OP needs to say is their living expenses so we know how much headroom there us for all these schemes. But a with a salary matching their house price they should be laughing!

[kempiejon]

I've not much to add on your specific fund choices, you've a good cover with some baises. To my mind not much wrong with global collectives, I like the vanguard ETF VWRL/P.
4% on £900k would give you £36k annual income, where does all that go? Forced redundancy 15 years ago caused me to do some hard budgeting, I occasionally update so have a very good idea of where I spend my money, what I could cut back on and what teats I wanted to include in my income desires. It's a useful exercise and I know a few other on the board have the done the same some to much higher spending granularity.

Because of the tax efficiency, my investment priorities are SIPP, LISA, then ISA. Salary sacrifice is the greatest contributor to wealth creation over the last few years. I’m keeping salary well under 100k and take advantage of the carry forward allowance. This is the last year I’m playing catch up of the 40k additional amounts from 3 previous years. I understand that annual allowance has now gone up to 60k,

Yes those tax efficiencies are a good deal but if you're retiring early, say 50ish remember your pensions & LISA are locked away.
You know that currently SIPP is locked until age 57 from 2028, LISA currently until age 60 or a tax penalty. For early retirees you'll need to fund from other accounts until those ages. At 40 I used to focus my investments outside of SIPP for early access, as I near 55 I max the pension first and will pull the max 25% out to reinvest.
Your plan might get you out before you can access those pots which means you need to find a way to bridge any gap between the £36k above either with some income or running down some capital. Hard cash is a good way to do this if it's only say 4 or 5 years. If your ISA fund is half you SIPP then natural yield would treble come normal pension age but you might want to be more profligate earlier once you can afford to stop working.

[Kantwebefriends]

The FT has carried some articles recently about the allocation beliefs of Jan Loeys of JP Morgan. For example:

"1. How many assets do you really need in your long-term portfolio?

In principle, you do not really need more than two: a global equity fund and a broad bond fund in your own currency, with the relative amounts a function of your return needs, ability to withstand short-term drawdowns, and need to control long-term risk on your ultimate portfolio. This gives you very good diversification, clarity and simplicity on what you are holding, and high liquidity with minimum costs if held through passive funds, mutual or exchange traded (ETFs)."

Perhaps he implies that he doesn't view cash as part of a portfolio. As an amateur I'd add a bit of gold as insurance against God-knows-what financial catastrophe. Again as an amateur I'd expect to diversify my holdings over different providers and fund managers if I can do that at trivial cost. Otherwise it's presumably a case of (i) keep costs and taxes down, and (ii) don't check your asset values more often than annually.

I suppose I might like to see how a 100% equity portfolio has done historically compared with, say, an 80:20 portfolio. No doubt plenty has been published on the matter.

[Kantwebefriends]

if you're retiring early, say 50ish remember your pensions & LISA are locked away.
You know that currently SIPP is locked until age 57 from 2028, LISA currently until age 60 or a tax penalty. For early retirees you'll need to fund from other accounts until those ages.

I suppose there's a case for paying off most of a mortgage and then, shortly before retiring, remortgaging. Then you can live off that capital until the pensions/LISAs are available. Alternatively use an offset mortgage for the same purpose. Then use the tax-free cash from LISAs and pensions to clear the mortgage or at least pay it down a long way. Keeping a mortgage running might be a cheap way of buying financial flexibility. It might even allow you to anticipate the arrival of the state pension.

[Gerry557]

You seem to be in a good position with nice problems to resolve.

I haven't much to add that has already been covered except for you to think a bit more about flexibility.

I think an offset mortgage is a bit of a no brainier next time round. The monthly payments are likely to triple at the end of your term anyway. The offset will offer lots of flexibility and options.

As already mentioned, access to the pensions is restricted. So should there be a hit to your income temporary (loss of job, sickness etc) then what would you do. So consider more ISA/offset holdings which you can access immediately.

[DrFfybes]

Draining the ISA to pay off the mortgage will taken 5 years to refill. They key thing the OP needs to say is their living expenses so we know how much headroom there us for all these schemes. But a with a salary matching their house price they should be laughing!

This is important, it has been said often, but anything removed from a tax wrapper cannot (usually) be put back and becomes a taxable asset for the rest of your life.

As others have said - you need a form of income until some of your wrappered assets become accessible. Personally I'm not keen on remortgaging, you are looking at 7 years or so and someone doing that 4 years ago might be in for a shock now. Also personally a major spect of a relaxing retirement is to be debt free, that way you have a lot more control over your outgoings.

Remember "Don't let the tax tail wag the dog" - you might get great tax efficiencies putting into a SIPP now, but if what you end up taking out is taxed at 40% then an ISA would be as good long term. Plus you can take from an ISA at any age.

However IMO the most important info missing, and the place to start any retirement plannning, is "How much do you (want to ) spend?" You need this as then you can start to work out how much you need to fill the gap between stopping work and accessing Pensions.

Last point is have you considered part time work to phase in retirement? Reducing to 3 days has several advantages - you keep busy in winter, you double your spare time each week, and at your tax rates the salary lost Is all taxed at the higher rate so takehome income drops by proportionately less than the time gained.

Paul

[Hariseldon58]

The OP has a great salary and is doing the right things, high growth all equity portfolio with a tech bias and works in tech ....

Perhaps having a portfolio that does not have a bias to your area of employment would be prudent.

Just keep saving on a regular basis, month in , month out, minimise life style creep and its very likely to end well.