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Almost FIRE

Including Financial Independence and Retiring Early (FIRE)
ayshfm1
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Almost FIRE

#202870

Postby ayshfm1 » February 21st, 2019, 11:23 am

Reading the other posts I thought it might be useful to add my thoughts on the subject.

I'm 51 and our investment income exceeds expenditure. I could FIRE but I won't until at least 55. This is partly because much of the income comes from my SIPP and hence isn't accessable until then and then there is the safety margin. Strictly speaking there is enough assets in my ISA to bridge the gap but I'd rather keep them (and the income produced is doing something useful).

One thing that strikes me is that you have to understand your financial enviroment (tax breaks, interest rates, own age,etc). This is very different for me today than when I started and will continue to evolve.

So :-

Own your own home? Use an offset mortgage, I've had two, first one enabled my original house to be paid off, second one is completely offset.

The offset means all your money generates a tax efficient return, insulates you from interest rate hikes, owning it means stability and no worries about rent rises. However my first house was compartively inexpensive and the second because I'd made so much on the first was also reasonably affordable. In todays world with comparatively expensive housing (by this I mean as a ratio to salaries) I'm not sure that works as a recommendation for someone just starting. In the round though I think retiring in a house you own is a primary goal.

Earn significantly more than average salary for a prolonged number of years. There is no getting over this in order to save a significant amount a decent salary is needed.

No partner, a partner committed to the same goal or a partner who pays their way. If there is a constant drain on the income then clearly savings won't grow. In my case, my wife has no interest in FIRE, I doubt she even knows it exists, she likes the consumer society and broadly speaking could be considered a spendthrift :) , on the face of it bad news. However she is also a monster earner. She pays half the bills, the holidays, buys and runs her car and self finances her spending. She has minimal interest in money so I manage the surplus cash for our collective benefit. She is much younger than I and is blissfully unware she's ontrack to have her own circa 1KK HYP pension at 57 which is the likely date she'll be allowed to draw it, I'm not even sure she wants to retire that early.

Tax. Understanding and manages the tax system is very important. Income tax and National Insurance being the two that matter most. The strategy I used (and use) is offset mortgage for cash, ISA and SIPP for investments. My wife mostly offsets the mortgage today as she likes to see cash (so she does and it does something useful). My money is invested with more risk. Age is also a factor as is the regime. I always loaded my ISA up the invested in my Pension as I got older so I began to target the pension (the ISA allowance is so large now that this makes things easier). As for pensions I use my SIPP and never contributed in any money that would not attract 40% tax relief. As I get older so I contribute money that no longer attracts 40% however I have stopped putting it in my SIPP now use salary sacrifice and put it in the company pension (I'll come to why shortly).

Investment strategy. HYP. Though I'm not a purist, I hold ITs, ETFs and Pref shares as well as ordinary shares (and far more than a normal HYP). The idea is well uderstood, the shares pay dividends and the divdends exceed the income requirments. The things I liked were, inflation protection both asset and income and the efficiency of both accumulation and when the time comes income without selling anything. This is achieved today and will be further enhanced by re-investing dividends over the next few years. There are many that argue this is not an optimal strategy, my view is that it does't have to be optimal it has to be easy to do and it needs to be good enough (ie deliver enough to live off). Investing to produce an adequate income is not a competion sport, it's "won" when the investment investment exceeds expenditure.

Risk. This strategy has significant risks, my very wide holdings should provide some safety, but it is really only mitigated by retaining enough cash to ride over any bumps. This is another reason I have to wait. The company pension is being funded at 40K per year and will be worth circa 200-250K when I reach 55. This will transfer into my SIPP and between them should be worth circa 1KK allowing circa 250K to be withdrawn as the cash free lump sump so providing the risk mitigation.

Enabler, my HYP ISA is currently paying out as income. This allows me to maximise my company pension contributions whilst still being able to carry on without having to curb my expenditure too much over the next 4 years. I would stuggle to contribute so much without this topup.

I have been running this plan for 20 years, modifying things as the envionment I operated in changed and it's worked - at least as far as I can tell.

Darka
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Re: Almost FIRE

#202904

Postby Darka » February 21st, 2019, 12:50 pm

Excellent post, thanks.

I like the idea of taking ISA income and using this as an enabler to increase your salary sacrifice - interesting and I might look into this a little more.


regards,
Darka

ayshfm1
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Re: Almost FIRE

#203379

Postby ayshfm1 » February 23rd, 2019, 9:49 am

I decided that it was worth a short summary.

Think about the target age you want to be out of the rat race, from the view of whats possible. I considered the various options and for me pensions were the only viable way to do it. Since 55 is when you can (currently) access private pensions 55 became the earliest feasible point I could do it.

Owning a house. This was an absolute no brainer when I started and therefore was a priority. The sky high valuations today make this less obviously a good idea.

Offset mortages were brilliant with high interest rates and are still very good today. Mine allowed cash ISA's to offset, so I build up my ISA pot like this, not an option today as far as I'm aware. Everyone should have an emergency fund it, this creates quite a large one and every penny you have is working for you.

Company pensions (at least for me) were not compelling until near the end. The charges were high(ish) and the investments tended to be actively managed (also with charges). I wanted to manage my investments so used a SIPP primarily. However the company contribution was worth having all the way along. The disadvantge of a SIPP is it can't do salary sacrifice. Since I was only contributing funds that would incurr 40% tax this didn't matter at all initially and laterly it was 1 to 2%, the charges would have eaten away at that. SIPP charges are a fixed amount, This quickly became a tiny %.

In the early years then :-

Mortgage
Company pension - no more than needed to get max contribution
SIPP - to ensure I was just a basic rate tax payer
ISA - anything thats left - paid from income that was taxed at 20% (+12% NI)

In the later years

Company pension to the max - I raid the ISA, taking the Divi's out to allow, this nets 42% at best and 32% at worst in tax relief.

I was also rather lucky my company was taken over and the pension that replaced it had better investment options and we were allowed to transfer the other pension out (this happened several times this however was the first time we were given a transfer option, normally it got force moved into the new pension and there was usually some loss when it happened). I transfered this pension into my SIPP and and effectively doubled my already diverse HYP, I picked a Vanguard world tracker in the new company pension. Charges are a concern as the pot grows it % linked to pot size, but since it was going from zero and would probably only run for a few years and only be materially large for a couple at the end, this can be taken on the chin.

It was at this point I tracked household expenditure against the income produced and one year later knew that theorectically at least I had just hit FIRE. 5 years in advance of my target, becalmed in front of a pension I couldn't access :cry:

Not quite as short as I was hoping :D

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Re: Almost FIRE

#203386

Postby monabri » February 23rd, 2019, 10:24 am

Interesting read but I'm not sure what you mean by a 1KK HYP...I'm guessing that it is a HYP that will (hopefully) generate £100k per year?

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Re: Almost FIRE

#203399

Postby MaraMan » February 23rd, 2019, 11:27 am

Interesting, thanks for posting. The only part I struggle with is taking tax free dividends out of your ISA and putting them in a taxable SIPP account. For me ISA's are more valuable than pension funds, but I guess that's just a personal preference and depends on values etc. I understand the tax relief on the way in, but you get taxed on the way out. I would though much rather have £1M in ISAs than in a SIPP.

MM

PS I assume 1KK means 1 million

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Re: Almost FIRE

#203417

Postby thebarns » February 23rd, 2019, 12:43 pm

Re SIPP/pension v ISAs.

Under a specific set of circumstances, SIPPs/pensions are way ahead of ISAs, assuming you have some cash available for emergencies.

Say you want to retire at 55.

Tax relief of 40% plus can be achieved meaning an instant 67% return on your money.

Mr and Mrs SIPP could each have £300k in a SIPP and assuming a 4% withdrawal, they could both draw £12k a year tax free via the personal allowance, this in addition to drawing a £100k tax free lump sum. So a couple could easily amass £800k pension pot and have no tax to pay.

And then the clincher at this point in time is that pensions can be passed on completely IHT free if die before 75 and even if die after that, they can still be left to children who can decide when to draw or not draw on the remaining pension as suits their own personal circumstances.

Contrast this with ISAs - no tax relief on the way in, thus no 67% increase for higher rate taxpayers.

Tax relief on income granted, but see what can be done with a split £800k pension pot.

And ISAs are part of an estate for IHT, so for many on here, that would be another 40% tax hit for your beneficiaries.

ayshfm1
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Re: Almost FIRE

#203420

Postby ayshfm1 » February 23rd, 2019, 1:10 pm

1K=1000
1KK=1000000

Salary sacrifice is the reason I decided to max contributions to the company pension and take the ISA cash an dthe much larger limits. If I find myself with cash in April I can simply pay it back in. The lower limits in the past meant keeping the cash inside the wrapper made more sense, not so much now. However I calculated that maxing contributions would have left me with only £100 or so more than my average expenditure, I needed more cash coming in or I'd have had to compromise, the ISA was the obvious pot to raid.

ISA incurs no tax charge when taken out - if I earned that money I would pay between 32-42% tax. Assume investment return is the same within both wrappers. Upon retirement I intend to pay ony 20% there is an immediate benefit of 12-22% by substituting earned income with ISA income. However pensions also give a 25% lump sum payment and the ability to use the personal allowance. So it's bigger than that and this return involves limited risk versus investment return.

Pension rules however change (though BrExit appears to have occupied the people who would be changing them) therefore piling in too early runs the risk of significant changes (hence the limited risk point above, the rules tend not to change for those close to milestones), moreover if you exceed the lifetime allowance the benefits erode, so it pays to get to that value and crystalise so there won't another assessment until 75.

The idea is then to turn the company pension into cash, transfer to SIPP take it as the cash free lump sum. I stop taking the ISA divi and re-invest it and add 20K per year from the lump sum, meanwhile extracting as much as possible from the pension income without paying 40% tax (no NI in retirement). This should also provide enough cash to provide house deposits for the children when the times comes. In todays age it pays to factor that in, otherwise they'll never leave home....

The ISA can then operate as a reserve/income topup if needed down the line.

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Re: Almost FIRE

#203426

Postby Spet0789 » February 23rd, 2019, 1:30 pm

Interesting post.

Looks like the best financial decision you made was getting hitched to the much younger, ‘monster earner’ wife!

I also make an offset mortgage a big part of my strategy - I am currently in the last 3-4 years pre FIRE and see it as (1) a zero opportunity cost cash savings account and (2) a cheap source of temporary leverage. I don’t run a HYP and If markets fall in the future I’d rather draw down a little on my offset for a couple of years than sell shares for income.

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Re: Almost FIRE

#203460

Postby MaraMan » February 23rd, 2019, 4:34 pm

I take the points made about SIPP v ISAs but would point out that ISAs can be passed onto spouses tax free. Also with due deference to Warren Buffett and his latest letter to shareholders, the potential provided by compound growth in a completely tax free wrapper for me outweighs the gain from moving dividends into a SIPP. I retired on my 56th birthday two years ago, until then I was a higher rate tax payer and put large sums into my SIPP each year but I never did that at the expense of my ISAs, and the growth of my ISAs and the ease of their use for me makes them indispensible and the idea of bleeding dividends from them before I needed to as unthinkable.

Each to their own of course, no criticism intended.

MM

ayshfm1
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Re: Almost FIRE

#203469

Postby ayshfm1 » February 23rd, 2019, 5:13 pm

On the subject of how much income it should produce. It'll be nowhere near 100K. Assume 250K cash taken, 750K in HYP, I project this will be circa 45K income per year.

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Re: Almost FIRE

#203498

Postby TUK020 » February 23rd, 2019, 8:39 pm

ayshfm1 wrote:
Not quite as short as I was hoping :D



You also need a cash buffer to protect against a market downturn clobbering your projected divi income in the early years, aka sequence of returns risk.
One of the regular posters here, who has been running an HYP for several decades and keeping detailed records, TJH, recorded a 40% dip in divi income after the crash in 2007-2009, since recovered.
Consensus here is that ideally you should have a cash buffer of 2 years worth of income - the other 3 years you can regard as builind in extra insurance.

Overall, excellent summary of your financial strategy, which appears to be pretty sound.

Advantages of SIPP route become even more pronounced if your taxable income exceeds 100k. Withdrawal of allowances means that your marginal rate (inc NI) goes to 62%.
Pension assets can also be bequeathed outside of your estate, making them a good route to pass on wealth to kids

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Re: Almost FIRE

#203607

Postby Hariseldon58 » February 24th, 2019, 10:49 pm

Having always been a basic rate tax payer, the ISA route has been more atttactive in my FIRE approach ( 12 years this year and still another six til the state pension hopefully)

A result is our taxable income has always been within the personal allowance... maximising the CGT allowance for a couple and reinvesting all ISA income within the ISA does allow for a minimal tax bill.

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Re: Almost FIRE

#203609

Postby Lootman » February 24th, 2019, 11:01 pm

Spet0789 wrote:Looks like the best financial decision you made was getting hitched to the much younger, ‘monster earner’ wife!

I like to say that there are 5 keys to financial security:

1) A decent career. Necessary but not sufficient.
2) Buy a home when young and trade up regularly. Ideally buy rental properties but less beneficial now with the various changes in the law.
3) Invest in shares, especially if tax-free. No need to get clever - global index funds are fine.
4) Be frugal but know how to spray some cash around on whatever takes your fancy. For me, it's travel and eating well.
5) Marry well (or don't marry at all). Avoid divorce at all costs - it's a wealth killer as a few of my friends can testify.

Not sure what "much younger" or "monster earner" means but my wife is 13 years younger than me, still working, and makes about 130K a year from her job. I suspect the problem will be getting her to retire given that she still enjoys it. But I'd really like more time for us to travel and do stuff. But she has a work ethic that greatly exceeds mine. We will see.

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Re: Almost FIRE

#203611

Postby Dod101 » February 25th, 2019, 1:37 am

Sounds as if Lootman has it sorted. Well done! I do not think that anyone would disagree with his 5 keys but sometimes life simply does not work like that.

Dod

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Re: Almost FIRE

#203646

Postby Spet0789 » February 25th, 2019, 9:55 am

I’d agree with all but 2) of Lootman’s points.

If your lifestyle permits it, renting property (particularly in cities) is likely to be a more efficient use of capital than buying.

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Re: Almost FIRE

#203652

Postby kempiejon » February 25th, 2019, 10:10 am

Spet0789 wrote:I’d agree with all but 2) of Lootman’s points.

If your lifestyle permits it, renting property (particularly in cities) is likely to be a more efficient use of capital than buying.


I'm not convinced that buying your home necessarily leads to wealth creation, I'm not sure it has for me. The fees, taxes, interest and other costs associated with buying and selling houses always grate with me. However it's a way to leverage rises in house prices.

ayshfm1
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Re: Almost FIRE

#203657

Postby ayshfm1 » February 25th, 2019, 11:06 am

kempiejon wrote:I'm not convinced that buying your home necessarily leads to wealth creation, I'm not sure it has for me. The fees, taxes, interest and other costs associated with buying and selling houses always grate with me. However it's a way to leverage rises in house prices.


I'm sure it was optimal for me, but I think moving often could erode the advantage. I'm a lot less convinced that it's a good idea today with current valuations.

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Re: Almost FIRE

#203669

Postby Spet0789 » February 25th, 2019, 11:43 am

Clearly for someone over the age of about 40 who has lived in the U.K., being long U.K. housing with leverage has likely worked out very well.

This performance has come from a massive ‘re-rating’ of the asset class so I think in this case good past performance is a reason to be cautious not bullish.

Also, given how concentrated one’s portfolio always will be wrt this asset, I think it adds massive sequence of returns risk. Anyone extending themselves to buy a 500k property today with 100k of equity could very easily lose all their equity and more over the next 2-3 years. If they then have to crystallise the hit to their accumulated lifetime wealth would be huge.

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Re: Almost FIRE

#203684

Postby Alaric » February 25th, 2019, 12:41 pm

Spet0789 wrote:Anyone extending themselves to buy a 500k property today with 100k of equity could very easily lose all their equity and more over the next 2-3 years. If they then have to crystallise the hit to their accumulated lifetime wealth would be huge.


Dividing everything by 3 that describes the years 1988 to 1991 and then followed with more stable prices to 1997. If you sold a house at the bottom, equally you could buy at the bottom and in retrospect there were some bargains going. I don't think wages and salaries have increased threefold since 1988.

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Re: Almost FIRE

#203696

Postby StepOne » February 25th, 2019, 1:20 pm

Lootman wrote:2) Buy a home when young and trade up regularly.


Disagree with the 'trade up regularly' part of that. I would buy the most expensive family home you can possibly stretch to as your first property, and hope you never have to move until you retire and down size. Rent out the spare rooms when you are single, and make sure it has space to extend if needed.

StepOne


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