Chapter 24

[manofstraw]

Hello all.

May I start by saying how useful, and inspiring, I have already found this forum, so thank-you. I must admit to not being overly familiar with American tax, saving and pension vehicles (and for that I apologise) but I've done my best to read up and convert to the British equivalent.

I'm 24, from Derbyshire and aim to be retired at about 50, with the usual trillion caveats attached to that number! I am at the very start of this journey so I only currently have:


£15K equity
£30K SIPP (self-managed pension)
£10K ISA (tax-free investment account)

Total = approx 75K USD

I am not currently married but could realistically expect the above to near double (possibly the biggest caveat!).

I am looking for advice about how others split their income each month/calendar year between, but not limited to:

- pension contributions
- mortgage repayments (overpayments, lump sum pay-offs etc.)
- fixed interest savings accounts
- bonds (outside of a pension)
- stocks/shares portfolio (outside of a pension)
- management funds (outside of a pension)
- ordinary bank account
- property investment

It'd be very helpful to hear from those with 10, 20 or 30 years on me about what you learned about maximising income.

As my pension will only be accessible to me at 55 (thanks George Osborne!) I'd be interested to know, in particular, what investments people have made outside of pension plans.

Oh, and I look forward to my very first trip to the States this December - Vegas may add another 5 years onto target retirement date!

Thanks for reading.

[MooreBonds]

Looks like you're off to a good start!

I'm 13 years ahead of you. Everyone has different ways of approaching early retirement, but there are mostly 3 camps of thought for the early years:

1) Extreme sacrifices early on, to maximize your compounding (what I did)

2) Do a moderate savings/moderate living scheme

3) Enjoy your 20s with your health and spend freely, and start saving in earnest when you're 30.

You can still reach early retirement with any of the 3 above strategies. And in fact, in spite of my extreme savings sacrifices, as I saw my portfolio drop $300,000 in 2008/2009, I kicked myself for not having enjoyed a good chunk of my money with various trips and experiences that most people my age would have enjoyed given the income opportunities I experienced. Of course, having kept the money in the market, it has rebounded nicely, and I knew that things would likely be ok in the long run, and it will enable me to retire years earlier...but it was a painful 12 months seeing those massive losses and thinking of all of the fun I could have had with the money that I sacrificed and saved. And remember - you don't HAVE to spend money to have a very fulfilled and enriching life. There are many experiences you can more than fill up a lifetime with which don't require a ton of money to do and enjoy.

Of course, if you do the first track like I did, you can enter your mid-late 30s in an enviable financial position, and you can likely loosen up your purse strings a bit and spend a bit more later on without worrying, since your savings stash at that point is likely growing more than your annual savings additions each year.

It can help to think of things in terms of retirement. Spending $3,000 on a trip means that money could be invested, and ultimately yield $400/year for the rest of your life to spend and enjoy. Or, if you're able, shop around and scour the land for the best deals so you only have to spend $2,000 or even $1,500 on your trip, so you can still enjoy some fun while adding more to your savings stash.

Remember that once the money's spent, it's gone, and it's all after-tax dollars. So spending $3,000 on a trip is like having to earn $5,000 in income. In the same vein, saving $3,000 in your annual spending by minimizing your utility usage, or living in a slightly cheaper area, or buying used, good quality furniture is like getting a raise or one-time bonus of $5,000 at work (Pre-tax).

When you look at all purchases as a financial transaction involving wages and other things you can buy with that money, it is easier to really ask yourself "Do I really want to pay this much for this thing/experience?" Most people simply "feel" that urge to buy this or pay for that trip/experience, without stopping to think "how will I pay for this? How long will I have to work to save up that much for it?" They only look at it in terms of the purchase, rather than what else the money can be used for.

And another item - dating. Don't fall into the trap of thinking you have to impress someone. If you marry someone that is a spendthrift, you will have arguments about money. Make sure the people you date have at least somewhat similar views and attitudes about money. If you date 10-15 people over the next 10 years, it's easy to spend TENS of thousands of sterling on them...for which all you have is a few memories you'll likely want to forget, and much less in the investment account to show for it. If you want to marry someone of somewhat similar financial mindset, then date that way as well.

It's ok to splurge on special occasions on someone...but make sure they're truly special occasions, and not turning into every damn Friday or Saturday night, blowing through hundreds of pounds just for a good time at an expensive dinner and club. Some people are able to live a little high on the hog initially in a relationship "for fun", and then tighten the belt later on - but those are very few and far between. Many people will say that they will live more simply later on....but they're just saying it to convince you to continue spending lavishly on them, and don't really mean what they say.

In terms of maximizing income, see if there are any moonlighting/side jobs you can find. Every pound you invest today is like 3 pounds or even 4 pounds you don't have to save later on! But it's usually much easier to control and adjust spending to save more, than it is to simply 'find an extra part-time job' or find a full-time job that pays more.

I know a few people in the forum have also gone down this path, but typically jobs that require overseas travel or stationing overseas (like oil companies) will compensate you with extra $ for that....so if you're willing to be stationed in a distant place for a while, they'll likely make it worth your while.

[manofstraw]

Thanks for the reply MooreBonds. Some great advice. Interms of your 3 camps to ER, I'd say I am most likely to follow your path, I actually find putting money to work as a hobby in itself so the sacrifices that come with that vocation are perfectly acceptable to me, as you allude, its whether a partner shares the same outlook.

I live quite frugally with my one major reward being a nice holiday each year - I note the point you make about trips and perhaps this is something I may need to tone down to start the pot growing that bit quicker.

In terms of jobs I am trying to forge a path where international travel/stationing is a must for this very reason. I need about 5-6 years more experience realistically though.

If you don't mind me asking have you found someone with a similar mindset to yourself?

[Animorph]

I retired in 2007, DW is just about to retire.

Decide how much to save for retirement, something like 20% or higher in your case. That also somewhat sets your standard of living. If you hit a point where your lifestyle is working for you, start giving yourself cost of living raises and save everything else (assuming your income increases faster than the cost of living). You'll have to balance out how that works if you get married, have kids, buy houses and cars, and any other big expenses. That may mean save much more now (no family) but spend more later. Once the retirement savings is set, spend the rest.

I never invested in property, other than our primary residence.

The rest is pretty much investing in a way to manage your taxes and take advantage of any opportunities, now and in the future. DW gets an employer match for the first 5% of her 401k (tax deferred) account, so that's pretty much a no brainer. If you have taxable accounts and the opportunity to move that money into a tax free account like a Roth that may be a pretty simple decision. After that, you need to have a rough idea of what your taxes will be like throughout your life. Then you can adjust your tax deferred contributions to level out your taxes. And leave enough in accounts that you can access before the tax advantaged accounts are available for withdrawal. You'll have to decide if a pension looks better than other investment opportunities, or if you feel more comfortable with pension income. Diversity can be useful, so a little of each is a valid option.

I use a single asset allocation plan for everything, though I like to keep taxable and tax advantaged somewhat close to the AA individually. No bonds to speak of. You want to go with more tax efficient stuff in your taxable accounts obviously, typically low turnover stock funds should be fine.

I'm diversified with large/small cap, growth/value, domestic, developed international, emerging markets, frontier markets, with a target percentage for each fund. I rebalance when I withdraw or add money, or when any fund is +/-20% high or low (6% instead of 5% of portfolio for example) of its target.

I'm happy to carry a mortgage if the interest rate is less than expected portfolio growth, or less than your fixed income yield if you're holding bonds. I think my current mortgage has 28 years to go at 3.25%.

I always let my portfolio act as my emergency fund. I just keep a convenient amount of cash in a checking account that ensures I won't overdraw and don't have to check it daily. Otherwise 98% of the rest is invested and 2% is left in cash to simplify portfolio transactions and checking account deposits. The exception is for large expenses, like a house or car, that also have a firm date attached. That money would add to the cash balance, or I might move into bonds if the expense is a year or two away.

Good luck!

[manofstraw]

Animorph, thanks for your reply. I realise I may have to manage my obsession with clearing debt even when the fundamentals suggest it pays to keep it (Re. your comments regarding mortgages), unfortunately that is something I have to overcome, particularly as I may be fortunate enough to come into a small windfall in the next 12 months or so. Thanks for sharing your experience.

[Walt34]

Quote:

Originally Posted by manofstraw If you don't mind me asking have you found someone with a similar mindset to yourself?

I would say that is essential if one is to retire at all, let alone early. Unfortunately I (and many others) had to learn that the hard way. So, like my Dad used to say, one "chalks it up to tuition".

In July it will be 26 years with DW. If anything she is more "financially conservative" than I am.

[MooreBonds]

Quote:

Originally Posted by manofstraw If you don't mind me asking have you found someone with a similar mindset to yourself?

Nope, not yet. Still looking. Sure isn't easy! Mainly use on-line dating to try and find women with similar values, but it's far more than just basic fiscal compatibility that I'm looking for.

One other tidbit - always consider financial angles of everything, and be creative. For example: for your job, look at benefits offered. See if there's a way to utilize as many of them as possible to reduce how much after-tax money you have to spend. Your employer might offer a free/reduced health club membership. Or they might offer special matches for different savings plan, or discounted company stock, or allowances for this or that. Or even pay for some/all of an advance degree! And if they don't, some employers may be able or willing to entice you with a different benefits package that isn't standard - for example, perhaps on your overseas assignment, they might be willing to pay for an extra plane ticket home for you in exchange for a little less paid time off. It's the same cost to them, but you don't have to earn money, then pay taxes, and be left with much less to buy an extra plane ticket. (Many large organizations don't have the flexibility for this, but it never hurts to ask - all they can do is say "no".)

When it comes to careers, find out ways to be the best at what you do. Some employers honestly don't pay for talent, regardless of how much of a superstar you are...but some do! It's up to you to find out what you like and/or are able to specialize in to really stand out with excellent performance. Know how to market your skills and stand out from your competition with your results. It might take job stints at 2 or 3 employers to find one that truly rewards performance, but there are those that recognize true talent and will pay for it. Don't be afraid to point blank ask your boss "what goals or results do I need to deliver in order to get that bonus or X% raise?" Show them that you care about results and are willing to produce.

Use sites like Glassdoor.com to find anonymous postings of employees at various world-wide companies to get a feel for what others in your field at companies are making to see how you compare. But also, one thing that isn't reflected in surveys and statistics like Glassdoor.com are benefits. One employer might match your retirement plan contributions (if they do that sort of thing in the UK) several percent, and offer other generous benefits, while another may not - and that could be worth several thousand dollars, or more! So while one company may appear to offer a higher base salary, don't forget to include all benefits that you will likely qualify for to truly compare.

If a rare employer offers a pension plan for an employee - realize the amazing value in that, and don't overlook the huge value that could be to you if you can stay there to vest in it. You probably don't have to stay for 20-30 years....most pension plans will let you roll over the cash value to your retirement plan if you leave after so many years, but most pension plans are set up to reward longevity at the company, so it makes sense for you to stay longer if the pension equation is good, and if you like your job.

[scrabbler1]

Quote:

Originally Posted by Walt34 I would say that is essential if one is to retire at all, let alone early. Unfortunately I (and many others) had to learn that the hard way. So, like my Dad used to say, one "chalks it up to tuition". In July it will be 26 years with DW. If anything she is more "financially conservative" than I am.

I do not agree it is essential at all. There are many in this forum who have retired, some early such as myself (in 2008 at age 45), who are single and have never married nor have any plans to do so. Being a childfree person pretty much eliminated any chance of ever marrying, which was fine. But it also greatly increased my chance of retiring early. Never marrying also eliminates any chance of marrying the wrong person and reducing one's chance of retiring early.

[38Chevy454]

Scrabbler1, I took Walt's comment to be if you are married, the two of you need to have similar financial goals and plans. Not one saver and one spender for example.

I did not take Walt's comment to mean you need to be married to achieve early retirement. Many single people can achieve ER, as evidenced by yourself and others on the board here.

For OP, I think the main goal for you should be to put as much into savings as you can now, since you need all the time for compounding you can get. Still have fun and enjoy doing things that make for good quality of life, but the goal of minimum 20% savings is the least you will need to achieve your goals. You basically have 25 years from now until your goal ER date.

I don't know your rules for UK, but if you have pension that is great. Do you have pre-tax savings available? If so max out that is generally good advice here in US. Your savings asset allocation should be nearly all equities now, you can handle the higher volatility since you have long term horizon and time frame from now until you will be accessing the money.

You are doing good having the amount saved at your age now, just keep it up.

[manofstraw]

Quote:

Originally Posted by 38Chevy454 Scrabbler1, I took Walt's comment to be if you are married, the two of you need to have similar financial goals and plans. Not one saver and one spender for example. I did not take Walt's comment to mean you need to be married to achieve early retirement. Many single people can achieve ER, as evidenced by yourself and others on the board here. For OP, I think the main goal for you should be to put as much into savings as you can now, since you need all the time for compounding you can get. Still have fun and enjoy doing things that make for good quality of life, but the goal of minimum 20% savings is the least you will need to achieve your goals. You basically have 25 years from now until your goal ER date. I don't know your rules for UK, but if you have pension that is great. Do you have pre-tax savings available? If so max out that is generally good advice here in US. Your savings asset allocation should be nearly all equities now, you can handle the higher volatility since you have long term horizon and time frame from now until you will be accessing the money. You are doing good having the amount saved at your age now, just keep it up.

Cheers Chevy. FYI, every person in the UK has to have a private pension now by law, albeit that has only just been introduced (my pension at work started in April). Prior to that I am (and still am) paying into my own - I claim back my taxes on any credit to my pension from the Inland Revenue (takes about 12 weeks). So I have two at the moment, I am building the one at work until such a point it breaches a threshold where it will enable me to activate an offered incentive from my other pension (when transferring the balance). So, in short will streamline to one again when the time comes.

I will have a State pension (we pay a National Insurance "tax" which pays for our healthcare and State pension - about 9% of my income) but this has been knocked back until 68 for people my age (from 65). I am not budgeting this pension into my plans (a bonus if you like), part of this journey to FI I guess is not expecting the State to honour its commitment or support me.

Thanks for the advice Re. equities, I am through no wisdom 100% equities at the moment in primarily UK Small and Mid Caps - doing really well as Britain seems to be outpacing the rest of the G8/G20 at present (after years of being in the doldrums), though I have begun to look (not done anything yet) to diversify taking on some funds which will offer some protection against a slowdown in China (short on Australian banks) and a debt bubble in Japan (short on Japanese bonds) etc. I suspect this will cost me growth in the short term but I may be thankful for it one day I figure. Its diversification I need to learn about in honesty.

Not sure about pre-tax savings, we have ISA's which are tax free from gains (only £15k can be invested per annum though).

[Walt34]

Quote:

Originally Posted by 38Chevy454 Scrabbler1, I took Walt's comment to be if you are married, the two of you need to have similar financial goals and plans.

Exactly. Sorry I wasn't clear on that.