Author Topic: Case study: in a good position, how to bring forward FIRE (UK)  (Read 1332 times)

Riemann

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Hello Mustachians. Newly registered and eager, previously clean-shaven but now looking to grow the mustache.

Life Situation: I'm a 34 year old from the UK with zero dependents. My 35-year mortgage was reduced to a five-year term through ploughing money into it and my last payment was a year ago. My life is simple, fairly frugal and fuss-free and I'm looking for advice on how to bring forward FIRE.

Gross Salary/Wages: Gross income is 80k per year with around a 5k bonus. I can assume a gross salary increase of 5% per year.

Pension contributions are 8% from me and 12% from my employer, with six years of contributions so far.

Deductions and expenses: After pension contributions, tax and NIC, I have a little over 50k in my pocket each year. There is no other income and no debt of any kind.

Current expenses: Summing together all of my monthly bills, council tax etc. comes to 4k per year. In a comfortably frugal year I could live on 6k. I have no car and don't see that changing.

My indulgence is travel. This isn't living it up nor is it sleeping in a shared room of 20 people at the cheapest hostel. It's several weeks away each year to far flung places and ends up coming to 8-10k per year. I could bring that down a little but wouldn't cut it out, and want to continue it into my later years.

Investments/assets: I have 26k sitting in a bog-standard savings account earning negligible interest. I have been looking at Vanguard recently but haven't yet done anything.

Specific Question(s): I realise I'm in a good position here and could have my cost of living covered and technically be FI within three years. Advice on my situation and how I could bring forward FIRE would be greatly appreciated. My investment knowledge is limited and I'm reading lots to change that, so any pointers would be helpful. I have a FIRE age of 42 in mind but even if it stretches to ten years from now it would be a goal I can focus on.

robartsd

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Re: Case study: in a good position, how to bring forward FIRE (UK)
« Reply #1 on: August 01, 2017, 05:02:44 PM »
I don't know anything about retirement accounts in UK, but that 26k in savings account needs investing. Your desired annual budget is 14-16k so you should need about 400k invested to FIRE (ignoring pension). A rough guess based on the numbers you've given, you should be able to fire by 42. Assuming 5% increase in annual take home pay, 2% inflation of all expenses, 16k annual expenses (6k basic + 10k travel), 7% nominal investment growth, it would take about 8 years to get your investments to 25x expenses.

Since the majority of your budget is travel, you could be more aggressive about your withdraw rate, but cut your travel budget if investments are down. Just targeting a higher withdraw rate (5% instead of 4%) you could FIRE a year earlier. If you also temporarily cut travel spending to 4k/year until FIRE, you could cut off annother 2 years of working.

2Cent

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Re: Case study: in a good position, how to bring forward FIRE (UK)
« Reply #2 on: August 02, 2017, 12:26:47 AM »
Please be sure to avoid currency risks in your investments. Since a large part of your spending will be abroad and the pound is a bit uncertain with the whole Brexit.
A friend of mine had a nice pension in the UK, but due to a weak pound had to cut his lifestyle a lot. Living only in the UK it would not have mattered, but abroad it hurts a lot when your fixed pound income loses almost 30% of it's value.

Roger D

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Re: Case study: in a good position, how to bring forward FIRE (UK)
« Reply #3 on: August 02, 2017, 02:12:17 AM »
You could invest using an ISA to avoid any taxes, choosing a low-cost passive fund that covers the London Stock Exchange (I have investments in the Vanguard FTSE All-share fund).

Because a lot of the LSE companies make their money overseas, you have a great deal of protection against currency movement. If the value of the pound drops, the value of your investment goes up (because the overseas profits of those companies are worth more in terms of pounds).

cerat0n1a

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Re: Case study: in a good position, how to bring forward FIRE (UK)
« Reply #4 on: August 02, 2017, 02:32:45 AM »
Simple answer is start by using your 20k ISA allowance every year to invest in stocks and shares.  Simplest solution is something like VWRL (Vanguard's world tracker). I don't see any good reason to invest only in the FTSE.

I'd probably also think about upping your pension contributions and/or starting a SIPP - reason being that you're paying 40% tax on a chunk of your income and the fastest way to increase your net worth is to get that 40% back. If you contribute say 20k into a pension this year, the pension company reclaims 20% tax for you (making it 25k) and you get back a further 8333 through a tax rebate. So your net worth increases by 20k * (1/0.6.)

You can't touch that money until you're 55 (and it will be later than that for someone your age) and so it may seem counter-intuitive to be putting more money into pension when you want to stop earning at 42. You need to think about two pots of money - the money that you need to live from 42 until ?57? and the money you need to live after that.

Riemann

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Re: Case study: in a good position, how to bring forward FIRE (UK)
« Reply #5 on: August 02, 2017, 02:51:36 PM »
Thank you for the responses.

Since the majority of your budget is travel, you could be more aggressive about your withdraw rate, but cut your travel budget if investments are down. Just targeting a higher withdraw rate (5% instead of 4%) you could FIRE a year earlier. If you also temporarily cut travel spending to 4k/year until FIRE, you could cut off annother 2 years of working.

This is very, very tempting to do, as much as I enjoy the travel. The thought of having a couple of years of more frugal living for long-term gain is a nice goal to aim for.

Please be sure to avoid currency risks in your investments. Since a large part of your spending will be abroad and the pound is a bit uncertain with the whole Brexit.
A friend of mine had a nice pension in the UK, but due to a weak pound had to cut his lifestyle a lot. Living only in the UK it would not have mattered, but abroad it hurts a lot when your fixed pound income loses almost 30% of it's value.

This has been on my mind after I was 'stung' on a recent trip due to currency fluctuations post Brexit. I hadn't thought about it in as much detail post FIRE so thanks for the advice.

Riemann

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Re: Case study: in a good position, how to bring forward FIRE (UK)
« Reply #6 on: August 02, 2017, 02:55:45 PM »
Thanks for your replies.

You could invest using an ISA to avoid any taxes, choosing a low-cost passive fund that covers the London Stock Exchange (I have investments in the Vanguard FTSE All-share fund).

Because a lot of the LSE companies make their money overseas, you have a great deal of protection against currency movement. If the value of the pound drops, the value of your investment goes up (because the overseas profits of those companies are worth more in terms of pounds).

Simple answer is start by using your 20k ISA allowance every year to invest in stocks and shares.  Simplest solution is something like VWRL (Vanguard's world tracker). I don't see any good reason to invest only in the FTSE.

I'd probably also think about upping your pension contributions and/or starting a SIPP - reason being that you're paying 40% tax on a chunk of your income and the fastest way to increase your net worth is to get that 40% back. If you contribute say 20k into a pension this year, the pension company reclaims 20% tax for you (making it 25k) and you get back a further 8333 through a tax rebate. So your net worth increases by 20k * (1/0.6.)

You can't touch that money until you're 55 (and it will be later than that for someone your age) and so it may seem counter-intuitive to be putting more money into pension when you want to stop earning at 42. You need to think about two pots of money - the money that you need to live from 42 until ?57? and the money you need to live after that.

Is an ISA the best thing for this in the medium term, say 3-4 years down the line? Or should I be targeting something else by then?

I hadn't even thought about SIPP and that actually sounds too good to be true at first! But I do like the sound of a staggered income increases thought that setup, which with the ages I'm looking at would be in three stages around 12 years apart, for FIRE, SIPP then NRA. Very helpful information, thanks.

Roger D

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Re: Case study: in a good position, how to bring forward FIRE (UK)
« Reply #7 on: August 03, 2017, 03:24:37 AM »
Is an ISA the best thing for this in the medium term, say 3-4 years down the line? Or should I be targeting something else by then?
The benefit of an ISA isn't so much that it saves you from having to pay tax THIS year. The benefit is that, by using this year's allowance, that money is tax free forever. In future years, you may reach your tax-free allowances for income tax, dividends, capital gains, current-year ISA contributions, lifetime pension contributions, etc, but your ISA investments from past years will continue to grow tax-free no matter how big they have become.

Riemann

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Re: Case study: in a good position, how to bring forward FIRE (UK)
« Reply #8 on: August 03, 2017, 02:41:39 PM »
Thanks again for the advice!

Monkeytennis

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Re: Case study: in a good position, how to bring forward FIRE (UK)
« Reply #9 on: August 08, 2017, 01:07:47 AM »
Hi Riemann, what's your pension pot value?

Riemann

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Re: Case study: in a good position, how to bring forward FIRE (UK)
« Reply #10 on: August 09, 2017, 12:42:32 AM »
Hi Riemann, what's your pension pot value?

As of today it's just under 75k. When I started contributing a few years ago it was on a much lower salary so has only really gotten started in the last 2-3 years.

Riemann

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Re: Case study: in a good position, how to bring forward FIRE (UK)
« Reply #11 on: August 09, 2017, 01:31:47 AM »
Have to say that after spending time reading lots on here, on the main MMM site and other FIRE sites and then putting numbers and assumptions into spreadsheets and seeing that this is real, what a buzz. It's an incredible goal to aim for and keeps the focus on simple living and saving.

Now to take advice on board and step up the FIRE efforts...

Linda_Norway

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Re: Case study: in a good position, how to bring forward FIRE (UK)
« Reply #12 on: August 09, 2017, 01:39:43 AM »
The first thing I am thinking of is why don't you plan on moving to your travel destination after FIRE. You talk about far away destinations. That sounds like you mean LCOL countries in Asia or South America. Could you imagine living there permanently? Then you would reach FIRE much earlier.

I myself are living in a country with a small valuta. We have property and pension in Norwegian crowns. Therefore we have invested our money in foreign index funds that are not valuta secured. That will be our extra insurance when the Norwegian crown becomes very weak.

2Cent

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Re: Case study: in a good position, how to bring forward FIRE (UK)
« Reply #13 on: August 09, 2017, 02:02:03 AM »
The first thing I am thinking of is why don't you plan on moving to your travel destination after FIRE. You talk about far away destinations. That sounds like you mean LCOL countries in Asia or South America. Could you imagine living there permanently? Then you would reach FIRE much earlier.

I myself are living in a country with a small valuta. We have property and pension in Norwegian crowns. Therefore we have invested our money in foreign index funds that are not valuta secured. That will be our extra insurance when the Norwegian crown becomes very weak.
That is awesome. You could even rent a mailbox or register with family or something and officially live in the UK while moving from place to place year round. And just airbnb something when you want to get back home for a while.

Riemann

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Re: Case study: in a good position, how to bring forward FIRE (UK)
« Reply #14 on: August 09, 2017, 02:23:01 PM »
The first thing I am thinking of is why don't you plan on moving to your travel destination after FIRE. You talk about far away destinations. That sounds like you mean LCOL countries in Asia or South America. Could you imagine living there permanently? Then you would reach FIRE much earlier.

I myself are living in a country with a small valuta. We have property and pension in Norwegian crowns. Therefore we have invested our money in foreign index funds that are not valuta secured. That will be our extra insurance when the Norwegian crown becomes very weak.

It has been on my mind but I think I'd struggle to leave where I am, even if the CoL is slightly higher. The ideal is FIRE and a lot of frugal travel each year but with the same home to return to.