Author Topic: First post - help me work out some priorities (UK)  (Read 2309 times)

The Cardinal

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First post - help me work out some priorities (UK)
« on: June 30, 2017, 07:10:06 AM »
Hello - this is my first post!

I've been avidly reading the MMM blog and skimming the forum over the last month.  So much of it chimes with what I was already thinking. 

I was taught to save from an early age, especially by my grandfather - who had walked from his home in early 1930s northern England to find a job in London and eventually make his way to financial stability.  He and my grandmother were very wary of any debt and couldn't understand why my parents had a mortgage for our family home instead of renting.  Like many people in the late 1980s in the UK (when interest rates hit the mid-teens), my parents had some tough times keeping up with the mortgage and those memories have stuck with me into adulthood.  I also spent 2 years working part-time for an advice service while I was an undergraduate, typing thousands of letters about people's debts and thereby gaining some great life lessons.

I haven't avoided debt entirely (as you will see), but was fortunate to marry someone with a relatively conservative approach to spending.  At the moment, it's only me earning a wage - although that helps keep family stress to a minimum. 

So - on the details, which I've altered after some feedback:

Me (36), wife (37) and two kids (7 & 5)

Annaul income:

48,000 - my wage after all tax, pension and other deductions

Annual expenditure: (changed from monthly, as I prefer to pay things annually and can therefore provide more detail)

7,200       Investment (drip-fed monthly into equities through an ISA / tax-free wrapper)
5,500       Groceries
5,205       Loan repayment
4,697       Mortgage
3,600       Loan overpayments (to reduce term)
3,600       Holiday fund
1,600       Council tax
1,300       Cleaner (2 hours weekly)
700          Gas
450          Electricity
366          Water
222          Home insurance
575          Car & van insurance
340          Car & van tax
1,200       Diesel & petrol
1,000       Estimated annual car & van servicing and repairs
229          TV license & Amazon Prime
200          Landline & internet
100          Mobile phone
1,000       Bicycle parts & maintenance
1,000       Clothes (for us all)
900          Children's activities (e.g. swimming, tennis) & occasional care (e.g. summer club)
500          Dining out
1,000       Miscellaneous cash withdrawals
2,000       House maintenance fund

Total = 44,484

Assets (all in today's values)

House               c.500,000 (1890s 4-bed extended terrace house in provincial city centre)
My savings        c.129,000 (equity funds in ISA; contributing 7,200 p/a)
Wife's savings   c.400,000 (equities in ISA, bonds etc; not contributing)
Car                   c.6,000 (Mini)
Campervan       c.25,000 (VW)

Pensions

I have membership of two government (NHS) defined benefit pension schemes, with expected annual payments in today's terms of: 11,800 p/a from 2040 and then an additional c.3,600 from 2048 (growing at a rate of c.1,800 p/a for every year I contribute from here onwards, assuming current salary).  I pay 13.5% pension contributions. 

My wife has no pension.

Debts

Mortgage 20,351 balance (3.29% APR; runs to March 2022 if no overpayments; 10% annual overpayment limit; reverts to standard interest rate of c.4% in March 2019)
Loan        16,041 balance (3.27% APR; runs to November 2020 if no overpayments; no overpayment limit)

Priorities

- Clear debts within 34 months at 1,125pcm (currently over-paying loan by 300pcm as no overpayment charges; clearing by May 2019, then switching to clear mortgage by May 2020);
- Provide a happy and fulfilling childhood for our kids; and
- Keep active: we have 8 bikes in the house, like travel and camping and are not very car-orientated.

Other than that, we don't really have any other priorities.  I think we'd be very open to the whole FI/RE thing, noting that:

- A net income of c.30k would support a similar lifestyle to our present one;
- Our stocks would need to grow by at least another 200k to support this;
- Assuming I work until I'm 50, my NHS pensions would be 12k in 24 years' time and then another 20k in 33 years' time (plus state pension).

I think this points to a retirement at around 50 years / in 13-14 years' time. 

I'd welcome any thoughts!  Thank you in advance. 
« Last Edit: July 03, 2017, 03:54:35 AM by The Cardinal »

Anette

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Re: First post - help me work out some priorities
« Reply #1 on: June 30, 2017, 04:40:48 PM »
Sounds like you are doing great!
Congratulations😊
Depending on how much you like or dislike your job I would suggest trying to save more on your 776 monthly balance money and / or the money you transfer to the joint account to be able to stop working sooner.
I am ten years older, we have five children and I wish we were half as far with our savings.
Sounds like your plan is very conservative already, considering that you will be getting these pensions on top of your investments.

former player

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Re: First post - help me work out some priorities
« Reply #2 on: July 01, 2017, 06:01:46 AM »
Welcome.  I agree with Anette, you are doing fine.  I've no problem with a conservative approach and paying off debt (others here may tell you this is not financial optimisation).

One thing to be aware of is that the Safe Withdrawal Rate of 4% applies to the USA and that the SWR for the UK is more like 3% (unfortunately I've lost track of the table which gives the different SWR rates for different countries.  Sadly, that would put up the necessary investments by a significant amount, were you to be relying only on investments.   Luckily you only need them to cover the years from retirement to 60 plus a pension top-up from 60 onwards, but it would still be worth getting the calculator out and checking where that would put you.

I found some of your expenses categories a bit illogical, with fixed and variable expenses being mixed up together and no logical division between what goes into the joint account and what doesn't.  That 1.2k a month, for instance, might be hiding some unconservative expenditures.    Are you keeping a sinking fund for annual costs, house maintenance and capital equipment replacements?

Are you really using all 8 bikes, or could you sell one or two?

Considering you have a campervan a travel budget of 3.6k doesn't look very conservative to me, even for a family of 4.  Which isn't a problem as long as you are aware of it.

I suspect that some financial fine tuning could mean that you could up your ISA contributions without losing out on much in the way of current lifestyle.
Be frugal and industrious, and you will be free (Ben Franklin)

Playing with Fire UK

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Re: First post - help me work out some priorities
« Reply #3 on: July 01, 2017, 07:22:12 AM »
Some things to consider:

Have you looked at how your FIRE date would change if instead of paying off your mortgage you took a bigger, cheaper one and invested the funds? Assuming low to average growth (I used 4% after tax) this significantly reduced my FIRE date. If you are uncomfortable with debt or leveraging your house then you don't have to do this (as former player alludes, some people will tell you that you are a fool not to mortgage, they are wrong). Also would you consider downsizing at some stage of the retirement plan?

Has your wife considered paid work? Again, not necessary, you are doing great, but it could bring your combined FIRE date forward.

Are your wife's assets as tax efficient as they could be? Are there unwrapped assets that need to be drip-fed into your ISAs? Has she considered putting 2880 into a pension to be topped up by the government to 3600? You'd need to look at pension access ages to see if this would work for you. How about her national insurance contributions?

I think there could be a better way of running your calculations. You are using the 4% rule? [Incidentally I disagree with former player that this doesn't work in the UK as you can still invest globally and rampant inflation could happen anywhere]. Consider instead working backwards:
Your 'old age' pension is sorted: you have 20k + 12k + state pension + any of your wife's state pension compared to spending of 30k.
From the age of 60 to 69 (does your pension let you take this any earlier or are you guessing that the legal age will be 60?): you'll have 12k, so need another 18k. 9x18k = 162k*
From the age of 55 or 57 or 60: you might be able to access a SIPP if the law allows at the time. You could put some of your 40% tax pay in a SIPP if your work pension is restrictive.
From the age of 50: you will need the full 30k per year. 10x30k = 300k*

So a total of 462k, which you already have between you (unless your finances are separate?).

*actually less than this because the money for year 9 will continue to grow in the eight years you don't need it.

So it looks like retiring at 50 is a slam dunk.

What next? How would your NHS pension be reduced if you stopped work earlier or went part time? Do you want to leave an inheritance for your children or charitable legacy?

Playing with Fire UK

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Re: First post - help me work out some priorities
« Reply #4 on: July 01, 2017, 07:25:47 AM »
If you change the title to include UK or GBP then you may find more UK folk stopping by.

If you want more feedback on spending then it would be good to post a breakdown of what is going out of the joint account and annual expenses account.

dreams_and_discoveries

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Re: First post - help me work out some priorities
« Reply #5 on: July 02, 2017, 10:44:14 AM »
Hi, always nice to see new UK posters.

So, your title was on priorities, and working them out. Do you want to retire at 50? Earlier? Would you be willing to make sacrifices and change your lifestyle to make that happen? Do you enjoy working?

I've got a question: what is your risk tolerance?  You seem very adverse to debt, yet your mortgage is at a high rate? You might want to remortgage, you can get 1.5% at the moment. Have you both filled up your ISA allowance this year? And do you add the funds to a pension for your wife to get the tax benefits - I think it's something like 3k you can get topped up for free.


The Cardinal

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Re: First post - help me work out some priorities (UK)
« Reply #6 on: July 03, 2017, 03:44:49 AM »
Thanks for everyone's contributions so far - this is really helpful stuff.

I've made some changes to the original post to break down costs, which it's easier for me to do on an annual basis as I tend not to pay for things monthly. 

My wife's investments are in ISAs or UK gilts, so reasonably tax efficient.  She will almost certainly return to paid work, at which stage we'd review pension arrangements.  This may not be very soon, though. 

To some of the questions (and to add a few more details):

- I'd like a second career rather than to retire per se.  Although I don't know what this would be, I can see it paying less and possibly being part-time - e.g. charity sector. 
- My wife worked for 3 years recently, giving us another 10-11k of post-tax income.  This has now gone for the time being, so to some extent we're already on a downward trend in terms of expenditure.
- I don't think I'd save much by switching the mortgage with its current small balance.  There would be an early repayment charge of c.200, most mortgage lenders won't loan less than 20k, many want an upfront fee and personal loan rates aren't any lower. 
- Our ISA allowances are not filled up to the maximum of 20k each - although this wouldn't be possible on the income we have. 
- Risk appetite is mixed.  I don't mind investing with more risk, but wouldn't borrow to do so. 

cerat0n1a

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Re: First post - help me work out some priorities
« Reply #7 on: July 03, 2017, 04:43:42 AM »
One thing to be aware of is that the Safe Withdrawal Rate of 4% applies to the USA and that the SWR for the UK is more like 3% (unfortunately I've lost track of the table which gives the different SWR rates for different countries. 

That doesn't really make sense any more. The internet allows us to invest anywhere in the world just as easily as in the UK and while a slight home bias is good, there is no reason to assume a different SWR for us.

In any case, for the OP's situation, simply applying a calculation of stash * some percentage value doesn't work. The NHS and state pensions provide a valuable income source. A better approach would be to model future needs as a 3 step process, as Playing with Fire has pointed out. I.e. this is the money needed to provide 30k per year from 50 to 55/57, this is the money per year need to supplement NHS pension from 57 to 67 etc etc.

SpreadsheetMan

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Re: First post - help me work out some priorities (UK)
« Reply #8 on: July 03, 2017, 05:15:15 AM »
There is a bit of low-hanging fruit to save - food costs are v. high, high holiday expenses+campervan=facepunch, high bike costs (I guess that is hobby bike tarting, not running costs?). Other stuff could be tweaked down, but doesn't look out of line.

If you really want to ramp up savings or do a career downshift then you need 2 incomes, but there would be a quality of life penalty to pay and the extra may not compensate.

It looks like you could do nothing, keep paying debts off, when debts are gone save more and coast to a 50+ retirement. So no urgent action needed unless there is something you really want to do.

cerat0n1a

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Re: First post - help me work out some priorities (UK)
« Reply #9 on: July 03, 2017, 09:19:01 AM »
There is a bit of low-hanging fruit to save - food costs are v. high, high holiday expenses+campervan=facepunch, high bike costs (I guess that is hobby bike tarting, not running costs?). Other stuff could be tweaked down, but doesn't look out of line.

No-one going to mention the cleaner at 25 per week :-) ?

Interesting to compare with my family. Gas & electricity way lower than our spend, as are groceries & costs of children (we have two in mid/late teens) but the cost of clothes is higher. Taking out the financial items (mortgage, investment, loan repayment) your annual spend is around 28k, a little over the median UK salary - not too bad for a family of four.

I would also echo playing with fire's suggestion to maybe look into the possibility of starting a pension (or a lifetime ISA) for your wife. You can contribute nearly 3k into a pension even if not earning and get it topped up by 25% by the government, similar for a lifetime ISA.

SpreadsheetMan

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Re: First post - help me work out some priorities (UK)
« Reply #10 on: July 03, 2017, 03:29:14 PM »
There is a bit of low-hanging fruit to save - food costs are v. high, high holiday expenses+campervan=facepunch, high bike costs (I guess that is hobby bike tarting, not running costs?). Other stuff could be tweaked down, but doesn't look out of line.

No-one going to mention the cleaner at 25 per week :-) ?

Interesting to compare with my family. Gas & electricity way lower than our spend, as are groceries & costs of children (we have two in mid/late teens) but the cost of clothes is higher. Taking out the financial items (mortgage, investment, loan repayment) your annual spend is around 28k, a little over the median UK salary - not too bad for a family of four.

I would also echo playing with fire's suggestion to maybe look into the possibility of starting a pension (or a lifetime ISA) for your wife. You can contribute nearly 3k into a pension even if not earning and get it topped up by 25% by the government, similar for a lifetime ISA.

I'm not, I have a cleaner too. In my case it's part of the coping mechanism for both my wife and I having stressful careers - at least home is always clean and tidy. When we Fire we'll do it ourselves no problem.

Good suggestion on the sipp - your 2880 in, 3600 out - 720 of free money from HMRC.

Playing with Fire UK

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Re: First post - help me work out some priorities (UK)
« Reply #11 on: July 04, 2017, 01:47:05 AM »
No-one going to mention the cleaner at 25 per week :-) ?

I echo the question when the spouse isn't in paid work and the kids are school age, but maybe there is something we don't know? Home schooling, allergy to cleaning chemicals, arthritis in knees or hands?

It wouldn't be my choice, because I'd value the 1,300 more; I'd be throwing facepunches if there was unaffordable debt, but they have it under control; I'd be questioning the value if they were super keen to retire ASAP, but none of those seem to apply at the moment. Because I am like this, I'll drop the comment that you can afford to pay a cleaner well. If that 12.50 an hour is going to the cleaner, that is reasonable (depending on the area), if it is going to an agency you should consider adding a hefty tip. You are not required to agree with my values.

Do you both own the house? If either of you have never owned a home before then the Lifetime ISA could be a great shout. Consider opening one with a token 100 before you hit 40 so that you'll have the ability to contribute through your 40s. If you lean towards this rather than a pension be aware that if you take it out before 60 not for a first home you are penalised 6.25% compared to what you put in + growth (you put in 100, topped up by 25%, and then the penalty is 25% of the total 125+growth)

- Our ISA allowances are not filled up to the maximum of 20k each - although this wouldn't be possible on the income we have. 

Okay, tiny face punch here.

You are choosing not to fill your ISAs. If this was your only priority, you could do it by cutting the spending and your wife finding paid work. You value your current lifestyle more, and that is your choice.

The Cardinal

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Re: First post - help me work out some priorities (UK)
« Reply #12 on: August 09, 2017, 09:47:01 AM »
Thanks again for more contributions.

We've got some more homework and thinking to do, starting with:

1) Ensuring that my wife's National Insurance contributions are complete.  She may have missed 2-3 years when she was at home with our kids from 2010-14 and there appears to be a 6-year backdating window.
2) Investigating the aforementioned SIPP / LISA options.
3) Looking again at expenses.

Based on the earlier numbers I gave, desiring a post-FIRE income of 30k, plus some re-runs of calculations using the suggestions here - I need to provide 300k to cover retirement from 2030-2040, then 160k to cover the years 2040-48.  In addition, I need to contribute at my current levels for a further 13-14 years to my pension scheme.  Net of the 129k ISAs I currently hold, this means I need to grow my funds by 331k

If there are no changes to expenses for now, but counting the additional monies available after debt is cleared in 2020: I will continue to invest 7.2k p/a until May 2020 and then a total of closer to 20k p/a thereafter (once debts are cleared).  Assuming 5% compounding, I should reach the additional 331k in year 13 - i.e. when I'm 49, in 2029.   

I think I'm being pretty cautious with my calculations.  I've also assumed: 

- That my wife's funds remain entirely separate;
- That my wife never earns a wage again;
- That I don't receive any wage increases;
- That I don't earn a wage after 50. 

The first of those is important because my wife inherited her money - and I don't want to look to her family as if I am funding my / our FIRE from that! 

In the meantime, I've sold 650 of bike parts in the last few weeks - taking my collection down by one ;).  I'll also be looking closely at our expenses as suggested below. 

But - most importantly - it has been massively relieving to see how I could only have another 13-14 year full-time / serious career ahead of me.  And that's at maximum!
« Last Edit: August 09, 2017, 10:00:00 AM by The Cardinal »

Laura33

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Re: First post - help me work out some priorities (UK)
« Reply #13 on: August 10, 2017, 07:07:09 AM »
Based on the earlier numbers I gave, desiring a post-FIRE income of 30k, plus some re-runs of calculations using the suggestions here - I need to provide 300k to cover retirement from 2030-2040, then 160k to cover the years 2040-48.  In addition, I need to contribute at my current levels for a further 13-14 years to my pension scheme.  Net of the 129k ISAs I currently hold, this means I need to grow my funds by 331k

I don't understand.  You need a total of L460K by the time you are 50.  You and your wife currently have L529K.  So you are already over and should be calculating how many years earlier you could retire given the hit on the pension -- it's probably not now, but it may be under 10.

Unless you are ignoring your wife's assets entirely and assuming you will need to fund the full L30K on your own?  E.g., in case you and your wife separate and both need L30K annually to get by (which would be high if you each needed to support only one person, but that's a different issue)?  If you are completely ignoring your wife's assets, you are not being "pretty cautious," you are being massively conservative.  Which is fine -- just know that the tradeoff is many more years in your present employment.
Laugh while you can, monkey-boy

The Cardinal

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Re: First post - help me work out some priorities (UK)
« Reply #14 on: September 06, 2017, 04:01:00 AM »
I am indeed ignoring my wife's assets. 

As I think I mentioned earlier, she inherited these - so I don't want to be seen to be funding my FIRE through this.  The target of 30k p/a is to support our family of four, although there is some degree of expenditure funded separately by my wife.  I therefore agree that I'm being conservative. 

Some updates:

- Overall debt is reducing nicely: now at 19,588 and 14,745 respectively for the mortgage and loan
- As of this month, I'm overpaying the mortgage by 100pcm - in addition to the 300pcm over-payments to the loan
- Funding this, I've reduced the annual holiday accrual by a third (to 2,400)

None of this is earth rocking stuff, but combined with my existing base payments it means that my debt has reduced by over 7k since the start of the calendar year.  The latest increase in over-payments should bring my debt-free date forward a few months (from the existing aim of May 2020).   

The next thing for me to look at is whether I could achieve my aims earlier. 

Applying the same rate of growth over the last 10 years to my ISA funds and an assumed 3% inflation, my savings would grow to the magic 460k by 2030 at 600pcm (i.e meeting target FIRE age of 50).  This may be optimistic due to the equities growth run we've had over the last 5 years or so.   However, I could easily save more than 7,200 p/a... Once the above debts are paid off, I could increase ISA contributions to somewhere north of 15k p/a comfortably. 

I've previously tied myself to the age of 50 / 2030 as my FIRE date, mainly because of the accrual rates of my NHS pension schemes.

So, I will look at whether I can achieve a similar income levels from their payment dates of 2040 & 2048-9 through further saving now (i.e. increasing my target from 460k and reducing the time period over which I make pension contributions to these schemes) - thereby bringing my aim forward from 2030 / 50 years old.
« Last Edit: September 06, 2017, 04:13:44 AM by The Cardinal »

BNgarden

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Re: First post - help me work out some priorities (UK)
« Reply #15 on: September 06, 2017, 07:59:56 AM »
I've made some changes to the original post ...
- I don't think I'd save much by switching the mortgage with its current small balance.  There would be an early repayment charge of c.200, most mortgage lenders won't loan less than 20k, many want an upfront fee and personal loan rates aren't any lower. 

Debts

Mortgage 20,351 balance (3.29% APR; runs to March 2022 if no overpayments; 10% annual overpayment limit; reverts to standard interest rate of c.4% in March 2019)

I know your balance is low, but you may wish to compare mortgage rates actually available and actual fees and charges given the rise in your rate as of March 2019.  [Using my spreadsheet program--Cdn though--at a 10 year amortization (probably not your length?) I see savings from your current discounted rate and a new presumed rate of 2%.  Given the number of variables, you really need to calculate your own to see if savings are possible...]

If finding lenders for < 20k mortgage is an issue, can you take a slightly higher value mortgage and ensure you use the 'extra' cash to either 1) invest or 2) make additional payments (is there a lender w greater flexibility in repayment terms?)?

One other option (available in Cda and not sure you have a similar opportunity in UK...):  can you hold a non-arm's length mortgage in your savings plan.  I.e., can you use cash holdings from your retirement savings and fund your own mortgage?  It is an option here (in our RRSP), and the terms here allow a person to charge the commercial rate.  Replacing some of the fixed income proportion of your portfolio with same can provide a greater ROR (better than bonds, GIC / CDs for example).  If you're a 'good' mustachian w a very high proportion in equity vs FI, maybe this would not be suitable...

The Cardinal

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Re: First post - help me work out some priorities (UK)
« Reply #16 on: September 08, 2017, 06:31:22 AM »
Acting on the suggestion above, I looked more closely this morning at the mortgage suggestion.

Based on the best possible rates of under 2% (but with a 400 penalty for early mortgage redemption), there's definitely some potential to save money across the current combined mortgage and loan of c.35k - both of which have rates of c.3.3%. 

With (over) payments of 1,200 over 30 months, I estimate that interest paid will be:

- 1,500 at 3.3%, and;
- 1,300 at 2% (900 plus a 400 redemption fee). 

A 200 saving for the sake of some form filling is not be to sniffed at, so I thought I'd make some enquiries this morning. 

Sadly, there was a setback at this first step.  I was actually refused a re-mortgage application with one lender and I'm struggling to find other lenders to meet my needs at this "low" level of borrowing. 

This is probably because under 20k of what I'm asking for is core mortgage lending (i.e. will be repaying an existing mortgage); that the remaining 15k is new lending not for a house or tangible asset (several lenders limit this to 15% of the borrowed amount; my ask is closer to 40%); and I am also applying for a relatively short term of 2-3 years (many want 5 years). 

There are plenty of lenders (in the UK) that will advance 35k secured on our house... but not at a rate that will offset the mortgage redemption fee and leave me with a clear saving. 

I may have to accept that I'm not going to easily save 200! 
« Last Edit: September 08, 2017, 07:09:27 AM by The Cardinal »

BNgarden

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Re: First post - help me work out some priorities (UK)
« Reply #17 on: September 08, 2017, 08:20:35 AM »
Sounds like it was worth doing the math to assure yourself though.

Banks here are a PITA (discovering how many ways this week...sigh...).