Author Topic: New Case Study - Never Too Late To Join The FI Party!  (Read 2848 times)

CMC8310

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New Case Study - Never Too Late To Join The FI Party!
« on: August 31, 2016, 12:51:05 PM »
Hi all - I'm relatively new to the FI blogs and only started reading MMM in the last couple of weeks. Pre blogs, I thought I was good with my stash / retirement plans but how wrong was I!!
Now looking to retire 7 years earlier at 50 and I would really appreciate if you more senior mustachians could take the time to review my case study / plans and provide any advice / guidance to ensure I’m on the right tracks.
Thank you in advance.

Case Study Details as follows (converted £ to US $ using 1.313):
•   UK Resident – Aged 45 – Single & No dependants
•   Current Assets:
- Flat (1 - Rental) - $169k (Outstanding Mortgage - $41k)
- Flat (2 – Primary Residence) - $284k (Outstanding Mortgage - $12k) – this has been aggressively reduced from $160k to $12k in the last 20 months. This will be cleared in the next 5 months.
- Shares - $21k (current employer shares in addition to $ Bonus payments each year)

Incomings:


•   Salary (Pre Bonus) - $83k (Monthly $6918)
•   Salary (Bonus) - $10k (Monthly $833)
•   Tax / National Insurance - $22,542 (Monthly $1879)
•   Additional Income:
- Flat (1) Rental Income - $8669 (Monthly $722)
– Parking Space Rent (Flat 2 – Primary Residence) - $788 (Monthly $66)
- Share Dividends - $1306 (Monthly $109)

•   Monthly Net Income – (6918+833-1879+66+722+109)= $6769

Outgoings:

•   Mortgage (1 Rental) – $390 mo (Interest is $135 mo – 3.69% Buy To Let Mortgage)
•   Mortgage (2 Primary) - $112 mo (Interest is c. $39 mo – 4%)
•   Flat Costs (Factor Fees x2, Letting Agency Costs, Council Tax, Insurance, Maintenance etc) - $622 mo
•   Social / Restaurants / Groceries - $880 mo (reduced from over $1100 18 months ago!)
•   Cable / TV Licence - $107 mo (punch away!! – annual cable deal I have ends in Jan 2017 then $0!)
•   Clothes / Haircut / Dentist - $71 mo
•   Mobile - $7.22 mo (recently reduced)
•   Luxuries – Holidays – $650 mo (Annual spend for 3 trips abroad c. $7800)

•   Monthly Net Outgoings – (390+112+622+880+107+71+7.22+650+59)=$2898.22

•   Net Saving Opportunity (6769 – 2898)=$3871 mo

My Saving % per annum has increased from 51% (2014) to 60% (2016) and I’m planning to hit 68% next year with a few further tweaks and the full yearly benefit of the reduced interest on my mortgage. The70-75%+ would only be achieved if I reduce the international holidays which I’m loathed to do but have been working on reducing these and trying to find good bargains!!
Couple of final points:

- I’m currently contributing additional pension contributions (APCs – I think this is the same as 401ks) of $1129 per month.
- When I reach 50, I can take early retirement with a company pension & take a 25% Tax Free lump sum. This is projected to be $24,300 (after Tax of 20% - $1620 mo) & $130k lump sum if I continue in employment and the current monthly Pension contributions (APCs) stay at this level.

- I estimate that my Expenses when I reach 50 (including Holidays) will be $26k per annum (Monthly $2167). Between the Pension $1620 / Rental Net $562 / Parking $66 / Dividends Est $500 & not including the Lump sum income this will generate, I think I’m on track to have expenses lower than my retirement income and have the ability to actually increase my net worth from 50 onwards.
 
When the primary residence mortgage is cleared, my plan is to start investing in Index Funds FTSE100 / Bonds and maybe ramp up the APCs to get the 20% Tax / National Insurance benefits but will do so once I have built up a pot of cash in case I get put at risk in my current job.

Hope this provides sufficient information for you to assess my current situation and FI plans. Any feedback / guidance etc is very much appreciated.



SpreadsheetMan

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Re: New Case Study - Never Too Late To Join The FI Party!
« Reply #1 on: September 01, 2016, 12:13:30 AM »
Is your pension defined contribution (DC) or defined benefit (DB)? If it is DB is there an actuarial reduction for taking it at 50? (with 55 as the usual UK earliest pension scheme withdrawal date)

No car?

dreams_and_discoveries

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Re: New Case Study - Never Too Late To Join The FI Party!
« Reply #2 on: September 01, 2016, 05:41:44 AM »
Hi welcome, love to see more UK based people here. It looks like you've got a solid plan, that's certainly workable. Are you prepared to reduce costs or go back to work if needed? Or do you only want to retire when it's 100% guaranteed to succeed?

With the minimum retirement age being raised to 55, do you definitely have one of the pension schemes that is grandfathered in to a retirement age of 50? There are still a few about, but not many.

On the mortgage side, is there a reason you have such a high interest rate at 4%? To put this in context, mine is 1.5% and has been under 3.5% for over 5 years.

What do you plan to do when you retire? Are you able to accurately estimate expenses - what will go up, what will go down? Your social spending is quite high, would this increase exponentially with more free time, or do you have frugal hobbies in mind?

Have you thought about tax? If your income is coming from a pension and rental income, it will all be taxable - looks like basic rate at those numbers.

What's the occupancy rate/desirability on the rental? It looks quite critical to your plans to have that income each and every month.

Do you have any transport costs or do you walk everywhere?

Also I'd cash out your employer shares as soon as you can and invest in a tracker -as if they went bust, you don't want all your eggs in one basket.

As an aside, I wouldn't worry about converting to dollars - it's certainly easier for me in pounds.

CMC8310

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Re: New Case Study - Never Too Late To Join The FI Party!
« Reply #3 on: September 01, 2016, 03:15:44 PM »
Is your pension defined contribution (DC) or defined benefit (DB)? If it is DB is there an actuarial reduction for taking it at 50? (with 55 as the usual UK earliest pension scheme withdrawal date)

No car?

Hi SpreadsheetMan - thanks for taking the time to respond.

You are correct, the usual earliest pension scheme withdrawal is 55. I'm on a great pension deal with the same employer since I left school over 26 years ago. The projected figures shown are taken from the Pension website and take into account the early withdrawal penalties. If I was to work just 1 yr more - the figures would increase by 3% however the pension payments are Index linked with a minimum 3% annual increase depending on the inflation rates so unless the inflation rate increases dramatically from the current levels I'm better off cashing in. The figures also take into account the 20% Tax reduction. I'm comfortable the figures are accurate.

No car at present. Will I want / need one in retirement? One for me to think about more and factor into my budget.

Thanks.

CMC8310

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Re: New Case Study - Never Too Late To Join The FI Party!
« Reply #4 on: September 01, 2016, 04:04:03 PM »
Hi welcome, love to see more UK based people here. It looks like you've got a solid plan, that's certainly workable. Are you prepared to reduce costs or go back to work if needed? Or do you only want to retire when it's 100% guaranteed to succeed?

With the minimum retirement age being raised to 55, do you definitely have one of the pension schemes that is grandfathered in to a retirement age of 50? There are still a few about, but not many.

On the mortgage side, is there a reason you have such a high interest rate at 4%? To put this in context, mine is 1.5% and has been under 3.5% for over 5 years.

What do you plan to do when you retire? Are you able to accurately estimate expenses - what will go up, what will go down? Your social spending is quite high, would this increase exponentially with more free time, or do you have frugal hobbies in mind?

Have you thought about tax? If your income is coming from a pension and rental income, it will all be taxable - looks like basic rate at those numbers.

What's the occupancy rate/desirability on the rental? It looks quite critical to your plans to have that income each and every month.

Do you have any transport costs or do you walk everywhere?

Also I'd cash out your employer shares as soon as you can and invest in a tracker -as if they went bust, you don't want all your eggs in one basket.

As an aside, I wouldn't worry about converting to dollars - it's certainly easier for me in pounds.

Hi D&D - assumed mainly US posters so wasn't sure if I would get the discussion going if I used £s.

Thanks for the reply. Comments added:

Are you prepared to reduce costs or go back to work if needed? Or do you only want to retire when it's 100% guaranteed to succeed?

I would prefer to retire when it is 100% guaranteed to succeed. I enjoy my job and earn a good salary / bonus and know that the company wouldn't want me to leave so if I needed to earn more for the pot, I would be better staying AS IS until I am 100% certain the FI pot is sufficient.

With the minimum retirement age being raised to 55, do you definitely have one of the pension schemes that is grandfathered in to a retirement age of 50? There are still a few about, but not many.

Yes - I know I'm very fortunate and the last generation in the UK who will benefit from these schemes.

On the mortgage side, is there a reason you have such a high interest rate at 4%? To put this in context, mine is 1.5% and has been under 3.5% for over 5 years.

Maybe I've missed an opportunity here! I've been aggressively clearing this down the last 20 months and will have this cleared by YE then onto the next phase. I paid £1500 interest during 2015 & projected £523 for 2016 so hopefully not a big difference if I include the costs of changing mortgages.

What do you plan to do when you retire? Are you able to accurately estimate expenses - what will go up, what will go down? Your social spending is quite high, would this increase exponentially with more free time, or do you have frugal hobbies in mind?

I've only recently became confident that I could potentially retire in 5 years time so cannot answer the first question with real certainty at this stage. What I have done is base the projected costs on my current spending and increased the holidays / social slightly (accepting these are high already so could be scaled back if required) and added in gym costs to build in a buffer. The reduced mortgage interest on Flat 1 & 2, reduced cable and Accountant fees of £540 (not shown in my case study but incurred this year) have also been factored in.

I'm getting comfortable with the frugal lifestyle across the various categories but still enjoying my weekends / holidays at the moment.

I've recently joined the library, stopped using lifts, getting a Cashback Credit Card, looking at bikes.......I'm up to Dec 2012 on the blogs and thoroughly enjoying the journey so far.

Have you thought about tax? If your income is coming from a pension and rental income, it will all be taxable - looks like basic rate at those numbers.

Pension - yes this has factored in the 20% Tax already. Buy To Let needs a few adjustments. When I'm 50, the rental will increase to min. £600 per month. From this, the Letting Agents (£72), Factor Fees (£100) and Tax at 20%. My mortgage costs will still be around £200 mo so I would need to pay this £20k off from the 25% tax free lump sum or savings / shares pot and buy myself out of the current deal or move to Interest only at around £50 per month. I'm thinking of paying this off at the moment but not decided at this stage. By that time the full impact of the Interest charges / 10% Maintenance costs 2015 budget changes take effect, the buy to let Annual profit will be c. £3600 (or £4200 if I clear it off).

Do you have any transport costs or do you walk everywhere?

No car & taxi costs are included in social budget. I live in the city centre so walk mostly when going out and get a taxi back to the flat at the end of the evening.

What's the occupancy rate/desirability on the rental? It looks quite critical to your plans to have that income each and every month.

I've had the flat for over 8 years now - only been empty a few days between tenants and in a prime spot near a hospital / university. I  currently have a foreign doctor in the flat on a 12 month agreement. This is critical to my plans however, I have the option to purchase a further flat which I could move into and rent out my current primary 2 bedroom residence in the city centre for c. £850 mo (net income after Tax / Letting etc - £600 mo).

Also I'd cash out your employer shares as soon as you can and invest in a tracker -as if they went bust, you don't want all your eggs in one basket.

Current employer in FTSE 100 and huge cash surplus so highly unlikely to go bust. Not looking to increase shares - all future share purchases will be in Index Funds (UK / Other).

Hope this covers the points raised - thanks again for your response and please let me know if you require any additional information.

dreams_and_discoveries

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Re: New Case Study - Never Too Late To Join The FI Party!
« Reply #5 on: September 03, 2016, 06:45:29 AM »
My pennies worth - it's a good well-thought out plan, which you can certainly make work.

How are you planning to spend the last 5 working years? Some people like to try out retirement budgets, plan out great escapes (if you like travelling you can rent out your place and slow travel much cheaper than staying in the UK), try out loads of hobbies to find what they like - golf, hiking, camping, cycling, cooking, gardening, fitness etc. Also you can think of taking your foot off the pedal, not chasing that next promotion or always going over and above..

One thing that doesn't quite tie together for me, you seem very risk adverse with FI, desiring 100% security, but you are taking a few risks on your company (loads of once successful companies have tanked...think Nokia, VW, nestle - one legal problem and compensation etc could wipe out their cash reserves). You are relying on this company for your current income, future pension and current savings. I agree you've not got much choice with relying on them for your salary and pension, but you could look elsewhere for savings.

From the numbers in dollars I think you're paying higher rate tax now, so additional pension contributions are very advantageous- saving the 40% tax and more in NI. This probably becomes a no-brainer if you can get the money out as soon as you retire from your pension scheme - can you get this at 50 as well I presume? If you can live without the cash now, I'd put all over the basic rate allowance into your pension now, then you can take out at basic rate in 5 years time.

CMC8310

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Re: New Case Study - Never Too Late To Join The FI Party!
« Reply #6 on: September 03, 2016, 10:00:22 AM »

Hi D&D – thanks again for your input. Plans for the next 5 years is to stay in the same role and make it to the finishing line. I’ve recently changed roles working between Glasgow & Belfast following a few years working in India and have decided that this is my final role before retirement. If I get put At Risk during this period, I will take the money and run. I’ve been with the same company for 27 yrs in various exciting roles so the redundancy package will easily get me to FI. Not going over and above as I have done in recent years – just looking to have the right work / life balance (WLB) to perform in the role and continue to deliver.

Plans for retirement are still being thought through. I really enjoy travelling and have been allowing my budget for this area to increase significantly in the last couple of years. I’ve been to India, Laos, Vietnam, Thailand, Cambodia and Myanmar in the last 12 months over 4 two week trips (one Business) and going to Costa Rica in a couple of months. This will continue over the next 5 years with South America, China and Japan being planned for next year. I will travel the first year or so and look into renting out my flat during this time.

As I’m unable to achieve FI without the pension (or At Risk pot) within the 5 years, I’m happy to be less ‘Mustachian’ in certain areas as long as I achieve the 60%+ savings & correct WLB each year to build up a Share / Bond portfolio of £125k I will be very happy. This may explain the perception of me being very Risk Averse with FI. I have a target date which is difficult to squeeze below the 5 year period & having been working solid for 27 years since I left school. I want a plan which allows me to stop and not work again unless I choose to do so. If I need to work for a further 6/12 months to achieve this, I think it makes sense to stick with the same job and build my pension pot / salary and savings further to achieve the 100% rather than stop and then have to start at a later date because I’ve got the math wrong! The reality is that I know I will work after I retire – I will be offered 6 month projects / consultancy work which I will be interested in doing. Hope this helps clarify the earlier response.

Regarding pension, the APCs are saving on the 18% Tax at the moment. If I commit to a monthly figure each April and commit to this for 12 months I can achieve 20% (18% Tax / 2% NI). I was going to do both – achieve 20% on a certain amount and add in additional APCs at 18% each month depending on whether I was booking a holiday that month or not! I know I can get the 25% Lump Sum Tax Free from my company pension in 5 years time but need to look into the Tax on the balance. I perhaps wrongly assumed it was the same UK Tax levels as my current earnings - thanks for asking.

The current plan is to split my available savings, once I clear down the mortgage by year end, across 2 Vanguard funds (FTSE All Share Funds / Life Strategy 80 Equity) and Company APCs. Depending on the tax relief, I may adjust the weighting more heavily towards APCs. I want to build up a bigger fund of available cash as I currently have £0 (Overdraft £1500) & the company shares of £18k. I live month to month at the moment to be aggressive on the mortgage.

I appreciate you flagging the concerns re my eggs in one basket. Happy to live with this Risk but never actually considered that before – much appreciated.

Hope you are enjoying the weekend and doing well on your own plans. What is your target date and how are things going?


dreams_and_discoveries

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Re: New Case Study - Never Too Late To Join The FI Party!
« Reply #7 on: September 03, 2016, 01:47:51 PM »
Hi CMC - I'm aiming for 2021 (when I'm 40) or late 2020 if things go well. Planning to do some serious travelling, then re-evaluate.  My list is long, includes things such as Trans Siberian, China, Mongolia, hiking Annapurna in Nepal, hiking in Tibet, doing basically the banana pancake trail in SE Asia, hanging in Bali for while.

Once I've done all the long haul stuff, seriously debating getting a dog and doing loads of UK & European hikes - want to bag all the Munro's, hike the Alps and potter about Europe.

Also I'm not adverse to travelling for a few years, then coming back and doing one more contract either for the money or as a favour.

As with all plans, I've got a few dependencies..
  • On the contract gravy train still going well, which looks promising for the next few years at least in my field
  • I'll need to keep back to back contracts at a decent rate for 4+ years
  • 6% return will take me to early 2021, anything over 6% will put me in 2020
  • Not increasing my spending beyond £26k
  • No more tax increases
  • Also seeing out my cat's life here - he's 15 and my cats usually live to 20, so works in nicely
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