The Money Mustache Community
Learning, Sharing, and Teaching => Case Studies => Topic started by: Nadia Edits on May 12, 2023, 05:52:27 PM
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Situation: I’m a WFH freelancer on a single income in the UK, no kids, no car. I’ve been on a low income for a long time, so my net worth is poor. I almost ran out of work and money altogether last summer. Since then, I’ve worked hard to boost my income to an average of £2700 a month net (after taxes, national insurance and student loans) which leaves me with a surplus that I’m keen to use wisely. I’ve hit the limits of my financial literacy and would value any advice.
Monthly budget:
£511 mortgage, rent and service charge on my shared ownership flat
£150 groceries and toiletries
£114 council tax
£76 electricity
£40 water
£35 occasional bus travel
£26 life/critical illness insurance (cancel?)
£22 internet
£16 budgeted to replace laptop every 3-4 years
£11 occasional train travel
£40 miscellaneous small costs (phone, dentist, eye test, subscriptions, etc).
And the real luxury spending:
£150 dining out/bars/socialising (reduce?)
£60 hobby (cancel?)
TOTAL: about £1250
This leaves about £1450 a month for savings. I put £300 a month into my SIPP, £120 a month into my S&S ISA, £100 a month into overpaying my mortgage, and excess money was diverted to my emergency fund until recently.
Assets:
£6k 6-month emergency fund in an easy-access 3.71% interest account.
Self-assessment tax savings are in a separate 3% interest account. I have my current tax liabilities covered and some more on top.
£13k SIPP is invested in various recommended Aviva funds. The SIPP does not get any employer contribution (alas), but does receive 20% tax relief. Performance was -3% in the last two years, which is painful when inflation is running so high.
£18k Hargreaves and Lansdown S&S ISA is invested 50% L&G UK 100, 25% Vanguard Ex-UK Equity and 25% Vanguard 80% Equity.
£102k in my 50% share of a shared ownership flat.
TOTAL: £139k
Liabilities:
£34k mortgage at 1.8%, fixed for 4 more years with another 13 years to run after that.
£22k student loan, which will be written off in 13 years.
TOTAL: £56k
Questions:
- Given the monthly surplus, what should I focus on—overpaying the mortgage, paying into the ISA or paying into the SIPP?
- What should I know about asset allocation? I picked these funds after reading Ramit Sethi’s book, but it was a long time ago and I don’t remember exactly why I chose what I did. I want to invest as passively as possible.
- Can I realistically plan to buy the other half of the flat for around £100k, increasing my housing costs to probably £850 and extending the term to maybe 35 years? It seems insane to borrow four times as much at a far higher interest rate, but I don’t want to be at the mercy of rent and service charge forever.
- Should I cancel my life/critical illness insurance? I have no dependents and could sell my flat and move in with family in an emergency.
- Any idea when I could realistically retire? I will not be able to access my SIPP until age 55 or the state pension until age 68, so my ISA will need to cover any early retirement gap. I’m finding it hard to estimate what my early retirement budget would be when future housing costs are such an unknown.
- Anything else I should know?
Thank you in advance for your thoughtful comments.
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Since most of the residents of this forum are US-based, it's going to be a bit harder to find useful advice.
For the ignorant (like me), how do you have both a mortgage *and* rent on your flat? Most USians are used to one or the other.
One thing to consider about prepaying the mortgage: if you still owe money, you're in the same legal position whether you owe 30k GBP or 1 GBP. I have seen several people recommend that, if you wish to pay off the mortgage more quickly, you invest your extra income until it grows to a sum large enough to eliminate the mortgage entirely. That way, your own equity in the home is less at risk in case it loses value and you have to sell.
Most folks around here just stick with simple broad market, low-fee index funds. They're a pretty reliable long-term investment.
Who is the beneficiary for your life/critical illness insurance? If it's intended to help your (non-existent) dependent family in case you as the breadwinner are taken out of action, then it's a bit silly to keep it.
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Thanks for your reply!
For the ignorant (like me), how do you have both a mortgage *and* rent on your flat? Most USians are used to one or the other.
Shared ownership (https://www.gov.uk/shared-ownership-scheme) is a part-buy, part-rent model of home ownership for low-income local people who can't afford to buy homes at the market rate. I legally own a 50% share of my flat and the other half is owned by a not-for-profit housing association. I pay a mortgage on my half and rent/service charge on the other half. I can’t be evicted without cause, and I can buy the other 50% share from the housing association (called "staircasing") if I can qualify for a mortgage on it.
If I don’t staircase, I’ll be paying rent on the other half even in retirement, but perhaps I’m worrying unnecessarily about this—the rent is capped and should be affordable.
You make a good point about overpaying the mortgage. I sort of hate the mortgage and gain satisfaction from cutting it down, but that’s money that could go into the stock market. My mortgage allows me to underpay in future to the value to which I’ve overpaid in the past, but I’ve already overpaid so much that I could just stop paying for 6-9 months.
Who is the beneficiary for your life/critical illness insurance? If it's intended to help your (non-existent) dependent family in case you as the breadwinner are taken out of action, then it's a bit silly to keep it.
I agree, I don't need life insurance. (I'm the beneficiary; my adult relatives would inherit via my estate if I died.) It came with the package when I took out critical illness insurance to cover unlikely but catastrophic scenarios—my policy will pay out £100k if I’m diagnosed with cancer, for example. As a freelancer, if I'm too sick to work, I won’t qualify for employer benefits or statutory sick pay, so the outlook would be bleak. I guess it’s an unlikely scenario, and even if it happened the insurer would try their best to deny the claim.
Perhaps I’ve been overly cautious and should just focus on those index funds. I appreciate the insight.
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You might have more luck posting in the UK Discussion forum, where you'll get more UK specific advice.
Congratulations on increasing your income so much.
I personally wouldn't overpay the mortgage, particularly as its fixed for another 4 years. I would focus on your SIPP (maybe review the funds) as that seems quite low compared to your ISA. Some people approach it as SIPP + State Pension from 68, SIPP alone 55-68, and ISA ??-55. And figure out an amount they need to cover each of those periods.
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I personally wouldn't overpay the mortgage, particularly as its fixed for another 4 years. I would focus on your SIPP (maybe review the funds) as that seems quite low compared to your ISA. Some people approach it as SIPP + State Pension from 68, SIPP alone 55-68, and ISA ??-55. And figure out an amount they need to cover each of those periods.
Thanks for the tips! I'll definitely review the funds the SIPP is invested in. All I remember is that the pension firm had a "guided setup" that asked me about my appetite for risk and then directed me to certain funds. It definitely doesn't seem to grow like my ISA does.
(Did you know the normal minimum pension age (https://www.gov.uk/government/publications/increasing-normal-minimum-pension-age/increasing-normal-minimum-pension-age) is going up? Looks like I won't be able to access my SIPP until age 57, which means the ISA will have to do some heavy lifting before then.)
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There are a few UK-based people here.
I have a shared ownership flat but with a slightly different setup because my employer owns the other part, rather than the housing association. I chose to overpay as much as I could for the five years I've owned it because I thought that reducing my existing mortgage would put me in a better position to qualify to take out a big enough mortgage to buy out the other part. In the end, I'm not sure if that was the right decision because I'm now selling the flat and moving to the US to take a different job. Overpaying reduced the amount of interest I paid, and I'll get back what I put in because the flat increased in value. But if I had known I would be here five years instead of thirty, I might have done things differently.
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I have a shared ownership flat but with a slightly different setup because my employer owns the other part, rather than the housing association. I chose to overpay as much as I could for the five years I've owned it because I thought that reducing my existing mortgage would put me in a better position to qualify to take out a big enough mortgage to buy out the other part. In the end, I'm not sure if that was the right decision because I'm now selling the flat and moving to the US to take a different job. Overpaying reduced the amount of interest I paid, and I'll get back what I put in because the flat increased in value. But if I had known I would be here five years instead of thirty, I might have done things differently.
Excellent point, thank you. I like my neighbourhood, my city and my friends, but it's not impossible I might want to move some day, especially as I have a fully remote job. I do dream of living somewhere more rural some day, but I don't want a car - rural places can be so car-dependent.
PS: Congrats on your new job and move back to the US.
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I made the jump to Vanguard today:
- The woefully underperforming pension is now invested in a Vanguard target date retirement fund, currently set to retire at state pension age, although I might move that date up.
- And the S&S ISA is invested in the Vanguard Developed World Ex-UK Equity Index.
- I also cancelled the mortgage overpayment and diverted it into the S&S ISA.
I'm debating if I should take out a Lifetime ISA (https://www.gov.uk/lifetime-isa) to take advantage of the 25% uplift the government provides. However, you can't take that out until you're 60 (unless you're buying your first property, which I already have). I see the different retirement options are sort of staggered - the state pension kicks in at 68, the LISA would be accessible at 60 earliest, and the SIPP will be accessible at 57 earliest. If I want to retire before that, it's all on the S&S ISA.
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I cant remember why but when I looked at LISA's when they came out they didnt make sense over a SIPP or ISA unless you are a first time buyer.. Worth a look I think but something put me off them and I dont remember why!
I think your income to expenses ratio is fantastic, it is a struggle to hit 50% of your take home that you can save/invest (potentially more if you are using the tax advantages of a SIPP) thats hard enough in itself congratulations!! You have mastered the art of frugality and I think you are now seeing the benefits of increasing your income. If you can bump your income even higher and hit 60/65% you could potentially have enough to retire very quickly! Although do remember to keep a nice work life balance as it is a marathon not a sprint and you dont want burnout.
I am 33 and my wife is 27 and we are both personally putting significantly more into our S&S ISA than our pensions/SIPPs but once we are a bit older and in our 40s we will probably start putting a lot more into our pension/SIPP, hopefully at that age we have had a few wage rises and can benefit even more from the tax advantages.
It is a difficult balance, your SIPP will have a lot longer to compound over time plus an additional 7 years while you are living off your ISA so you can get away with not putting as much in at the start. Your ISA will need to be more aggressive in general otherwise you wont have enough to bridge the gap but if you have enough time it should have some time to compound allowing you the ability to pump your pension for a few years before you retire.
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Another good month, bringing in about £2900 after tax.
I think your income to expenses ratio is fantastic, it is a struggle to hit 50% of your take home that you can save/invest (potentially more if you are using the tax advantages of a SIPP) thats hard enough in itself congratulations!!
Thanks for the kind words! I admit I'm not always as frugal as this budget suggests—I definitely overspent a bit this month with an extra dentist appointment, additional bus travel, and some unnecessary food spending. That said, I've always been a low spender with low-cost hobbies.
You make great points about feeding the ISA now and the SIPP later. I'll plan to prioritise the ISA for now so I can continue to dream of early retirement.
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December 2023 update:
SIPP £20k
ISA £27k
Emergency fund £6.5k
Home improvement fund? £1k
That's about £17.5k in additional savings since I posted in May. I think about £2.6k was taken from my tax savings account, which I always save too much in and I’m trying to transfer the excess into my SIPP and ISA over time. I also paid a £7.2k tax bill this week without breaking a sweat.
I reread YOUR MONEY OR YOUR LIFE and started tracking my expenditure more closely. Total expenditure in the last few months (not counting taxes) for your amusement:
August: £1220 spent, £400 saved
September: £1440 spent, £2600 saved
October: £1390 spent, £1180 saved
November: £1160 spent, £2550 saved
Looks like my average monthly expenditure was £1300 all in, so pretty close to the £1250 budgeted above. Did not cancel the hobby (decided the enjoyment is worth the small cost) and I haven't yet cancelled the critical illness insurance, as I do worry about what will happen if I can't work. The emergency fund will cover me for a few months, and the ISA will cover me for a year, but I don't have long-term financial security.
Back-of-the-napkin maths indicates I'm bringing in £44k a year income, which is £32.9k after tax, so after paying £15.6k in expenses, £17.3k should be saved per year. That's a savings rate of just over 50% and would suggest I can retire in around 13 years! That's exciting.
The pleasant complication is that I should be saving £17.3k per year, but I actually saved £17.5k since May. No idea how that maths works out. I think I just had a really successful quarter.
Thanks for listening! I get a better overview of my finances when I write it all down.
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Absolutely amazing savings rate! Well done
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Absolutely amazing savings rate! Well done
It looks like you're doing great, but perhaps one little extra thing might help...
If you've got a 1.8% rate on your mortgage, and you can get 4-5% on a risk-free savings account, you can make money by not paying off the mortgage. If you just throw it into savings you'll be getting ~3% free return, and on average more if you put it in equities (but with risk even if it's just in a well diversified index fund). You could put that 100 pounds a month into the savings account and over the next 3 1/2 years that's a bit extra of a chunk of change, and then you can decide if you want to use it to pay down the mortgage, or not.
Moreover, you get the extra safety margin of a bigger emergency fund!
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Thank you both! I forgot to mention, but I took the advice given earlier in the thread and stopped my mortgage overpayment. My emergency fund is now at 4.84% interest, and even my tax savings are getting 4.25%, so you're quite right that overpaying the mortgage felt satisfying but wasn't the best move.
My quest in the next few months is to finally get to grips with my tax savings account. I've been saving into the same pile of money for over a decade, and while I know I've saved too much, it's difficult for me to grasp how much I can safely take out and invest because the account never reaches a zero balance due to the way self-employed tax is paid in the UK. Let me try to work it out...
I've paid all tax for 22/23. I've also paid about £2.7k on account for 23/24. My spreadsheet indicates I probably owe about another £3.8k in taxes so far this year, but I still have £5.2k in my account, so that suggests there's around £1.4k of excess savings in there.
OK, sounds good. At the end of the tax year I can pay out the remainder for 23/24, start a fresh tax account for next year's savings (a tip I got to help keep it all straight), and divert any excess money to the SIPP and ISA. Remind me next April!
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End of February 2024 update:
SIPP £24k
ISA £29k
Emergency fund £6.5k
Home improvement fund? £2.3k
That’s another £7.3k in savings since last time I posted. Tax account is looking healthy as well. I’m almost at the end of the tax year and I always oversave, so soon I’ll be able to reclaim any excess money and send it to the SIPP.
Expenditure versus savings, not counting taxes:
December: £1330 spent, £1300 saved
January: £1340 spent, £300 saved
February: £1210 spent, £2200 saved
I felt really satisfied sending that money to my SIPP yesterday, and the government will put in another 25% on top. I think Vanguard hasn’t updated yet, so the SIPP should shoot up when it does.
I think I’m paying more than 6% interest on my plan 1 student loan?! The interest rate is the lower of inflation or the Bank of England base rate + 1%. I never paid much attention because interest rates were so low until recently, and repayments are a flat 9% on income above a certain threshold, but the debt is growing faster than I’m repaying it (albeit not very fast). I don’t like it, but Martin Lewis says there is no real cost to plan 1 student loans because the interest rate is essentially tracking inflation. I guess my SIPP is in greater need and has a bigger payoff. OK, I’ll forget the student loan.
It’s been almost a year since my first post. I’ve set myself a reminder to come back in May to run the numbers again.
Thanks for listening!
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Hi Nadia. Just found this. Congratulations on your excellent savings rate.
I've been having a bit of a play with your numbers to try and see what might be possible. You haven't given your age, but I've guessed that as 39 based on how long you said you had to run on your student loans. All the following calculations are based on that. I assumed 4% real return on your investments, SIPP access at 58, State Pension at 68 and all tax thresholds etc just rising with inflation. All calculations done in today's money.
You've identified £1,450 a month as being available for saving / investing. I assumed you continued to do £300 a month to SIPP (grossed up to £4,500 pa) and £1,000 to ISA, leaving £150 of wiggle room.
The good news is that your spending is so low (excluding mortgage and rent) that eventually you should be fine on the state pension. The challenge, therefore, is to get you staircased and mortgage paid off by then, plus enough to live on until SP age.
I did some quick, back-of-a-fag-packet modelling on what your numbers might look like if you aimed to FIRE at 52 in 13 years time (all the best people FIRE at 52.)
SIPP
Putting in £300 a month (increasing with inflation) until 52 and the maximum allowed £2,880 net / £3,600 gross for a non-earner thereafter, with 4% real returns, gets you to about £170k in your SIPP at 58. That's a very nice number to target, because 25% you take tax free and the other 75% is roughly ten years worth of personal allowance ie £12.5k pa of tax free income for the ten years until your state pension starts. Part of the lump sum of £42k might be needed to buy a few years of voluntary NIC to ensure you get the full state pension. The rest could be invested to give a little bit of a top up to your income.
ISA
Adding £12k pa until 52, with 4% real returns, gets you to roughly £250k by age 52. Say £12k pa x 6 = £72k gets used to fund spending until you can access your SIPP. A further £17k pays your SIPP contributions over that period. Call that £90k all told, leaving £160k left over. Would that be enough to buy the other 50% of your property? If so then it's looking good :)
I strongly recommend you to do the numbers yourself - I'm just a random internet stranger and my free advice is worth exactly what you are paying for it - but it looks to me like age 52 should be very achievable if you maintain your current income and expenditure. Best of luck :)
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I strongly recommend you to do the numbers yourself - I'm just a random internet stranger and my free advice is worth exactly what you are paying for it - but it looks to me like age 52 should be very achievable if you maintain your current income and expenditure. Best of luck :)
Incredible work, thank you so much. It’s amazing to think I could retire so early.
I’m actually 35—more years to save up while my investments compound! It sounds like £300 a month is plenty for the SIPP to cover the 10 years before the minimum state pension age, so that’s great news. If I’m understanding correctly, the challenge is funding the ISA to the point that it can pay off the other half of the flat and any remaining mortgage and then cover my living expenses after that. I think I was hoping to invest enough money in the ISA + SIPP that the returns alone will cover my expenses and I won’t need to draw on the capital, but that might be a bit optimistic when the ISA has less time to grow.
I do think I might keep working part-time once I reach financial independence. If I could bring in even £800 a month from my freelance business, that would cover most expenses without being too demanding in terms of workload. That’s the dream—being financially independent enough to only take on projects that really fascinate me! It sounds like I could potentially switch to part-time around 50. I guess that’s coast FIRE?
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Sorry for prematurely aging you :)
Being 4 years younger than my guess gives more time for things to grow, but also more years to have to fund, so it's swings and roundabouts - you'll probably have to work longer than the 13 years I calculated, but could potentially retire at a younger age. You are spot on that they key challenge is growing the ISA funds enough to pay off all of your flat and fund the years to pension access age.
Spending capital is usually the best answer mathematically when you have a future income stream such as the state pension that will cover most of your spending needs. It is an incredibly hard thing to do psychologically though - I've certainly not done a good job of it. You can definitely make the numbers work without having to spend too much capital, it probably just means you having to work a few more years longer than you would if you were prepared to spend it all / most of it.
We've just found that you have four more working years to get to 52 than I guessed, so lets try running the numbers again to that same age and see what difference it makes. All the same assumptions ie 4% real return, £300 a month to SIPP, £1,000 a month to ISA.
SIPP
If you keep working until 52 you probably don't need to keep funding the SIPP beyond that point. 4% real gets you to nearly £200k at 58, which is enough to fully utilise your personal allowance from 58 to 68, so the benefits of using a SIPP get much less beyond that. You would plan to withdraw your full PA each year over that period, but some of it you would just reinvest in your ISAs, for reasons that will become clear.
ISA
£1k a month until 52 and 4% real returns would get you to the princely sum of £360k at 52. Lets say you spend £150k on paying off the mortgage and staircasing. If you keep £172k invested, a 3.5% drawdown rate on that gives you £6k pa. That leaves £38k of capital that you will need to steel yourself to spend (unless you do keep working PT). That £38k over six years is another £6k+ pa, so added to your drawdown that's £12k pa tax free.
At 58 you can access your pension of nearly £200k so >£6k of further drawdown income at 3.5% with negligible tax as you can get most of it out via your 25% lump sum and ten years of personal allowance. That plus the £6k from the original ISA drawdown gives you £12k pa for the period 58 to 68 so hopefully no need to work PT (unless you want to) or spend any more capital.
At 68 your income just about doubles as you start getting your state pension on top of the £12k of drawdown. That gives you a nice cushion against the risk of having bad returns earlier and needing to draw at an unsustainable rate.
TLDR, Retiring at 52 looks like it has a very good chance of being doable and without having to spend much of your accumulated capital on living expenses. 50 would probably be possible if you were happy to spend down your capital a lot more, or to work PT until 54 / 55 or so. Congratulations!
The numbers are very different, but there are a lot of similarities to what I ended up doing. I FIREd at 52, needing to fund the gap until pension access and then the gap until our DB pensions and finally state pensions come on line. I planned to spend a lot of my capital over those periods, but have ended up continuing to work very part time, which has largely done away with the need to spend that capital. This has had a very significant impact on my numbers, because by not having to spend capital, that capital gets added back in to the drawdown pot. That increases my drawdown income, which in turn decreases further the amount of capital I need to burn in the bridging period, which again gets added back to give more income and so on in a virtuous spiral.
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Thank you so much—that’s excellent to hear. I admit the FIRE calculators are a little bit daunting when I try to factor in inflation, withdrawal rates, tax rates, the ISA vs SIPP vs state pension, etc, so your comments are really helpful.
So it sounds like the plan is to save like a maniac, putting £300 a month into the SIPP and everything else in the ISA. That should enable me to retire early around 52 once the ISA can reduce any remaining housing costs to zero/near zero and cover living costs afterward. Then I’ll pick up the SIPP at NMPA and the state pension at 68, reinvesting any excess cash in the ISA. I’ll plan to do part-time work when it’s fun and/or as necessary to cover any lean periods. That’s inspiring!
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Glad to be of service. As long as you increase your monthly savings amounts by inflation each year, you should be fine.
One note of caution though. You will note I only calculated using your £300 a month and then another £1k a month to the ISA for a total of £15.6k per year, rather than the £17k+ you feel you should be able to save. I did that very deliberately because this is a marathon, not a sprint. You don't want to spend the next 17 years 'saving like a maniac' and focused on nothing but FIRE. You need to enjoy yourself along the way too. The real aim of the game is to maximise enjoyment of your life across the whole of your remaining years on this planet. Being able to give up work early really helps with that, but you have to make sure it's not at the expense of being so tight with spending it overly impacts your quality of life during the saving phase.
I'm sure you'll work out a good balance.
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Hear, hear - Doctor Phil has spoken (or written)!!
Yes, very inspiring to hear of folk who aren't on c-suite money still making it work for them.
The one thing I will say is that, when the budget is tight and you don't have all that much margin to pull different input levers, it will make more difference at the margins by taking a long term view and optimising around that, rather than doing "what feels good" but isn't mathematically optimal - classic case in point is don't overpay your mortgage when you have a current 1.8% rate. For some people it won't make that much difference, but in your case it could make quite a difference. I find that really getting yourself familiar with the numbers and the idea of opportunity cost of debt payoff (vs investing) can help reinforce the long term mindset.
And what DrP says about 52 is true - my numbers keep inexorably gravitating towards it!!