The fourth quarter of 2018 contained the pivotal moment of my FIRE journey so far – FIRE day. Financially it represented the transition from rapid wealth accumulation to hopefully well managed wealth decumulation or drawdown. As I write this though more importantly it also represented the start of what seems to be called the decompression phase of retirement and I’ll freely admit I’m finding this really difficult. Prior to FIRE I had 60 – 70 hours a week either commuting or in the workplace where I would be seeing new data that would require action every 15 to 30 minutes. I would then be paid reasonably well for this effort on a monthly basis with some being spent to live well while the majority was saved.
Now we get to do what we want when we want and there is no need for urgency but also if we want to eat I now need to withdraw from my wealth that will only be renewed passively. I can’t speed it up without taking more investment risk. So what emotions have I been experiencing? Initially, mainly a lot of stress caused by giving a good work handover and pushing too hard on our relocation plans to Cyprus. That has now subsided with us now having been here for about 6 weeks. After the stress left I experienced euphoria! I’d done it, I can now do whatever I want and am free to be where I want when I want. That also has now subsided.
So what am I experiencing right now? That’s have we done the right thing and should we persist. There is certainly some fear in there as well. Fear of running out of wealth, fear of not having enough wealth to meet our quality of life ambitions for the next 40 or so years, fear of my skills quickly becoming stale and not being able to re-enter my career when that occurs… At one point I even thought about asking my employer if they’d take me back and I have also looked briefly at what jobs are out there. Thankfully, I’ve bitten my tongue and moved on for now.
So what am I doing about it? Firstly, I’m getting outside and exercising as much as possible. Initially, I’m just covering a lot of miles on foot to explore what’s around me. The result of that so far is that I’ve lost 7kg. I also think the increased exercise and loss of stress is resulting in my sleeping like a baby currently which can’t be a bad thing. I’ve also started to write things down – a lot of things both psychologically and financially. If it remains cathartic it may even end up in a 2nd Edition of my book in the coming months. I’ve also started to try and meet new people but that’s going slow. The informal cycling club here has either closed down or is only operational in the warmer months and some other clubs I’ve investigated have an average age of attendance at least 15 to 20 years my senior. I guess that’s one of the challenges of an early retirement.
Click to enlarge, Beauty everywhere, Paphos, Cyprus
So what’s next? We’ve always said we want to give this FIRE to the Med a fair chance. We’ve jumped in with both feet and have always said 6 to 12 months to allow time for the homesickness to subside and decompression to play out. In the coming months we also have some travel planned to see far flung friends and family in person which may also put a different take on things.
That the psychological piece. Let’s now looking onto the financial front where wealth closed year on year down £19,000 even after savings in 2018 of £28,000. Let’s look at the details.
SPEND SENSIBLY
This section in my quarterly updates used to be called Save Hard which I defined as Gross Earnings (ie before taxes, a crucial difference) plus Employer Pension Contributions minus Spending minus Taxes. Given I no longer have Gross Earnings (only passive income from dividends and interest) or Employer Pension Contributions I’m going to switch this to a focus on spending sensibly only.
2018 spending totalled £31,971 with £12,911 of it occurring in the final quarter of 2018. This was not unexpected as it included my higher cost of living in the South East of England for most of the year but on top of that it also included establishing ourselves here in Cyprus. That included big ticket items like international removal costs, sorting out our Cyprus private medical insurance for the next year which necessitated expensive visits to private UK GP’s (you would die before getting an NHS GP appointment in the part of the UK I was living) as well as car hire for a period.
The chart below shows where the money went. Those removal and car hire costs can be seen under Miscellaneous and the Medical Insurance costs can be seen under Personal Care/Medical.
Looking forward to 2019 I see no reason why spending won’t now reduce to the £24,000 per annum planned. There have certainly been some puts and takes on where the spend will go but directionally I don’t think I’m far off. January 2019 spending is shaping up to plan with a view of what that might look like also shown in the chart.
Click to enlarge, RIT Spending
Spending Sensibly score: Conceded Pass. An explosion of costs at the end of 2018 but not unexpectedly so.
INVEST WISELY
2019 (06 January 2018 to 05 January 2019) investment return closed at -3.7%.
Investment wise the portfolio is now positioned for FIRE drawdown. Cash and cash like holdings (NS&I Index Linked Savings Certificates predominantly) for a non-mortgaged home purchase and to give me a few years of cash buffer as I enter FIRE sit at £342,000 today. I’ve also positioned my portfolio to hopefully enable us to live just off the dividends. 2018 total dividends were £28,704 which if we succeed in living well off £24,000 per annum will mean I’m spending 84% of dividends. Right on plan.
Click to enlarge, RIT Annual Dividends
For completeness this is what my asset allocation looks like today.
Click to enlarge, Current RIT Asset Allocations
I continue to invest as tax efficiently as possible with my tax efficient holdings from a UK perspective now consisting of:
- 43.5% held within Pension Wrappers within SIPP’s
- 8.7% held within the no longer available NS&I Index Linked Savings Certificates (ILSC’s)
- 14.6% held within a Stocks and Shares ISA.
If we stay in Cyprus then this isn’t going to be very helpful as the NS&I ILSC’s and ISA’s are not recognised as tax efficient vehicles. Positively though as we are of non-Cyprus domicile all of our interest and dividends should now attract zero tax for the next 17 years.
Tax efficiency score: Pass. At the end of 2017 this was 66.3% and at the end of 2018 is now 66.8% from a UK perspective. If we stay in Cyprus long term that will shift to 100% tax efficiency which is a pass in anyone’s books.
Investment expenses also continue to be treated like the enemy. 2017 finished with expenses at 0.23% and today they are slightly lower at 0.22% helped by a partial pension transfer earlier in the year and by not making previous investing mistakes like buying expensive active funds that I can’t currently sell. If we become certain we won’t be returning to the UK within 5 years of leaving I will clean that up reducing expenses further. There is no capital gains tax on the sale here in Cyprus but UK HMRC has far reaching talons thus the 5 years.
Minimise expenses score: Pass. A reduction by taking some conscious actions throughout the first half of the year. 0.01% doesn’t sound like much but given my current wealth that’s £135 a year staying in my pocket. I’ll take that.
In the scheme of a lifetime of investing this year is insignificant. I’m all about time in the market and not timing the market so let’s zoom out and look at my performance since I started down this DIY road. My long run nominal is 6.0% which is a real (using RPI) return of 3.2%. The chart below tells the story. Note that the chart assumes a starting sum of £10,000 which was not my portfolio balance at that time but is instead simply a nominal chosen sum to demonstrate performance.
Click to enlarge, RIT Portfolio Performance vs Benchmark vs Inflation
Long term investment return score: Fail. My whole investment strategy since 2007 has been about generating a long term real return of 4%. A real 3.2% is well below that but importantly we are now long into a bull market and the returns just aren’t there. While better than my benchmarks real 1.8% it’s still nothing to crow about. I believe I have a portfolio that historically would have survived the worst bear markets from a drawdown sequence of returns perspective historically but it still doesn’t feel real good. The question is what action can I take but sit tight for now…
RETIRE EARLY
Wealth today sits at £1,307,000 down a little from the peak £1,367,000 in August 2018. My complete journey is shown in the chart below which is now segmented to show my new decumulation phase. From where I sit today in the throes of decompression I am so glad I did my One More Year(s). That extra buffer feels really good right now as I wrestle with have we done the right thing.
Click to enlarge, RIT Progress Towards Retirement and In Retirement
Piecing everything together and we end up with the drawdown tracker below. The spending explosion of quarter 4 2018 can be clearly seen but positively even that only equates to an annual drawdown of 2.5% of current wealth. On the negative side of the equation there is a long road ahead to get that spending back below 85% of dividends but the maths tells me it will work so a bit of trust is now needed…
Click to enlarge, RIT’s Drawdown Tracker
How did 2019 play out for you?
As always please do your own research.
