Latest posts by FIRECracker (see all)
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- Friday Reader Case: Reformed Debt-Junkie Wants to Retire with Kids - November 10, 2017
Hello from Poland! I gotta tell you, it’s pretty jarring to be back in Europe after hoping around in South East Asia, Mexico, and Central America. After being spoiled by ridiculously low prices and letting my budgeting muscles atrophy, I wasn’t sure I was ready to give them a work out again.
As it turns out, I had nothing to worry about. Because as soon as I got off the plane, I was reminded of one of my favourite things about Europe. How fast, easy, and cheap it is to hop around countries! And as it turns out, I didn’t need to work out my atrophied budgeting muscles at all because I’d completely forgotten about the fantastic deal that is Central and Eastern Europe. In fact, we’re currently spending around the SAME amount in Poland as we did in Malaysia. Yup. I kid you not. It’s cray cray. But that’s something I’ll be telling you about in a future travel post.
But since this is a Friday Reader Case, let’s get down to brass tacks:
I’ve discovered your site through a work colleague and I love how easy it is to read and how it explains a lot of concepts very well.
I am new to the investment scene, having only opened my first non-ISA investment account a few months ago (with a spread trading company). However, from your site and from others, it looks like index/ETF funds are the way to go. The number of options has me slightly overwhelmed and obviously I’m not looking for professional investment advice, but rather your own assessment on my situation from past experience.
Firstly, here are some details as per the template about my situation:
Your gross/net annual family income:
£56,000 (pre tax)
Your monthly family spending:
On average, around £2000 – £2500 (based on approx £3000pm income after tax. After student loan is removed starting this month, monthly income after tax is roughly £3,200, so hopefully spending will remain the same and leave more for savings)
None – I finished paying off my student loan last month!
– Mortgage for flat in London:
£234,852.44 left to pay (purchase price 480k, deposit covered by family)
Monthly payments are around £1076pm (this is included in my monthly spending figure)
– Car – shared between 2 other family members (insurance approx. £1200py)
* Both of these assets are unfortunately necessary for my current situation, which I won’t go into in detail.
– Cash ISA with my bank – £17,300 (this is what I’d like to invest)
– Spread trading account – £5450 (initial deposit of £5000, that’s made around 10% profit in the last 2.5 months)
– Instant access saving account with my bank – £1000 (emergency spending)
In summary, I’d like to take £10,000 out of my cash ISA account and use it as a starting investment. The rest I’d rather leave in there for now for emergencies.
It seems almost obvious to build my portfolio around an Index/ETF fund – although I’m new to investing I completely agree with the logic that buying and holding shares of this type over long periods is an almost guaranteed win (I’m talking 10 years or more). What I’d like to do is have a long term index/ETF investment that’s designed to grow rapidly over time, and potentially at a later stage diversify into other investments such as IPOs and the like (not sure what your thoughts are on these).
I am however torn as to whether, for a long-term index fund, I might as well be putting 100% into equity and none into bonds – but on the other hand it seems I should cover myself somewhat.
I’d also like to add that I’m 28 now and I don’t plan on doing this to retire early (not until 40-50 at least anyway). What I think makes sense is to take my annual bonus (roughly around £10,000 after tax at the moment) and drop it into my portfolio to boost the rate of compounding. My main goal isn’t quite for retirement or the short term (next few years) but more for a good quality life around my mid 30s to 50s.
My final question – I’m quite concerned that I have left this opportunity to invest far too late. Obviously money for retirement is a given, but I’d really rather not save vast sums of money till I’m 60 and have a pretty cheap existence until then. Even looking at your figures, I’m not quite sure how you managed to raise a portfolio to >1m in under 10 years. Can you elaborate on ways to boost the standard growth rate given my most index/ETF funds? Is this more likely an effect of your rebalancing strategy?
Sorry for the text wall. I really appreciate your time and if you have any advice, I’d love to hear it!
Wait, CB, you’re only 28-years-old and you are “concerned you have left this opportunity to invest far too late?” Say what? And not only that, you’re planning to invest for the long term because you’re not looking to retire until you’re at least 40-50 anyway. So you have a runway of 12-22 years and you’re worried it’s too late?
C’mon dude. Don’t let the dreary London weather mess with your head. Read Starting over at 35‘s reader case and you’ll see that people who’ve been paying off debt this whole time and had to start over from scratch at 35 aren’t too late, so why would that be the case for you?
You paid off your student loan last month, so you’re at least 7 years ahead in terms of debt repayment. There, doesn’t that make you feel better?
Blegh. I just said “feel”. *Gag* Gross.
Okay, now enough talk about gross gross feelings. Let’s MATH THIS SHIT UP!
|Total Annual Income (after-tax)||£40,260.00|
|Total Annual Expenses||£30,000.00|
So, after plugging CB’s income into this trusty UK tax calculator , we get a after-tax income of $40,260 (if this is incorrect, CB is free to redo the calculations himself with his own numbers).
This means that with a yearly expense of £2500*12 = £30,000, you have a savings rate of 25.48%. Based on your expenses and the 4% rule, you’ll need £30,000 *25 = £750,000 to retire.
So with a conservative 6% return over the long term, if you invest all your assets, you’ll be able to retire in:
27 years. At this point, you’ll be 55 years old, which is about 5 years out from your 40-50 target. However, since your goal is not early retirement, this isn’t a bad thing.
But you also mention you have a £10K after-tax bonus he’d like to invest. Well, let’s see what happens to your portfolio if we deploy that, shall we?
With the extra 10K, CB would boost his savings from 25.48% to 40.31%, and enable him to invest 20,260.00/year. This doesn’t change how much he needs to retire, BUT it does shorten this time to retirement:
So instead of 27 years, he’ll be able to retire in 19! Shortening his time to retirement by 8 years and moving up his retirement age to 47. So yes, by the power of compounding, deploying that extra 10K will end up giving 8 whole years of your life back! To put that in perspective, it took us 9 years to retire and travel the world, so within that amount of time, a person could potentially start over from 0 and end up being just 1 year from retirement!
Which bring me to CB’s last question. How did we manage to raise a portfolio of more than $1 million in less than 10 years? And do we have some sort of magical formula for boosting our investment gains or tricks up our sleeves for rebalancing?
The fact that CB asked this question, basically exposes one of the biggest myths sold to poor, unsuspecting novice investors by the financial industry.
“The only way you can become a millionaire is by hitting a home run with insane stock market returns. I have just the product for that…”
No. No. A thousand times no!
The point of the Millennial-Revolution is NOT to sell you crap and try to convince you you’ll get 20% returns. These shitty products are exactly how unscrupulous advisors end up making themselves richer while making your poor. My job is to tell you the truth. Even if you don’t want to hear it.
Because in reality, when it comes to your time to retirement (TTR), savings rate matters a WHOLE lot more than investment gains.
Don’t believe me?
Just look at this chart:
This chart is showing the number of years to FI depending on your savings rate, and from it you can see that the number of years to FI decreases as your savings rate goes up.
But we’ve added a twist—the colourful lines represent different investment returns.
And based on this chart, you can see that everyone who saves 10% or less has to work 35 years or more, regardless of the market return. Even if you get a whopping 10% return, you’re STILL 35 years from retirement. Proving that there’s no bullet or shortcut to get you there in 10 years with a crappy 10% savings rate, even with consistent 10% returns in the market. And anyone who says they can get you risk free 20% returns, RUN, RUN AWAY FAST!
As your savings rate increases, that effect from investment returns is dampened even more. If you’re saving more than 75% of your salary (the circled area), you’re going to retire in 10 years or less, and even a jump from 1% return to 10% will only shave of 6 months to a year at most.
In CB’s case, if he invests the 10K after-tax bonus and boost your savings rate to 40%, you’re looking at a best-case scenario of 15 years with a 10% return instead of 19 years with a 6% return. A difference of 4 years. Not as much as the 8 years you were able to shave off by putting away an extra 10K a year. But again, the amount you save is within your control versus the 10% annual return, which is pretty optimistic and not something you can control.
He also wants to know whether he should use 100% equities. Well, given your 27-year time frame, putting a high allocation in equities makes sense, assuming you can stomach the risk of market fluctuations. However, we always advocate going with some bonds (90/10 or 80/20 instead of 100/0), so you have something to use for rebalancing during market downturns.
What do you guys think? What advice do you have for CB?