It’s Friday, and you know what that means: Reader Case Time!
Today’s reader case comes from Jolly Old England. Well, it used to be Jolly. These days English politics is more about acrimious name-calling and people throwing milkshakes at each other if the news is to be believed, but regardless let’s get into it, shall we?
Firstly, thanks so much for sharing all your knowledge with us all; it’s greatly appreciated. Secondly, we would love your help on evaluating how quickly we could be financially free based on our current situation ?
We live in UK; near London. We are 35 and 41. We haven’t got children and not planning to have them at all. Our current mortgage deal is coming to an end and after reading your blog and hearing many other successful stories we are considering selling our house and use the money to invest instead could be an option for us. We all know / hear that another recession is on it’s way which could be a good opportunity to get on to the market at the’cheaper’ rate but also, it will be more risky… We know, you are not fond of owning property but we could consider buying again during the next dip (just a thought) :)?
The numbers below represent combined income and expenses:
- Gross/net annual household income:
- Total gross salary £113k (£53k & £60k) incl. health care, travel insurance, matching pension scheme etc.
- Monthly net income total: £5.8k (£2.7k lower as contributing £650/month towards a stock option scheme at work & £3.1k)
- Annual bonus total: £5k net
- Annual share dividends total: c.£1k per annum
- Monthly household spending: max £4k incl. mortgage (£1,6k – it should be lower once we remortgage), other bills like water, tv licence, electricity, tax (£300), holidays/weekend away (£800 ) , food (£200), petrol (£250), phones (£30). We cook at home, take own made lunches, eat out – once or twice a month when there is a deal available (£100-£150) ?
- Vehicle insurance / tax – £2k per year (2 cars)
- Debt: no debt except the mortgage of £189k. Current rate is 3.19% but after remortgage (due in June) the rate could be between 1.44% (variable) or 1.89% (fixed for 5 years) with 3% penalty charge on the balance if we decided to cancel it before. The cost of remortgaging is between £999. Based on our rate of payment (we managed to pay 17 years of mortgage in 9 years), we could pay this mortgage off within the next 6-9 years if our job situation remains or improve.
- Fixed assets: House value is between £500k – £550k. We have two cars: 13 years old Mazda MX 5 worth not more than £3k and 5 years old VW currently valued c.£12k). We use both cars to get us to work.
- Investments and savings:
- me: £56.7k (maxed out by me and the employer, cannot touch it until I’m 55 & 65)
- my partner: £230k ( this is to be double checked as it’s defined benefit scheme as we had a problem to find the value of his pension)
- Stocks in companies we either worked or currently working in : £42k
- Gold & silver (actual coins and bars): £26.6k
- Crypto (I know your take on it but we have it so I am including it) £6.8k
- Cash: £117k:
- Me: £39k
- £20k is in cash ISA which I need to move to stock & shares ISA (tax free savings account), £10k (in checking account to cover any emergencies)
- £4k I’ve started trading options in plan to replace my full time job in the future,
- £5k currently doing nothing in checking account (to be invested)
- My partner: £78k
- £18k will become available in June from share scheme (to be invested),
- £20k in cash ISA to be moved to stock & shares ISA,
- £40k in premium bonds (most likely it could provide better return invested in the market)
If we remortgage now our monthly rate would be £1.3k/month. If we sell, we would have around £300k in equity which could be invested long term. Instead, we could rent a 2 bed place for around £1k – 1.2k/month + bills £300. This will be a downsize from 4 bed detached house to an apartment or semi-detached property which we wouldn’t mind if this step could bring us freedom in the long run ?
Given that we have savings / emergency fund in place, we think that we could put an additional £2k/month towards investing.
So, how quickly could we potentially retire if we sell and invest the equity + top it up monthly by £2k vs. if we don’t sell and start investing with the currently available cash + monthly top us?
We are really interested to hear your findings 🙂
If our scenario could help your readers, we don’t mind your sharing it in your blog.
PS. I am polish and I was so happy to read about your experience in my home country ?I am glad you enjoyed the food and your time in Poland and I hope I could show you some other parts one day, who knows? ?
I actually enjoy these international ones quite a bit. The basic principles of FIRE are universal, but each country has their own specific quirks that need to be untangled and the UK is no different. First of all, apparently on OS X you can type the £ sign using Option-3. See? You just learned something new already!
And second, there are quite a few differences between the UK retirement system and US/Canada that affect the analysis. For example, like the US and Canada, they have a governent-run pension system named a State Pension. They also have employer-sponsored pensions named Occupational Pensions. Unlike the US/Canada, however, these tend to be defined-benefit schemes rather than contributory systems like we have, which is why our reader alluded to the difficulty in figuring out how much money was in there: To get a single number for a defined-benefit pension you have to do a present-value calculation which involves lots of math, actuarial tables, and what not. The point is, it’s not as straightforward to figure out how much is in there.
Most importantly for us, though, while in the US/Canada it’s possible to access those funds at any age (with some hoop-jumping if you’re American), in the UK there’s no way to get to it before the age of 55. This complicates our analysis.
But before we get into that, a few things jump out at me.
Pick an Investment Strategy!
UKFIRE’s investment strategy is, to use the technical terminology, a bloody mess.
They’re simultaneously trading options, owning individual stocks, have a safe full of gold and silver bars, AND crypto!
This is a recipe for confusion and will become impossible to manage as your portfolio gets bigger. Pick a single investment strategy and stick with it!
Here are Millennial-Revolution.com we advocate for a balanced and diversified portfolio of index ETFs which we write about in our Investment Workshop as that’s the one we know best (and has worked out great for us). If you want to go about this doing options trading or crypto (barf), I can’t help you with that since I don’t do it myself, but either way your first step should be to consolidate your money into one strategy.
Beware Domestic Bias
US investors often take this for granted since their stock market is the biggest one in the world, but investors who live elsewhere have to be really careful of something called Domestic Bias. Basically, it’s the tendency of people to invest the majority of their wealth in their home country since it’s the one they’re most familiar with, and if you live in a smaller country like Canada this can make your portfolio overly concentrated on a relatively small market. That’s why the majority of our equity holdings are non-Canadian.
This is even more important if you live in the UK. I’ve been following the Brexit debacle with a morbid curiosity and it’s a right bloody mess (their words, not mine). For those of you who aren’t caught up, Westminster has been twisting itself in knots trying to extricate themselves from the EU, mostly because parliament can’t agree on how to actually do it.
The ruling Tory government’s plan has been voted down multiple times. A no-deal crash-out was also repeatedly voted down. Then a series of indicative votes were held to try to find a parliamentary majority for a way forward, which failed. Then the Tory government tried to reach out to the opposition Labour party to try to find a compromise, which failed. Then Theresa May suddenly resigned, paving the way for a leadership contest and a possible ascension of a hard-Brexit leader like Boris Johnson or Jacob Rees-Mogg. Meanwhile Jeremy Corbyn, the Labour leader, is facing increasing pressure to formally back a second referendum due to his party’s drubbing in the EU elections, which might overturn Brexit altogether.
In short, nobody knows what the bloody Hell’s going to happen in the UK, and as a result it’s even more important to make sure your investments are diversified outside your home country. Using a simple world index like Vanguard’s VT ETF would be a good start.
What To Do About The Bloody House?
So onto our reader’s central question: What to do with their house? Should they keep it and refinance their mortgage? Or sell and free up the equity?
The nice thing about doing a FIRE analysis is that it actually makes complicated decisions like this simple, because it translates a decision involving multiple confusing metrics into one metric that everyone understands: time. How long does it take to retire if I do A vs. B?
So without further ado, let’s MATH SHIT UP!
|Income||£113k gross, £69,600 net|
|Expenses||£4000 per month|
|Net Worth||£500-550k house, £287k pension, £192k investable assets|
Again, because the amount in the pension can’t be used until 55, we can only count the money in UKFIRE’s other investments towards early retirement. I’m assuming here that they liquidate all their different investment schemes and consolidate it into ETFs.
Now, that £4000 monthly expense looks pretty nasty, but they mentioned that after they refinance their mortgage payment should drop from £1600 a month down to £1300 a month. That makes their post-refi monthly expenses £3700. Also, they mentioned that they’re 9 years away from paying it off, so in 9 years that £1300 expense will go away completely, which drops their expenses down to £2400. That’s important since the £2400 amount is what they need their portfolio to cover each month.
So by taking this post-mortgage amount, their FI target is £2400 x 12 x 25 = £720k. How does our projection look?
Note that the table shows 2 savings rates. The first 9 years UKFIRE should be able to save £5800 – £3700 = £2100 per month or £25,200 a year. After the mortgage is paid off, their savings should jump to £5800 – £2400 = £40,800 a year.
And for shits and giggles, I also ran the analysis if they paid off the mortgage and that actually made it worse. It’s because their new mortgage rate is so low (1.89%) that they’re better off not paying it off and investing it instead.
Now let’s see what happens if we sell the house.
Our reader estimates that after fees, they would net £300k from their equity. They would then rent a 2 bed place for £1200 per month. That changes a few things.
First, their monthly expenses would become £4000 – £1600 (old mortgage) + £1200 (new rent) = £3600. Because the rent is permanent rather than an expense that goes away like the mortgage, that raises their FI target to £3600 x 12 x 25 = £1,080,000. Yikes.
BUT it also increases their savings rate to £5800 – £3600 = £2200 per month, or £26,400 per year.
And most importantly, it raises their starting portfolio balance from £193k to a whopping £493k!
So how do all these factors come together and affect UKFIRE’s time to retirement?
A little over 8 years! Looks like selling and renting will save them 3 years to retirement!
So there we have it. 11 years to retirement if UKFIRE refinances and keeps the house, or 8 years if they sell and invest.
Oh and let’s not forget about that Occupational Pension. In 8 years, UKFIRE’s partner will be 49, so just 6 years later that pension gets unlocked and dumps another giant bucket of pounds into the bank account. This is one of those few times that I go “Eh, don’t worry about sequence of return.” Having a couple hundred thousand pounds rain on you does that.
So what do you think of UKFIRE’s retirement plan? Let’s hear it in the comments below!
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