I’m a financially independent, 50-something, UK based, man who wants to share what I have learned. It’s one year on since I started this blog. I’ve been a bit quiet lately because of some distractions in the rest of my life, but I’m hoping to write more soon.
I’m pleased that I have kept it going for a year and have been able to express my point of view on certain topics. I’ve written 26 posts and garnered over 3,000 views. I’d like to think my writing has been of interest and has maybe been helpful to some readers.
I’ve struggled to write as much as I feel I should say, and as much as I feel I have to say. I feel I have been on the path to financial independence and beyond for over 35 years now so I have formed many views on these topics which I will try to put into words in future posts.
This is an update on my previous reviews of four and six months ago.
A total return for the year of 20.24% growth, slightly above the FTSE All Share total return index growth of 19.17%, results after draw down expenditure in a capital uplift of 15.87%.
Source: Pixabay
Six years
of drawdown results
As I am not earning any income from employment any more, I am in draw down in that I am drawing down some of my financial assets each month to cover our spending. I have been in draw down since December 2013 so the six years since then will be the main time period under review. My five key performance indicators in this review are capital, income, expenditure, total return, and income growth. My key comparisons are with an inflation index, an equity index, and the “safe withdrawal rate” (SWR).
Inflation (RPI)
My chosen inflation index is the
retail price index. I have chosen this one because it has the longest history,
it is perhaps more inclusive than other rival indices, it tends to be higher
than these rivals, and is favoured less by politicians. In 6 years the RPI index has increased by 15.23%
(I have estimated the figure for December).
Equities (FTSE UK All Share)
My chosen equity index is the FTSE All Share total return index. I have chosen this one because I live in the UK and the majority of my portfolio is invested in UK equities. This index also has a history that extends back to when I started investing in 1986. In 6 years the FTSE UK All Share total return index has increased by 45.53%. If I chose to invest in funds that attempt to passively replicate and track the index these would return less than the index because of fees and tracking errors. A typical unit trust tracker (M&G Index Tracker Fund Sterling A Acc) had a total return of 41.56%.
“Safe Withdrawal Rate” (SWR)
This approach suggests taking an income, or drawing down, only 4% of your available capital in year one and then increasing that amount by inflation each year.
Capital
My capital has increased by 22.69%. This compares to an increase in RPI inflation of 15.23% (I have estimated the RPI figure for December).
Year end
Capital
Growth
RPI
Growth
2013
100.00
100.00
2014
100.18
0.18
101.62
1.62
2015
96.05
-4.13
102.84
1.20
2016
106.87
11.27
105.41
2.49
2017
117.30
9.77
109.75
4.12
2018
105.88
-9.74
112.71
2.70
2019
122.69
15.87
115.23
2.24
as % of 2013 assets
Income
My income has increased from 3.53% to 5.38% of my original capital. This compares to the income according to the “safe withdrawal rate” which has increased from 4.00% to 4.61%, based on inflation from December 2013 to December 2019.
Year end
4% Rule
Income
2013
3.43
2014
4.00
3.53
2015
4.06
3.81
2016
4.11
3.92
2017
4.22
4.63
2018
4.39
4.89
2019
4.51
5.38
2020
4.61
as % of 2013 assets
Expenditure
My
expenditure has increased by 32.87%. This is more than double the inflation
increase and reflects some choices made in 2015/2016. I would be prepared to
undo some of those choices in the future if that were needed. In the meantime I
take comfort from the fact that income growth has exceeded this expenditure
growth.
This year my spending as a percentage of my income is 78.10%. Expenditure is running at an annual rate of 3.67% of the average asset value during the 2019 year.
Year end
Income
Expenditure
Growth
RPI
Spend %
Expenditure
2013
108.40
100.00
100.00
92.25
-3.52
2014
111.58
92.27
-7.73
101.62
82.69
-2.91
2015
120.61
104.79
13.58
102.84
86.88
-3.38
2016
124.12
122.16
16.58
105.41
98.42
-3.81
2017
146.58
123.34
0.97
109.75
84.14
-3.48
2018
154.75
126.19
2.31
112.71
81.54
-3.57
2019
170.13
132.87
5.29
115.23
78.10
-3.67
as % of 2013 expenditure
as % of year average assets
Total return
The portfolio total return has been 51.17%. This compares to 45.53% from the FTSE All Share total return index and 41.56% from the M&G Index Tracker Fund Sterling A Acc, a typical index tracker fund. I can’t compete with the total return of global and US equity indices because of my preference for UK and Asian equities.
Year end
Total Return
Growth
Index
Growth
Tracker
Growth
2013
100.00
100.00
100.00
2014
103.14
3.14
101.18
1.18
99.69
-0.31
2015
102.28
-0.83
102.17
0.98
101.29
1.61
2016
118.24
15.60
119.29
16.75
116.54
15.05
2017
134.39
13.66
134.91
13.10
131.46
12.80
2018
125.72
-6.45
122.13
-9.47
119.69
-8.95
2019
151.17
20.24
145.53
19.17
141.56
18.27
Income growth
Income has grown by 56.94%. The portfolio income yield has increased from an annual rate of 3.82% in 2013 to 4.70% in 2019. This is calculated on the average asset value during the year.
Year end
Income
Growth
RPI
Growth
Income Yield
2013
100.00
100.00
3.82
2014
102.93
2.93
101.62
1.62
3.52
2015
111.26
8.10
102.84
1.20
3.89
2016
114.50
2.91
105.41
2.49
3.87
2017
135.22
18.10
109.75
4.12
4.13
2018
142.75
5.57
112.71
2.70
4.38
2019
156.94
9.94
115.23
2.24
4.70
as % of 2013 income
as % of year average assets
Conclusion
My current
main objective continues to be income growth rather than total return. Compound
income growth is running at about 8% per annum. This is derived from increases
in the dividends paid per share, from re-investing any unspent income, from
re-positioning the portfolio towards higher yielding investments, e.g. high
yield bonds and commercial property, and from remaining focused on the higher
yielding stock markets in the United Kingdom and Asia. I have had to steer
clear of lower yielding markets such as the USA.
Markets seem
buoyant since the election but some concerns are ongoing and volatility in
capital values is always a possibility. If that were to happen then I will aim
to stay invested on the basis that any volatility would be short lived and the
investment trusts I hold should be able to maintain or even increase their
dividends.
Income growth has stalled a little in the last two months as I took the precaution of going global and also increased my cash holdings. I currently want to further raise my portfolio income but I expect to move towards more of a total return objective in the years ahead.
Last month I wrote about beginning to go global as I increased my non-UK exposure in response to the unstable political and economic situation. The impending general election could have resulted in a change of government to one much less supportive of business and of investors. In early November therefore I reduced my UK exposure from 58% to 52% as a precaution and I had plans ready to reduce this further depending on the outcome. In early December I sold a little more of my UK holdings in order to hold more cash.
As we now know such fears of a Labour government or hung parliament have proved to be unfounded and the Conservative government has won a landslide victory. In my view such a decisive outcome means that both the Brexit stalemate and the Labour threat are removed. Some Brexit uncertainty remains as to the shape of a future trade deal, but overall the UK is now a better place to be invested. Having reduced my UK exposure, I am now cautiously increasing it.
One week after the polls closed the FTSE All Share total return index is up by 4.2%. My portfolio has risen by 3.6%. This is acceptable to me given that I have some exposure to bonds and property and to international equities and that my UK exposure had been reduced to 52%.
Even after this “Boris bounce” following the general election UK equities are still relatively cheap compared to global and US equities. As at 19 December 2019, I calculate that buying £1 of income is 31% cheaper in the UK than it is globally, and 34% cheaper in the UK than in the US. The same calculation also shows the UK to be only 5% cheaper than Europe and only 9% more expansive than the Asia Pacific region. This is based on the dividend yield of selected income investment trusts. These show an average yield of 4.80% for Asia Pacific trusts (HFEL, AAS, SOI), 4.40% for UK trusts (EDIN, CTY), 4.20% for a European trust (JETI), 3.03% for global trusts (HINT, STS, SCAM), and 2.90% for a US trust (NAIT). I am still persuaded that UK equities offer good value but now I do want a few more of my eggs in that basket.
The latest information on these investment trusts can be found at the AIC website under find and compare investment companies. You can then filter on a particular AIC sector or else search a trust name or TIDM code (e.g. CTY).
After my changes last month my portfolio looked like this:
Investment Trust Sector
Portfolio %
UK %
Non-UK %
NDY %
UK Equity Income
38.78
33.09
5.69
3.67
Asia Pacific Income
21.90
0.32
21.58
4.98
Global Equity Income
21.09
1.68
19.41
4.11
Property - UK Commercial
9.02
9.02
0.00
7.67
Debt - Loans & Bonds
8.42
7.39
1.03
7.65
Total
99.21
51.51
47.70
4.76
Note: Data is from my portfolio and from the AIC website as at 7 November 2019.
I now intend to leave my bond and property holdings unchanged but to reduce my global and Asia Pacific exposure and increase my UK exposure. Having added certain trusts in the global and Asia Pacific sectors just last month I intend to keep all of my holdings in these sectors but to trim the size of some of them. My non-ISA holdings are all in UK trusts and will not be changing. My ISA holdings are spread across three platforms and my increase in UK exposure will ensure that each platform has some UK exposure as well as some global and/or Asia Pacific exposure. I have initiated some trades this week and am now awaiting confirmation of them, but they should result in an increase in UK exposure of about 5%. This will bring my UK exposure roughly back to where it was two months ago. Arguably I should have not made any changes before the election, and I would not then need to make any changes now. That, however, is hindsight and I don’t regret my approach to this. This situation actually served as a good prompt to review my portfolio and consider how I would go global with my portfolio if that were needed.
All these portfolio changes and the raising of cash levels will likely curb the income growth from the portfolio in the last two months of this year. Income growth has been more of an objective for me than capital growth over the last six years. In the new year I expect to make further progress on that income growth once these portfolio changes are behind me. I expect UK, Asia Pacific and selected global equities to continue to provide good income and good income growth, so I will continue to invest in them. I may add further to my UK position as further events unfold. Although subject to some Brexit uncertainty continuing as trade talks proceed, I think UK equities will continue to make progress.
On BBC’s Question Time TV programme, last week in Bolton, a man earning over £80,000 criticised Labour’s higher tax policy. He believed (wrongly) that earning over £80,000 didn’t put him in the top 5% of earners. That incorrect claim was swiftly rebutted. This led to a wider debate in the media.
I was interested to read that according to Torsten Bell, director of the Resolution Foundation: “You may need to earn only £80,000 to join the 5% club for earners, but that’s unlikely to ever be enough for you to join the top 5% club by wealth. To achieve that, you need housing or savings of almost £1m – which you’ll probably have to inherit or marry rather than earn. That’s the result of our stagnant incomes but soaring wealth of recent years.”
I commented elsewhere that I think many in the FIRE community (those seeking, or having achieved, Financial Independence Retire Early) will disagree with that pessimism on wealth building. I think someone earning over £80,000 in income should eventually accumulate over £1 million in wealth from reasonable saving and investing.
A follower of FIRE blogger Mr Money Moustache saving 31% of salary would look to be able to retire after 28 years of work on 70% of salary. This is based on 5% investment returns after inflation. You can run this calculation on the networthify calculator, or in an excel spreadsheet.
I used these annual figures in my calculations:
Gross salary £80,000
Income tax £19,500
NI £5,654 (UK current position at 29/11/2019)
Net Salary £54,936
Savings £17,030
Savings rate 31%
Spending £37,906
This gives the following year by year growth in net worth:
Year
Net Salary
Spent
Saved
Growth
Net Worth
1
54,936
37,906
17,030
426
17,456
2
54,936
37,906
17,030
1,299
35,785
3
54,936
37,906
17,030
2,215
55,030
4
54,936
37,906
17,030
3,177
75,237
5
54,936
37,906
17,030
4,188
96,455
6
54,936
37,906
17,030
5,249
118,734
7
54,936
37,906
17,030
6,362
142,126
8
54,936
37,906
17,030
7,532
166,688
9
54,936
37,906
17,030
8,760
192,479
10
54,936
37,906
17,030
10,050
219,559
11
54,936
37,906
17,030
11,404
247,992
12
54,936
37,906
17,030
12,825
277,848
13
54,936
37,906
17,030
14,318
309,196
14
54,936
37,906
17,030
15,886
342,112
15
54,936
37,906
17,030
17,531
376,674
16
54,936
37,906
17,030
19,259
412,963
17
54,936
37,906
17,030
21,074
451,067
18
54,936
37,906
17,030
22,979
491,076
19
54,936
37,906
17,030
24,980
533,086
20
54,936
37,906
17,030
27,080
577,196
21
54,936
37,906
17,030
29,286
623,512
22
54,936
37,906
17,030
31,601
672,144
23
54,936
37,906
17,030
34,033
723,207
24
54,936
37,906
17,030
36,586
776,823
25
54,936
37,906
17,030
39,267
833,120
26
54,936
37,906
17,030
42,082
892,232
27
54,936
37,906
17,030
45,037
954,300
28
54,936
37,906
17,030
48,141
1,019,470
Net Salary
Spent
Saved
Growth
Net Worth
Total
1,538,208
1,061,364
476,844
542,626
1,019,470
So, it may take 28 years and a savings rate of 31% but it is possible for someone who is just inside the top 5% of earners to accumulate over £1 million in wealth or net worth. This is a simple calculation and doesn’t allow for any earlier and lower earnings and savings, nor any later and higher earnings and savings. It ignores any contribution from employer pension contributions, or from house price growth.
The savings rate equates to our £80,000 earner effectively living on the equivalent of £50,638 of gross pay. At a marginal tax and national insurance rate of 42% the £17,030 of net pay saved is equivalent to £29,362 of gross pay. This saving of £17,030 in net salary is asking the top 5% earner to live on the earnings of a top 12% earner. This is based on government statistics from 2017 which showed that you needed £75,300 to be in the top 5% and £49,600 to be in the top 12%.
Moreover, the net worth accumulated would support a 4% “safe withdrawal rate” of £40,779 which is in excess of the annual spending of £37,906. Assuming that this net worth is all or mostly tax sheltered in an ISA or pension or is only subject to the 7.5% dividend tax then tax would be minimal and less than this excess. After the 28 years financial independence would therefore be achieved.
If you are able to earn at that 5% level but spend at that 12% level then based on these assumptions you can accumulate the net worth to become financially independent and to continue to live at that 12% level.
This also works for lower earners who can save that same percentage of their net salary. Someone earning £40,000 in gross pay would need to save so as to live on the equivalent of a £25,983 in gross pay. Spending would be only £21,208 but saving £9,528 each year should grow and accumulate to £570,381. This would then support a “safe withdrawal rate” of £22,815.
At all levels of earning you would need to be able to spend significantly less than you earn, as in these examples, in order to achieve financial independence and be able to retire much earlier than is the norm. That should be easier to do the more you earn but it requires the commitment to do it. Maybe that was what Torsten Bell thought would be unlikely. What do you think? How likely is it that someone can follow this path to the destination?
I had moved
to London to start my first proper job in my early 20’s. At first, I moved into
a hostel and shared a room and ate in a communal dining room and watched TV in
a communal lounge. It was a more downmarket version of my student hall of
residence from an earlier year.
Nevertheless,
I had started a job and was earning money, serious money it seemed, so I could
start planning. Even before coming to London to work I had looked at property
articles and adverts in the newspaper and was starting to form an idea of what
was possible. The estate agent’s windows near my hostel showed properties that
were out of reach, but there were magazines that promoted new build flats not
too far away that seemed a possibility. A new studio flat could be bought for
about 3 ½ times my salary in some areas. I had some savings, no debts, and felt
able to ask my parents to help a little in the guise of tax planning. My bank
would lend me just under three times my salary and with parental help I had a
20% deposit which meant I didn’t have to pay a fee for having a high level of
mortgage debt.
As a first-time homebuyer the idea of a new build with some built in furniture and appliances appealed to me. At that time the cheapest new build flats in the London area were on reclaimed marshland but I found that this was an area of completely new property quite some distance from amenities, shops and the train station. There was one other development elsewhere on a former industrial site in an established area with shops, amenities and a train station within a ten-minute walk. This was the one I chose. I remember my parents being supportive but quite concerned as I put down a stakeholder deposit of £100 to reserve my flat just six weeks after moving to London to start my first proper job. Later on, writing my deposit cheque, the first four figure cheque I had written, I had a rather sleepless night as I considered how much I was spending and committing.
Source: Pixabay
With
hindsight, I later realised that this was in some ways a reckless move that could
have quickly gone wrong if my first real job had not worked out or if living in
the capital had not suited me. On the other hand, it was in some ways a bold
move that committed me to my job, my location, and to home ownership. I was on
the property ladder. In the next few years it seemed to be a good move as
property prices rose rapidly in the mid to late 1980’s. In some years my small
flat made more money than I did in my job. As I progressed in my job and my
earnings grew, I was able to move up to a bigger two bedroom flat. The capital gains
from the first flat meant that I had over 40% equity in the second flat. The
mortgage was now for less than 60% of the value of the property and represented
three times my salary.
For a time, property prices continued to rise in the late 1980’s and peaked as changes were made to tax relief on mortgage interest. Then as interest rates rose up to 15% property prices fell significantly in the early 1990’s. My second flat developed a building problem that involved protracted monitoring and remedial works that meant we couldn’t move on from it until these were resolved. I remember noticing that ten years after buying my first flat the price for flats in that same development, which had doubled, had now fallen by half, back to the price I paid. Shortly thereafter we were able to move on from the second flat but I had to sell it at a loss. Most of my 40% equity was lost and I had just about broken even on my first decade in property having experienced boom then bust. I could have probably rented for that time and emerged in about the same financial position. Others we knew at the time were less fortunate. They had only experienced the downturn which had given them negative equity where their property was worth less than their mortgage debt. They had to save up to make up the difference if they wanted to move. More than ten years after my sleepless night I had experienced and survived a property market cycle.
Last month I wrote about reviewing the situation. I was reviewing my 58% exposure to the UK against some possible alternatives. I was doing this because of the unstable political and economic situation arising from the Brexit impasse and the prospect of a general election. I wanted to have a plan ready in case I decided to reduce my UK exposure as events unfolded.
The general election could result in a change of government to one that is much less supportive of business and of investors. I’m surprised that there has not been much commentary in the mainstream media about the possible need to diversify away from the UK because of this. Maybe there is some complacency there. The odds of a Labour government may be 20/1 at present but I believe I should consider this as a possible black swan event.
UK equities
are still relatively cheap compared to global and US equities. As at 13 November
2019, I calculate that buying £1 of income is 33% cheaper in the UK than it is
globally, and 37% cheaper in the UK than in the US. This is based on the
dividend yield of selected income investment trusts. These show an average
yield of 4.60% for UK trusts (EDIN, CTY), 3.10% for global trusts (HINT, STS,
SCAM), and 2.90% for a US trust (NAIT). I am still persuaded that UK equities
offer good value but I don’t want too many of my eggs in that basket.
At the end of September my draw-down portfolio looked like this:
Investment Trust Sector
Portfolio %
UK %
Non-UK %
NDY %
UK Equity Income
50.05
42.74
7.31
3.96
Asia Pacific Income
19.72
0.27
19.45
4.86
Global Equity Income
14.77
1.33
13.44
4.50
Property - UK Commercial
8.83
8.31
0.52
8.00
Debt - Loans & Bonds
5.77
5.45
0.32
7.50
Total
99.14
58.10
41.04
4.79
Note: Data is from my portfolio and from the AIC website as at 26 September 2019.
Trusts can
hold some investments outside of their sector, e.g. a UK trust can hold up to
20% outside of the UK, which is why I needed to look into the geographical
distribution of each trust in preparing this summary.
My first
actual step just over three weeks ago was to reduce UK equity income and
increase bonds. Last week I made further reductions in UK equity income and
increased global equity income and Asia Pacific equity income. Some of my
global and Asia Pacific selections had lower dividend yields but the increase
in bonds has maintained my dividend income at about the same level. I was
constrained in these actions by about 26% of the portfolio being in non-ISA
accounts and all invested in the UK equity income sector where I didn’t want to
incur capital gains tax on some substantial unrealised gains. Also, these non-ISA
holdings that I have retained are in lower yielding trusts so my UK dividend
yield percentage is now lower.
The portfolio now looks like this:
Investment Trust Sector
Portfolio %
UK %
Non-UK %
NDY %
UK Equity Income
38.78
33.09
5.69
3.67
Asia Pacific Income
21.90
0.32
21.58
4.98
Global Equity Income
21.09
1.68
19.41
4.11
Property - UK Commercial
9.02
9.02
0.00
7.67
Debt - Loans & Bonds
8.42
7.39
1.03
7.65
Total
99.21
51.51
47.70
4.76
Note: Data is
from my portfolio and from the AIC website as at 7 November 2019.
There have
also been some dividends re-invested and some small movement in share prices
that is reflected in this table.
The changes between late September and now are analysed in this table:
Investment Trust Sector
Portfolio %
UK %
Non-UK %
UK Equity Income
-11.27
-9.65
-1.62
Asia Pacific Income
2.18
0.05
2.13
Global Equity Income
6.32
0.35
5.97
Property - UK Commercial
0.19
0.71
-0.52
Debt - Loans & Bonds
2.65
1.95
0.70
Total
0.07
-6.59
6.66
These changes
represent about one-third of what I was contemplating. Overall the reduction of
UK equity income sector by 11.27% has resulted in a reduction of only 6.59% in
my UK exposure. Total UK exposure of 51.51% rather than 58.10% does give me
more comfort against the possible headwinds. I also maintain good exposure to
the UK in case my concerns prove unfounded. I am not yet ready to reduce my UK
exposure to below 50%.
This exercise
has forced me to widen my investment trust holdings in the Asia Pacific income
and global equity income sectors and leaves me poised to increase these
holdings in the future if necessary. The difficulty in future may be in selling
the non-ISA UK holdings and incurring capital gains tax, and in selling the UK
property and bond holdings and thereby reducing my portfolio income. I don’t
want to take these steps if I don’t feel that they are absolutely necessary.
Depending on the situation after the election on 12th December I could be making further increases in my global exposure or alternatively increasing my UK exposure and in effect reversing these recent changes. This is my record of my current thinking about my investment situation and it may not be suitable or appropriate to anyone else’s circumstances.
