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Do you have a vision of your future? Do you know where you want to be in five years or twenty-five years, or do you take one day or one year at a time?

In considering a path to financial freedom it is helpful to have a vision of reaching that destination. It is useful to believe that you can reach that destination. This can help to provide the motivation needed to make the commitment that is necessary to get there. Your vision could include the idea of the prize being sought. This could mean being able to live and pay your bills without going out to work. It could encompass owning a property you live in and other possessions to satisfy your desired lifestyle.

Your vision could be created incrementally, piece by piece. It could begin with the idea of an emergency cash fund to cover a job loss or similar crisis, that could sustain you for a few months. It could grow to the idea of paying down or even paying off your mortgage debt. It could involve creating an investment portfolio that could provide passive income equal to a slice of your employment income. This portfolio could grow to become something that replaces all of your employment income.

Negative thinking such as thinking that this is all a pipedream is not helpful. If you have read any newspaper reports of how people have achieved these things in the past, then this is helpful to your vision. Sometime such newspaper reports emerge after someone has died and they have left a large bequest and yet those who knew them did not imagine them to be wealthy.

I remember reading just such a report back when I was still at school. As a sixth form student I delivered the Sunday papers and I stopped to read some of them including this story. It said that someone who had been assumed by those who knew him to be poor, because of his frugal ways and his old clothes, had died and left over £1 million. This money was invested in shares and it was thought that he had been very careful to save money and to invest it in shares. This showed me what could be possible.

A similar case was reported in the USA in 2015, when Ronald Read who had worked as a gas station attendant and as a store janitor died aged 92 and left an estate of $8 million mostly to Brattleboro Memorial Hospital and Brooks Memorial Library. It was reported that he invested in dividend-producing stocks, avoided the stocks of companies he did not understand such as technology companies, and was a buy and hold investor in a diversified portfolio of 95 holdings in mostly blue-chip stocks.

Closer to home in the UK in 2014, Vincent Evans who had served in the Royal Navy died aged 90 and left nearly £2 million entirely to Sherborne Abbey. It was said that “He was sociable and had a lot of friends. He lived very simply in a modest bungalow and drove a fairly elderly car. The money was in investments.”

These reports show the possibility of building a significant investment portfolio over a lifetime of saving and investing. This can be a part of your vision.

You can live on 4% (so far so good)

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I’d like to say more about my experience so far of living on 4% (or thereabouts) of my drawdown funds each year. Five and a half years ago I quit my job with a view that I could live on my existing assets if I chose to. I finished work in December 2013 so I regard 1 January 2014 as the start of this new phase. Apart from a two-week assignment in 2014 I haven’t worked since then and I’m not minded to seek work at present, although I don’t absolutely rule it out.

One of the reasons I quit when I did was because I felt I had enough. Financially I felt I had enough assets to live on. At that time the natural income of my investment portfolio had just exceeded my spending. I had reached and gone past the cross-over point as mentioned in “Your money or your life” by Joe Dominguez and Vicki Robin. Working on would have produced more cash than I felt I needed based on my current lifestyle.

I had read of the 4% “rule” – the so-called safe withdrawal rate. That gave me comfort that 4% was a reasonable level of drawdown. My portfolio then, and now, is mostly based on equity income investment trusts with a typical net dividend yield of around 4%. I knew with investment trusts that some income earned is held back from payment in a revenue reserve in better years so it can be released in order to pay the dividend in less good years. These trusts often have long records of maintaining and increasing their dividends. One leading trust has increased its’ dividend every year since 1966. This gave me confidence that the investment income I had in 2013 would be maintained and should increase over time. Historically it had beaten inflation going back twenty years or more.

I wasn’t assuming I would spend less when not working, but I was thinking that I didn’t need to spend more and could maybe spend less, and within reason I could choose when to spend anything significant. This was all of some comfort.

I have shown in the tables below how things have worked out so far in the five years to 31 December 2018.

2013 to 2018 - 4% Rule versus Dividends

Year endAssetsRPI4% RuleDividendsSpend
as % of 2013 assets

The first table compares dividend income received and spending incurred against the guidance of the 4% “rule”, with the percentages calculated on the opening asset balance. I have uprated the 4% rule column each year using the RPI inflation measure. My current natural yield (4.89%) is now above what the “4% safe withdrawal rate rule” would suggest (4.39%) and also above the best flat rate annuities for my age (3.80%).

2013 to 2018 - Assets, Dividends and Spend

Year endAssetsGrowthDividendsSpendSpend %
as % of year average assets

The second table shows the dividend income received and spending incurred, with the percentages calculated on the average of the opening and closing asset balances for each year. I have also shown spending as a percentage of income, and the growth (or decline) in the asset total.

Dividend income has been stable with an average yield of 3.96% and a range from 3.52% to 4.38%. Capital returns, including unspent income, have been more volatile with average growth of 1.47% and a range from -9.74% to +11.27%. Relying on the dividends enables me to be more relaxed about these capital fluctuations. Not selling the shares enables me to benefit from future capital growth and from dividend increases. Spending about 13% less than the natural yield has allowed me to reinvest a little.

I have chosen to invest in investment trusts in the UK equity and bond income, property direct UK, Asia Pacific excluding Japan (income), global equity income, and UK equity income sectors where the average dividend yields for each sector range from 5.9% to 3.9%. I am consciously selecting from a subset of the world market. I believe my chosen subset can match or beat the FTSE All Share index but not the global index at present. I reference my own returns as an equity investor from 1985 to 2018 and the published historic returns of my main holdings in coming to this view.

Going forward I see two possible threats to my approach. Firstly, inflation in the prices of what I spend my money on. Recently this has been of the order of 2% or 3% and the Bank of England is targeting inflation (CPI) of 2%. In the 1970’s, however, I remember much higher inflation and looking at the history of certain of my investment trusts it is true that their dividends didn’t keep up with inflation in those years. Inflation as calculated is based on a specific basket of goods and hence of continuous consumption. I reckon that my basket of goods will not match that of the statisticians, but more importantly I can choose to take less in my basket if I have to.

Secondly, the consistency and stability of taxes and the financial freedoms that we now enjoy could change. A future Labour government could threaten this with policies that could have an adverse impact on the UK economy, the UK stock market and UK dividend returns, and also a tax and nationalisation regime that could be a threat to investors. You can mitigate the some of this by investing overseas but you may not be able to avoid some of it. These concerns would, however, apply also to other strategies such as total return.

In summary given stability of prices and taxation and government policy generally then I am confident that my approach will suffice. Given the numbers so far it is so far so good.

Driving in my car

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Having a car can be a significant benefit to an individual or family but can represent significant costs being incurred. A car can be one of the top five household expenditures but it is one where we can have and make some choices.

A car incurs an initial purchase cost, and an interest cost or opportunity cost depending on whether funds are borrowed or not. Petrol, servicing and repairs, insurance, and tax are ongoing running costs.

The first choice is whether to have a car or not. This choice can be impacted by where one lives, the availability of public transport, one’s time of life, and one’s lifestyle in terms of work place, leisure activities and holidays. As a student and young worker in a large city it didn’t occur to me to have a car because of the need to use public transport to get to college or work. Later on, it became a useful option when taking up a job outside of the big city.

The second choice is about a new or second-hand car. I was fortunate enough to have the use of company cars for about 30% of my working life – although the company car tax was a burden. My first company car was, however, second hand so I had the opportunity to experience that before I was able to pick a brand-new vehicle. When opting out of the company car situation I chose to buy outright a second-hand car of a lower specification as a conscious lifestyle choice. I wanted to step away from the big new company car in favour of a second-hand medium-sized car that I would be wholly responsible for. This was symbolic of career and job choices I was making at the time.

A third choice is about funding a car purchase. I have chosen to never borrow to buy a car. If I couldn’t afford a car then I wouldn’t have one was my view at the time. Then later as mentioned I bought a second-hand car outright. Later as that car approached a mileage of one hundred-thousand I opted to buy outright a brand-new car of similar or slightly higher specification. This was a conscious lifestyle choice again and reflected the time of life I had reached. A key follow-up decision from this was to continue to run this car which I have now had for over fourteen years and over ninety-four thousand miles.

A significant cost to having a car is depreciation but by running a car for longer, even if bought from new, that cost can be brought lower as an annual cost. The same is true of any interest costs. I have not really considered the opportunity costs of a car purchase, i.e. could I have saved and invested the purchase cost and earned a return of 2% or 8% per annum from that. If one considers that then it may act as a further pause for thought.

There are some steps to take to minimise running costs. I always consider insurance costs via a comparison website to ensure that these costs are kept as low as possible. I have maintained membership of a lower cost rescue service and also check that on a comparison website. I have chosen to have car services, MOT’s and most repairs at a franchised dealer and whilst that has proved expensive at times, I am not disappointed with that approach. I have at times referred to websites that advise on the best local petrol prices but have generally opted for what is a convenient location.

A key choice on buying a car is of the brand and class of car. After some early ideas of having a big-name brand I have preferred to go for lesser name brands that have a reputation for reliability. Having had larger family cars as company cars I have opted for medium family cars when purchasing my own car. One needs to check the storage capacity and the people carrying capacity, which were mostly the same! One helpful thought on this is that our smaller cars have been easier to park.

In conclusion I would say that car choices are a part of one’s lifestyle choices. I have chosen to have a car (and a good one) but not an over-expensive ostentatious car. I have chosen cars that have facilitated and not conflicted with my chosen aim of financial security leading to financial independence.

I can share some of the financial numbers that measure my choices:

Costs per year: Purchase cost £949 (so far), Petrol £912, Services £547, Insurance £280, Tax £163. Total £2,851.

Can you live on 4%?

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The 4% “safe withdrawal rate” (SWR) is often mentioned on financial independence blogs (e.g. Monevator) or in books (e.g. Reset). I view it as a guideline based on a specific historical model. I prefer to use natural yield as my guide. Having ceased paid work just over five years ago I have now calculated how that has worked out for me so far.

The 4% 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. Some commentators suggest this draw down should be reduced to between 2.5% and 3.5% based on current high stock markets and to allow for fund expenses and taxes. Others suggest that a 4% draw down will leave you with a richer legacy to pass on in most cases.

Based on the original capital this 4% approach would start at a 4.00% withdrawal in year one and based on the UK retail price index (RPI) would have increased to 4.06%, 4.11%, 4.22% and 4.39% in the following four years.

The natural yield on my draw down portfolio started at 3.53% and has increased to 3.81%, 3.90%, 4.63% and 4.89%, calculated on the original capital value. This has been helped by a recent tilt to higher yield investments.

Interestingly both the above guidelines average 4.16% per year on the original capital value. The natural yield began 12% below the SWR (3.53% versus 4.00%) but is now 11% above it (4.89% versus 4.39%).

We can now consider how these guidelines compare to what was actually drawn down and spent. Being cautious in year one only 2.92% was spent, but this rose to 3.31%, 3.86%, 3.90% and 3.99% in the following years. This was an average of 3.60% per year on the original capital value and represents 86% of the SWR and 86% of the natural yield.

We can also look at how capital values have moved. Over the five years capital growth was only 3.07% but income exceeded draw down spending by 2.81% meaning that overall capital was 5.88% higher. This shows to me the importance of re-investing some income where possible and not spending capital gains.

Overall over the five years RPI Has increased at a compound rate of 2.42% (just ahead of the Bank of England target), spending has increased at a compound rate of 4.66% (after a low start), but investment income has increased at a compound rate of 7.38%. I’m pleased that the natural yield of income has grown to exceed that of the RPI and of my spending.

I am using tax free ISA’s and capital gains and income tax allowances to minimise taxes. My natural yield is after incurring individual investment trust charges. Low platform fixed fees and minimal transaction charges (as well as any tax charges) are included in my spending.

I aim to remain flexible on both spending and investing according to future circumstances and will use natural yield as a guideline.

The Brexit blues

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The news is full of Brexit news this week with various parliamentary votes happening. There is much concern about whether we leave or postpone or remain, and whether we have a deal or not. I don’t want to get into all that but I do want to consider the investment situation. There are many global issues of concern but Brexit is more particular to Britain and seems to be depressing UK share prices.

According to a Citywire commentator “the UK stock market, which has relatively little connection with the domestic economy is cheap, dirt cheap, trading at a 30 per cent discount to global stock markets and yielding comparatively more than government bonds than at any time in the past 100 years.” According to Investors Chronicle magazine this week the FTSE All Share index has an average dividend yield of 4.27% which is higher than most other markets excepting Australia and Russia.

My way of considering value for money in investment is to look at the dividend yield of investment trusts I would consider owning (or do own). As of yesterday, City of London (CTY) and Edinburgh Investment (EDIN), the two largest investment trusts in the UK equity income sector were yielding 4.4% and 4.3%. By comparison in the global equity income sector Scottish American (SCAM), Henderson International Income (HINT), and Securities Trust of Scotland (STS) were yielding 3.1%, 3.5% and 3.6%. (Murray International (MYI) yields 4.4% but has more of a bias to Asia Pacific, Latin American and emerging market equities.)

My thinking is that the UK is cheaper than global equities from this brief sample with an average 4.35% yield versus an average 3.40% yield. £1 of income is 22% cheaper on these figures. Also, many of the UK registered companies held by these trusts will have global interests and these trusts also hold a small percentage of their assets in non-UK shares.

Looking at the recent history of City of London and Edinburgh Investment from their annual accounts they have only had significantly higher yields at year-end, i.e. above 5%, in June 2009 and June 2010 (CTY), and in March 2009, March 2010, and March 2011 (EDIN), in the aftermath of the financial crisis of late 2008. Those who bought CTY and EDIN ten years ago have enjoyed, I estimate, around 12% to 13% per annum compound growth.

On a simple analysis, I regard any opportunity to buy City of London (CTY) on a yield above 4% should be considered. Given its’ over fifty-year record of yearly dividend increases it suggests you can maybe lock in a safe withdrawal rate of 4% from these dividends.

In conclusion if one can ignore the political and macro-economic background these shares do look cheap to me and are worth considering for purchase. You may think they will get cheaper still, but as ever do your own research.

What did I give up on stopping work?

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These thoughts are inspired by a post from a US blogger I follow on four things he gave up to retire early. According to him the four things given up were power/influence, big beautiful house, international travel, and guaranteed financial security. I will comment on these four and two more of my own.

I feel that I had my time of “power and influence” in the workplace and have been there and done that. I peaked in my career relatively early (in my thirties) in achieving a senior role and holding it for eight years in a growing and successful small-medium company. I wasn’t so keen to keep doing that so felt able to drop back into supporting roles in mostly larger companies for the second half of my career. I then felt able to drop out of working altogether after thirty years of it. I had moved away from having or wanting power and influence long before I stopped work.

Houses and travel are all about choices and trade-offs when working. Paying off the home mortgage felt like a better choice than buying a bigger house when striving for financial independence. We did, however, make it so far up the property ladder and had some good luck on the timing of things. As with the career we peaked early on housing (in our thirties) and didn’t strive for more thereafter. As house prices got much higher, with the differential price of a bigger house rising, that was a disincentive too. We were settled in our big enough house and were not motivated to move to a bigger house long before I stopped work.

On travel we have travelled a bit internationally, and can do a bit more in the future. We probably should have done a bit more when we were working so I regret that a little. We can’t travel more in our thirties anymore because that time has gone. We can only consider it for our fifties or later. Travel was not a big priority for us at the time, so I only have a little regret. I think I retain some (but not all) choices on travel now I’m not working. Whether working or not these choices would narrow anyway as time moves on.

Security can be considered on different levels and can be elusive whether working or not. Things change. I feel I have financial security although there is no guarantee. As I gained more financial security, the security of a job was not something I especially sought in my later years in work. Earlier on I had seen a three month notice period as a benefit, later I came to see it as a burden. At the end I only had one month’s notice to give in order to make my exit.

Healthcare provision in our country (the UK) gives our family some protection and confidence that is maybe lacking for those in other countries. We haven’t taken out health insurances and have no issues at present. Residential care costs towards the end of life pose a potential concern. I believe these would be manageable but they would reduce the value of any inheritance we leave.

What I did feel that I consciously gave up was the opportunity to earn more money. The one (or five) more year syndrome if you like. I did consider the amount that five more years of my take home pay would represent but I then decided that it wouldn’t make a lot of difference to my life at that point. Five years on I hold to that view. In striving for financial independence, I did not have an expectation of a lavish lifestyle and I still don’t. By having a more modest lifestyle it has been easier to get to financial independence and easier to live with it.

A second thing that I consciously gave up was the opportunity for further challenge and recognition in the workplace. I am still interested in challenges but I recognise that I am now seeking them outside of the workplace.