Seven years of Financial Independence

Most financial blogs about financial independence, or “FIRE” (Financial Independence Retire Early), concern themselves with the journey to reach that objective. By contrast I aim to discuss that journey towards “Getting Minted” but I also aim to discuss what happens next. That is the journey to financial independence and beyond. After climbing to the summit of financial independence the challenge then is to sustain your capital assets as you incur drawdown spending and to stay minted. I now have had seven years of that journey to report on.

I am not earning any income from employment and I have been in draw down, drawing down some of my financial assets each month to cover spending, since December 2013. 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, the “safe withdrawal rate” (SWR) and an equity index and tracker fund.

Inflation (RPI)

My chosen inflation index is the retail price index. After seven years the RPI index has increased by 16.18% (I have estimated the figure for December 2020).

“Safe Withdrawal Rate” (SWR)

This approach to drawdown 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. This “safe withdrawal rate” has increased from 4.00% to 4.65%, based on inflation from December 2013 to December 2020.

Equities (FTSE UK All Share)

My chosen equity index is the FTSE All Share total return index. After seven years the FTSE UK All Share total return index has increased by 31.25%. A typical unit trust tracker fund (M&G Index Tracker Fund Sterling A Acc) attempting to track the index had a total return of 27.53%. This is lower because of fees and tracking errors.

Capital

My capital has increased by 27.04% as shown in this table and graph.

	Opening	Inherited	Capital growth	Investment Income	Expenditure	Closing
2014	100.00	0.00	-0.43	3.53	-2.92	100.18
2015	100.18	0.00	-4.63	3.81	-3.31	96.05
2016	96.05	0.00	10.76	3.92	-3.86	106.87
2017	106.87	0.00	9.70	4.63	-3.90	117.30
2018	117.30	0.00	-12.32	4.89	-3.99	105.88
2019	105.88	0.00	15.63	5.38	-4.20	122.69
2020	122.69	13.95	-12.08	6.41	-3.93	127.04
	100.00	13.95	6.62	32.57	-26.10	127.04

[as % of 2013 assets]

This increase is 13.09%, and is 3.09% below inflation, if the inheritance is deducted.

This graph shows only the year end positions with all bar one being above the opening value. A graph of the month end positions shows some nineteen month ends, out of eighty-four, as being below the opening value. That is something to get used to if you’re invested in such risk assets.

The graph on the top right of my blog home page also uses only the year end values and that takes a lot of the mid-year drama out of the graph.

Income

My income has increased from 3.53% to 6.41% of my original capital and has exceeded the Safe Withdrawal Rate for the past four years.

Expenditure

My expenditure has increased from 2.92% to 3.93% of my original capital and has stayed below the Safe Withdrawal Rate in every year as shown in this table and graph.

	Inv Income	Expenditure	4% Rule
2014	3.53	2.92	4.00
2015	3.81	3.31	4.06
2016	3.92	3.86	4.11
2017	4.63	3.90	4.22
2018	4.89	3.99	4.39
2019	5.38	4.20	4.51
2020	6.41	3.93	4.61

[as % of 2013 assets]

Total return

	Total Return	Index	Tracker
2014	3.14%	1.18%	-0.31%
2015	-0.83%	0.98%	1.61%
2016	15.60%	16.75%	15.05%
2017	13.66%	13.10%	12.80%
2018	-6.45%	-9.47%	-8.95%
2019	20.24%	19.17%	18.27%
2020	-4.44%	-9.82%	-9.92%

[Total Return = (ending balance – ½ contributions + ½ withdrawals) divided by (beginning balance + ½ contribution – ½ withdrawals) minus 1 ]

I calculate that my portfolio total return has been 44.46%. This compares to 31.25% from the FTSE All Share total return index and 27.53% from the M&G Index Tracker Fund Sterling A Acc, a typical index tracker fund. My return would, however, be much lower than the return from global indices with their heavy US and technology weightings because of my preference for UK and Asian equities that pay out higher income.

Income growth

Income has grown by 87.074%. This compares well to inflation of 16.18% and expenditure growth of 24.20%.

Conclusion

My approach to drawdown has been to spend less than I receive from dividend income. I have been able to keep to that during the last seven years. In the last few months my property REIT holding cut its dividend. I sold another UK equity holding prior to a dividend cut. My other holdings in UK, global and Asia Pacific equities, and high yield bonds have all increased or maintained their dividends so far. Currently my expenditure is much lower than my dividend income so I can withstand some further cuts in dividends.

My main objective has thus far been income growth rather than total return. This was successful in that compound income growth was running at about 9% per annum up to March 2020. This was derived from increases in the dividends paid per share, from re-investing any unspent income, from re-positioning the portfolio towards higher yielding investments, and from investing in the higher yielding stock markets in the United Kingdom and Asia. Unfortunately, those last two steps amount to reaching for yield at the cost of impaired capital growth. My objective going forward now is to seek more capital growth whilst sustaining the current level of income. That means that dividend increases and dividend income in excess of expenditure can be used to buy new investments aimed more at growth. This may be a slow process.