Revisiting the race for FIRE

The never ending puzzle of forward planning, solved? (credit)

So some idiot started a blog and said in their first post that it was entirely possible for him to retire by 40 if he so wanted to. While he has detailed some of his story and financial history so far, he’s never really revisited that previous statement and tried to extrapolate out whether he’s actually likely or not to hit his targets. That original post was actually based on an old spreadsheet I’d devised a couple of years ago and have been adding monthly updates to – but I haven’t revisited the actual plan itself.

Having somewhat recently turned 31, I thought I should take a closer look of what my current position is, how things may continue (or not) and what obstacles or hurdles may stand in my way to the FIRE goal line.

The current situation

Having paid off my car loan now (woohoo!) my monthly essential expenses are down to around £1,200 a month or £14,400 a year. Essentials to me are defined as either “bad stuff will happen if I don’t pay them” (mortgage, council tax, utility bills, food) or “luxuries I am prepared to pay for in modern life” (broadband, mobile phone plan, Netflix, etc.). My wife and I split all household related bills 50/50 – so her monthly spend is actually less than mine as she’s not commuting right now, doesn’t own a car and doesn’t have expensive hobbies!

The first three levels of Maslow’s Pyramid should be covered by the above (credit)

At this level of spending (£28,000-ish for the two of us per year), my wife and myself could live quite happily day to day and not worry about the basics. I wouldn’t say it would be a life filled with with exotic adventures abroad and 5-star dining experiences – but we’d be okay if we never had to go to work again if we had a passive income equal to this amount. And we could still see our friends and family and have fun (tick for level three of the pyramid)!

I’ve actually decided to aim for around £12,000 a year as my half of the “essentials covered” passive income floor. There’s a couple of reasons for this:

  • Roughly £9,000 of that £14,400 is mortgage payments and that number will drop in 5 years (we’re on an aggressive repayment schedule)
  • We’ve invested money into bringing some of our costs down already and will do more in the future (petrol, electricity usage, gas usage)
  • My car insurance is very high at the moment (£1,000+) and this will drop as the car ages and electric cars become more mainstream (the cost of being on the cutting edge)

Based on much finger-in-the-air guessing and some reading at Monevator, I’ve settled (for now) on a 3.3% Safe Withdrawal Rate (SWR), meaning that for a passive income of about £12,000 a year I would need about £360,000 of capital invested. I think I will need more than that personally, but it’s a good starting point to try and calculate from.

So let’s dig a little deeper into the problems I’m going to face in the next 9 years.

Problem #1: I have an outstanding mortgage of about £150,000 (my half)

This isn’t as bad as it seems as just by making my mortgage payment every month, the capital amount owed drops by about £7,000 every year. Having also read the tale of the Ermine struggling to manage his money between silos, I also see the benefit in holding off paying a small amount, say £12,500, of my half of the mortgage in case we have liquidity problems in the future.

That does still mean I need to find an extra ((£150,000 – £12,500) – (£7,000 x 9 years)) = £74,500 to overpay the mortgage in the next 9 years. This is equal to an extra £8,300 a year or about £690 a month of additional payments I’ll have to fund. I could divert my ISA contributions for a few years and do this easily, but then I’m giving up a hell of a tax break with the growth the ISAs could have. I’m not sure both is possible for me right now so it’s the age old question of investing verses paying off your mortgage.

Problem #2: Are we going to have children? How many? And when?

Needless to say, this is a very personal decision and I won’t be delving into any details here beyond saying we don’t really know, but our house has room to spare for them if/when we decide. Also, kids are expensive I’m told.

Problem #3: I probably won’t be able to access my pension till I’m 60

It’s extremely hard to plan 30 years out as all the rules with tax, pensions and anything related to finance will probably have changed by then. So at a rough guess, if I continue my pension contributions as-is until I am 40 and then let it continue to compound until I am 60 with no further contributions (a stab in the dark guess of when I can access my private pensions) then I should have in the region of £1 million. This assumes a 4% after inflation yearly compounding. This would provide roughly £33,000 a year of pre-tax income which sounds like a lot of fun money to me!

My problem is bridging the gap between 40 and 60. With a wild assumption that my yearly costs will be in the £12,000 region and if I’m running down the ISA in those 20 years then I would need about £240,000 saved in my ISA when I turn 40. If the current ISA allowance stays the same, at £20,000 a year, then I can potentially still make this. All it requires is putting the £1,666 a month into my S&S ISA for the next 9 years and I’ve made it! I’ve managed to max it out the past 3 years – can I do this for another 9/10…?!

Putting this all together

Putting aside the children question, here’s what my monthly outgoings would have to look like to stand a chance of hitting all of the above:

Money SiloAmount to Contribute (Monthly)
Outgoings (inc. mortgage)£1,200
Mortgage Overpayment£690
ISA Contribution£1,666
Pension Contribution£1,800*
Total:£3,556 (exc. pension)*
A rough guide on how much it would take to reach the above goals
*The pension contributions will stay the same, that 40% tax break is too good to give up

I earn good money – but it’s not that good. I could contribute less to the pension but I’d find it very hard to give up the 40% tax break just to chuck the money at my low interest rate mortgage. If I stick with keeping the pension the same, keep my outgoings about the same and keep maxing the ISA I would probably owe about £80,000 on my half of the mortgage when I’m 40. Looking up how much a 2% mortgage for 20 years would cost on that amount gives me a monthly figure of £405 compared to my current £750 a month, so there’s some wiggle room in there!

Based on all of the above I would estimate that it’s still doable for me to hit my “essentials FIRE” level by the time I’m 40, but I can make it easier on myself by overpaying the mortgage whenever possible if I have some spare cash sitting around. The gap from 40 to 60 would be the hardest, but once I hit 60 then it would be an easy ride through the remainder of my life. There’s a heck of a lot of assumptions in that sentence and I could get hit by a bus tomorrow, I know, but it’s better to have a rough plan than none at all!

The #1 reason most Daily Mail readers say they won’t bother saving for a rainy day (credit)

The happy unconsidered upsides

While those assumptions and figures up above are accurate for right now, there’s a few things that I haven’t taken into account that could swing things my way positively!

I’m still fairly young (so I tell myself) and am entering my prime earning years. If I’m still earning in 9 years time what I am right now, then something might have gone horribly wrong (or I cut my working days down to four or something, who knows). I have the technical certification to progress to the next level now and once I have some more experience I’ve already been told I’ll be put forward for promotion which is always nice to hear.

None of the above factors in any bonuses that I may (or may not) receive. The past few years I’ve been putting them straight into my pension but I may ease off and hit the mortgage more as it is by far my biggest monthly outgoing, dwarfing everything else. I never count on the bonuses though – they aren’t guaranteed.

And of course the big one is, I may not actually ever completely quit work. I like my job for the most part – the people are smart, funny and enjoyable to work with. The pay is pretty good and while there is a high amount of travel (less so at the moment), I do find it pretty nice to have a clear divide between “work time” and “home time”. Again though, the children question rears its head as I certainly wouldn’t want to miss them growing up by being away all the time. Then again, I could switch into a new job if I wanted to…!

So if I may give myself a small dose of optimism – I think I’ll be okay whatever happens when I hit the big 4-0. I hope that work becomes 100% optional, but I’m also okay if it’s merely 80% optional.

Any tips or suggestions from you, the reader?


2 thoughts on “Revisiting the race for FIRE

  1. Here’s an alternative. Aim to pay your mortgage capital off with the pension PCLS. For a fellow at 31 you have 29 years to go till you can get hold of that. You can offset the mortgage to reduce interest rate costs and rises, though at the moment it’s hard to make a great case for that. Paying capital from the pension PCLS means you pay it from the gross salary, but also the value of the capital will have been eroded, it will be less than half its current value in real terms, and possibly less if inflation is high for any time over that 29 years. And you get to invest the capital over three decades.

    Clearly you want an answer to servicing the interest if interest rates go up, but that will be in a while, and probably not going to happen overnight. In the mean time, depending on your risk tolerance, you could invest the (taxed) money that you would put into the mortgage offset in an ISA. Sure, you may say then you could be a forced seller into a bear market if interest rises, but interest rates are likely to rise slowly, so you could run your investments out over time to reduce your mortgage interest in the offset. Plus policy doesn’t tend to jack interest rates up in/after a market crash, although 1992 was a harsh exception to that rule.

    Avoid a sequence of short-term two or three year fixes unless you know you are going to remain employed, however – pay the higher interest rate for an offset that lasts several years. And renegotiate it before it comes to the end if you are going to retire or you see a hazard of losing your job in the offing.

    You need some answer to what happens during periods of unemployment, though for a young ISA saver then either pausing or withdrawing offset mortgage repayments and/or running down some of the ISA could help. I would be tempted to hold more money in the offset at high market valuations and less at low valuations, because market crashes are more likely at high valuations and correlate (with a lag) with the increased hazard of job loss.

    The kids choice is very important, however, to the arc of your FI/RE journey. You cannot set long term direction until you have bottomed that out. As an example, the above strategy would be a little bit nutty in the face of such a huge change in the financial situation, because it sterilises a lot of your earnings for pretty much the entire duration that your kids will be dependent on you. You would chart a different course for that journey.

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    • Thanks for the detailed reply Ermine! While I mostly agree with your scenario – you are of course assuming that the PCLS will exist in 30 years and hasn’t been removed by a future government or caps placed on it or something else. I’m generally debt adverse and stretching a mortgage over 30 years just seems… wrong to me? I know interest rates (right now) are low but… yeah paying more interest due to the longer time period doesn’t feel right. Mathematically you’re correct assuming equities returns are higher than the interest cost.

      We’re on a 5 year fix at the moment so we’re in no rush right now but will consider our options when the time comes. Part of me wants to pay it off ASAP, make bank by investing heavily in equities when ~66% of my outgoings have been reduced and then mortgage to an off-set just before FI if I decide I need a bunch of cheap cash. We currently have enough savings combined to keep the lights on for >5 years so… decisions, decisions…

      As to the kids part – it may be down to “are we doing it or not” at some point 😉 I have a colleague who’s just had her first at 35 – when I asked her about it she said “when you’re ready, you’ll know”. I just may not be ready yet.

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