Want to FIRE? Be like the Dude…

It occurred to me that before Mr Money Mustache there was a man. 

 

‘Sometimes, there’s a man, well, he’s the man for his time and place. He fits right in there. And that’s the Dude, in Los Angeles.’

 

Not only is the Big Lebowski my favourite film of all time, but it is also a cult classic. I must have seen the film over 20 times and I enjoy it every time. For those of you not familiar with the film, it was released in 1998 and follows Jeffery Lebowski aka “The Dude” as he and his hapless friends Walter and Donnie try to solve a mystery of a kidnapped wife of the “Big Lebowski” after he crosses path with the wealthy Jeffery Lebowski in a case of mistaken identity. 

Big+Lewboski+Jeff+Bridges

The thing about the Dude is he doesn’t work. He spends his time drinking White Russian cocktails and bowling. He is certainly Retired Early and one must assume he is Financially Independent. 

 

The film never explains how he maintains this life of leisure from a financial viewpoint. It is said the Coen brothers deliberately kept that a mystery, and I like that as knowing his financial history would have taken away from the mystique of the Dude. There is a theory that the explanation for his idleness is that his father invented the Rubik’s cube and he lives off the royalties from this; however, he lives a somewhat frugal lifestyle so I’m not sure that would be true as Rubik’s cubes are very popular and sell millions a year. 

hero_Big-Lebowski-image

No, I think the Dude at one time decided he was going to FIRE and saved and invested and lived frugally. He worked as a roadie for Metallica (“fuckin assholes”) in his younger days so probably saved a fair bit. All he had to do was stick it in a Vanguard account and there you go. 

 

I’ve always been envious of the Dude’s lifestyle and attitude to life so maybe through FIRE I can achieve the same end. I’d love for people to dismiss me and assume I’m poor when I have several million in the bank. That side of FIRE really does appeal to me. I’d be happy to be out there “taking it easy for all you sinners.”

 

I’m going to channel my inner Dude and keep on keeping on and save that money. 

 

Have you ever wondered about the finances behind a film character? Leave a comment below and let me know.

My decade and the most important thing to achieve a healthy financial life.

This decade has been the first decade where I have been a fully-fledged adult for the entire time. There have been many ups and down, as I’m sure anyone will have experienced, through out. For me the following landmarks occurred:

 

Ups:

  • Moved to London for the second time – 2010;
  • Obtained my status as a Chartered Civil Engineer – 2012;
  • Bought my flat in London – 2012;
  • Started studying Law – 2015
  • Met my girlfriend – 2017;
  • Took a gap year to study for the Bar – 2017;
  • Called to the Bar – 2018;
  • Discovering FIRE – 2018;
  • Travelled to Australia, South America, Malaysia and USA plus many more countries.

 

Downs:

  • Getting Divorced – 2013;
  • Father dying – 2016;
  • Grandmother dying – 2016;
  • Finding myself tied to a leasehold flat in a very difficult situation 2014- present;
  • Various relationship break downs;

 

So in all, it has been a bit of a rollercoaster, but I can look back and be proud of my achievements. The ups outnumber the downs, but its not that simple.

 

 

How do these relate to financial success?

 

The fascinating thing I find with reading various FIRE blogs and Reddit is how young people are. I am continually impressed when I see someone who is 28 and has £60k+ in the bank (or more!). They seem to have their head screwed on in a way I was incapable of back then.

 

I am hardly old but I have had more than my fair share of life experience by age 36. By looking back to how I viewed life at the start of this decade and how I look at it now I realise how different a person I am now. Certainly, a bit wiser! Reflecting on my decade has highlighted to me the importance of having a good life partner to achieve your financial goals.

 

I wish very much that I had discovered FIRE at some point in the past. Indeed, I think I was not far from the path to FIRE and may have found it many years back had a few things not set me off course. Life seems to have a way of throwing spanners in the works.

 

Back in 2010 I lived in Doha, Qatar earning tax-free salary with my company giving a generous allowance for travel and accommodation (no rent!). I saved enough in the three years there for a deposit on a flat and some more, and also did a lot of travelling and partying.  It was a pretty dull place to live and the temptations of a fancy cocktail bar or staying in a plush hotel “because I deserve it” due to the day to day suffering you endure was ever-present. If you ever fly Qatar Airways, I helped build the runways at their big new airport. I think my savings rate was around 50% and I spectacularly blew the rest on the high life and 5-star hotels. When you are that age you imagine time to be infinite and for some mega promotion to occur which will solve any financial issues, but of course, that doesn’t happen to most people.

 

In my defence, I was relatively frugal compared to others my age some of whom would compete to see who could spend their entire salary first. People also went mad and bought expensive cars on finance (which I did not). I put it down to being completely bored in an inhospitable country. Looking back I genuinely think that a 95% savings rate would have been feasible if you went extreme but that’s another story.

 

I got to a point where I had £45k in my bank account at age 26 and realised that I could quit my job (something I thought about every day as I hated living there) and live for about 2-3 years on that money. I also had a backup plan to go to India and live off that for the next 10 years if the shit hit the fan (it was after 2008 remember and Dubai was a sinking ship). It was a good feeling and a mini FI for me, but I did not feel happy with my life there. I think this is when I understood the phrase “money doesn’t buy you happiness”.

 

While out there I got married way too young to someone who didn’t know what they wanted and eventually hurt me big time by demanding a large chunk of money from me at the divorce. I accept a portion of blame for the relationship breakdown, but it caused a lot of stress. Not only that, the flat I had bought with a mortgage assuming two incomes was now only being paid by me which destroyed my ability to save. I had to get a lodger in to rent the spare room just to make ends meet. Going from the ‘high life’ to feeling totally and utter trapped was a low point for sure.

 

Fast forward to 2020 and I am now in a great position with a loving and caring girlfriend with whom we share similar values and can see a great future ahead. Having been in relationships with several people in the last decade (often reeling from one screwed up relationship to another) I have learned a lot about myself and what is good and bad. Most importantly I’ve learned having a successful personal life is key to having a successful financial life.

 

Take this example. I dated someone for a while just after my father died who was on paper, great. Went to a great school, had a good job in the arts (however, not that well paid). She lived in a Thames-side one-bed apartment which must have cost around £2200pcm. This was probably more than her take-home pay. Her father heavily subsidised her life and I quickly learned that she expected me to do so too. I think of all the wasted expenses and money spent on eating out and holidays and shudder (as I do when I think of her!). Despite being from a wealthy family she was hopeless at managing money. In fact it was around this time that my debt skyrocketed as I was certainly living beyond my means probably to try and compensate for the grief of my father’s passing. Needless to say, this relationship ended bitterly.

 

I am happy to report that my wonderful girlfriend is frugal and fiercely independent and insists on paying her way. I have no debt and I feel better mentally and financially as a result. I will never take this for granted!! We have bonded over saving money and really enjoy things like cooking meals at home.

 

What I think a lot of the younger FIRE members don’t realise is how important it is to have a relationship with someone on the same page as you. Some people luck out and find the right person early on which is great, however, if like me you have a few cock-ups along the way then it makes it hard to focus on FIRE as you are struggling to deal with mountains of stress and dismay in the other areas of your life.

 

I often wonder about people that FIRE on their own and whether that is a barrier to entering a relationship.
It has been a decade of growth and learning and I feel that all things considered, I’ve done a lot and achieved some very long term and challenging goals. I have gone from a frugal man (forced) to a spendaholic and back to a relatively frugal man (chosen).

 

The main thing is I’m glad I can look forward to the next decade and know that I have a strong partner to journey through life with. I hope that at my next decade review in 2029 I’ll be reporting that I’ve FIRED and am loving life!!

 

 

2019 year end

Last 2019 post

 

December was incredibly busy for me and I hope you will excuse the lack of a post until now.

 

My girlfriend’s sister has been visiting and we have been busy entertaining her. That involved a trip to Dublin for a weekend and then Scotland for Christmas and New Year.

 

Along with a very busy December at work, I have finally tied up some financial loose ends.

 

I have consolidated two pensions from former employers into a SIPP. This tidies up my finances and I hope will save money on fees. Previously I was paying 0.5% on the pension from my first employer. It had been sitting doing nothing (except growing to be fair) but it was time to sort it out. I also had another pension combined that was on 0.3%.

 

I am paying £120/year for this pension flat fee and have gained £250 cash back for making the transfer so basically it will be free for 2 years. It is with Interactive Investor whom I also have my S&S ISA.

 

Disappointingly, after I started the transfer process, which was tiresome, Vanguard announced their SIPP. Never mind, I can always transfer later but thanks to the cashback offer there is no need.

 

I now have my current workplace pension which needs to remain to get their contribution and one from my last employer which I have not been able to sort out as yet. I need to contact the provider of my former employer to find out about the tax rebate they should do before I move it.

 

It turned out it was a bit of an admin nightmare to get the transfers done. I suppose in some ways that is a good thing as it means it’s harder for fraudsters.

 

The exciting thing is I now have to decide how to invest this money…

On the downside, my lodger has let me know he is leaving. I’ve been renting out my spare room to a lodger for £500/month (mid-week only) which can be claimed tax free under the rent a room scheme. He commutes from Holland for work in London and has been there for 2 years so it’s quite sad he will be going as we all got on great. He was working in a bank in London and they fired him on his last day before Christmas. Absolutely shocking.

It drives home the underlying goal of FIRE to gain independence from a job (and someone else’s cruel decision).  I don’t know what he will do – he has two children and a wife to support in Holland. Hopefully, he put away some money. I also had a chat to him about FIRE every now and again but I don’t think he was sold on it so not sure if he was putting money away. However, he is a smart guy and well qualified so I think he will get another job.

From a selfish point of view, it also means I have less spare money to invest. I don’t think I’ll be getting another lodger for now so I expect my savings rate will drop.

My girlfriend has also taken a pay cut to do another job she will hopefully enjoy more. The pay cut should only be for a while (12 months) until she finishes a Masters degree the new company are paying for at which time her pay should be more than she was on in her last job. If anything this temporary reduction in income will make us more frugal so is a good thing!

 

2019 brief review

 

I will do a better review when I have some time in January but for now I will do a brief overview.

At the start of the year, I made some goals, one of which was to pay off my debts. I did this by September. Unfortunately, I have misplaced the notepad I wrote them down in so cannot recall the other goals! So I think they were:

  1. Pay off debts;
  2. Obtain a legal training pupillage;
  3. Renovate my bathroom.

My net worth is up from £265k to £324k (up 23%).

This is due to paying off debt and saving more. I paid off £37000 of debt and saved more into pensions and ISAs. It also includes mortgage debt reduction. I have not included any increase in my home equity (as I believe it has not increased in value!).

My FIRE fund has grown from £102k to £125k . A solid 23% increase mainly due to the bull run in the markets.

I am very pleased with this progress and will continue to save as much as I can…

In January 2019 I had £37000 of debt. This was causing me some concern. My savings rate was 13% which I thought was ok at the time!

I have ended this year with a savings rate of 57% with a peak of 85% last month.  Over the whole year it has averaged 41%. I am beyond pleased.

The other goals I have failed to achieve but I have removed the tiles from the floor in the bathroom. After receiving quotations for £12k to redo my bathroom I decided not to…

Pupillage is a long-running dream of mine and I will not give up.

Watch this space for 2020 goals!

We are all going to enjoy ourselves in Edinburgh at the street party this evening so I will wish you all a very happy new year in advance.

RE: The problem with FIRE

My FIRE journey is approaching 1 year old. I first came across FIRE around this time last year by reading a New York Times article about it and was completely inspired. I set about doing it right away. I chucked some money into a Stocks and Shares ISA before realising I was making a false start. I had to pay off my vast debt before anything else and now I’m actively investing.

 

Over the past few months, I have had a niggling pain in my side about the whole process. Although I am completely enamoured with the FI part, the RE end is what is bothering me.

 

I think I have come to understand what it is that is causing me an issue.

 

Firstly, I should say I am highly enthusiastic about obtaining financial independence. The benefits are clear in that you are beholden to no one and you are free from the shackles of work.

 

Retiring early is, in theory, a great thing. When you rock up to work on Monday morning wishing you could continue the weekend, it never seems more appealing.

 

I may be speaking from a position of privilege as I have a professional job, but work is good for you in many ways. Beyond making money, you have a daily challenge, meet interesting people, and can have a sense of achievement once you have done something.

 

In my line of work, managing the design and construction buildings, it is rewarding to finish a job. Yes, the journey there is often a war of attrition, but overall it can be a very interesting and rewarding job.

 

Is giving that up in my mid-forties, at a time when real success is likely to come knocking, really going to make me happy? Giving up decades of hard work at the peak of my career is likely to be something that would be quite depressing.

 

I feel like if I was 10 years younger retirement would allow me to undertake some sporting challenges, but I’m getting older. In 10 years I will likely have kids and be in my mid-40s. I won’t be able to do the physical challenges I once thought I could do. I’ll also have mouths to feed!

 

However, with success comes time commitment. It may be that spending more time with my family (yet to have one…but fingers crossed!) will be the reward. FIRE will give me the choice.

 

I know lots of wealthy people who work by choice. My old boss was married into the Pilkington glass fortune. They were so rich that they sold some vases they had in the family home for around £20m. I oversaw him on his iPad once looking at his current account. It had £140k in it. He came in every day, worked and had a jovial attitude to work. He perhaps could see it for what it was rather than a financial need and I think that led to him enjoying the challenge. I think this is where I would like to be once Financially independent.

 

Going forward, I am going to strive for FI but maybe take it easy on the RE part. If I retire at 50 that would probably be great. After all, they say the Devil makes work for idle hands…

 

Savings update Nov 2019     

It’s that time again – my savings update. This month I put a lot of effort into developing a spending tracker so I can accurately calculate my savings rate. I had previously been using a theoretical savings rate based on my budget. However, as we all know, sometimes we go a bit off course and I need the data to reel that back in. I now have that data but first the figures in a spreadsheet.

 

The Figures

 

My Saving rate for Nov 2019 was 84%.

 

Yes, I was as astonished as you perhaps are. I actually thought I had made an error, but no, I have achieved this.

 

My investments increased by £6199 in one month. Again, I am astonished. It is more than my salary already. (Sorry for the small size!)

november assets

How did I calculate this?

 

Very simply, it is as so:

 

((Total Income – Expenses) / Total Income) * 100 = Savings rate.

 

If expenses are (Total Income – Investments) then the formula becomes.

 

(Investments / Income)*100 = Savings rate.

 

I back-calculated my savings rate to give the following:

nov 2019 SR

As you can see, a general increase throughout the year (with a few hiccups along the way!).

 

Key points of the month

 

Several significant things happened this month; firstly, it was the first month with increased pension contribution. I am putting away 14% of my salary. This has the benefit of increasing the amount of tax I claim back (which counts towards the savings rate). My employer puts in a higher amount than my previous employer too which increases the savings rate even further.

 

I also invested £1600 into my S&S ISA.

 

All these things made my savings rate higher.

 

On a down side, was hit by a bigger tax bill in my salary than expected (thanks to my old employer totalling the annual taxes rather than paying out the average PAYE). This left me with £600 less than I was expecting. Combined with the increased pension contribution, this is putting a squeeze on the budget as my new employer whacked it out my pay. Payroll say it will be back to normal next month.

 

Finally, I had a massive expenditure on a skiing holiday I’m taking in February which became due now. This was expected and budgeted for,but was a lot of money to handover. It counts as expenditure, but It was from my savings.

 

Otherwise, this month has been fairly quiet for me and I was very happy with my spending until the end of the month when I got the double whammy of holiday and less take home.

 

Spending tracker

 

To make my spending tracker I have used the Emma personal finance app. The app links up to my bank accounts and automatically categorises my expenses real-time. It then provides a monthly total for each category against a budget. I have simply used this as the basis for my spreadsheet.

spending nov 2019

 

In the spreadsheet I have also tracked my investments which for this month are as follows:

investments

 

So that explains the extremely high savings rate this month. It does seem to be counter-intuitive that with such high expenditure, but it is what it is. It can be explained somewhat as I now include my investment in my budget.

 

I have massively increased my rate thanks to increased pension contributions which gives increased tax breaks to give a savings boost. My ISA contribution was the first I have done this year.
Well done me. Now I just need to keep this up!!

In other news…

I nearly forgot to mention that I was very pleased to have been featured in on the EU’s FIREhub. It’s a great place to get FIRE resources from a wide range of bloggers from across the EU. Thank you very much FIREhub!

Enjoying life

After perusing the UK personal finance Reddit thread, I came across a post asking people to name their biggest financial regret. Amongst the many depressing and amusing suggestions, there were several people who claimed that they had “no regrets” and that the others admitting regrets should just “enjoy life”.

 

At first, I thought that was a rather strange answer to the question as surely, being honest with yourself, there must be something that you regret purchasing.

 

Despite that thought, I came later to reflect on what enjoying life means.

 

Certainly, it means something vastly different to each and every one of us; however, in the context of a financial regret, what does it mean to enjoy life?

 

Did they mean they don’t regret anything, or that they are not bothered by those regrets? Or did they mean spend recklessly and not worrying about the consequences even if that means ending in £20k of credit card debt?

 

Presumably enjoying life in the context of financial regrets could mean anything, I propose, that includes partying, buying expensive cars, boozing, going on expensive holidays, having an expensive hobby, and eating at the finest restaurants.

 

All of these things: 1. Cost lots of money, 2. (Admittedly) Can be fun and 3. Are part of massive lifestyle creep over time. As someone seeking FI, 1 & 3 are things that will only hinder my journey to FI.

 

Often it is said that you regret the things you did not do more than those you did. That is something I have kept in mind when making decisions (not just financial ones) throughout my life- but will I regret not doing these expensive things because I have chosen to become financially independent?

 

Deep down, having done many of these thing in the past, I think the opposite is true. I think of all the times I went out on a ‘bender’ spending lots of money on food and drink only to feel hungover the next day. The times I went on holiday and spent my way around a city without a care. The times I spent money to make myself feel better or to impress people I didn’t like. Yes I had fun (mostly), made friends and whatnot, but looking back, I could have been less foolish and saved more with little loss socially or otherwise. That money would now be growing in an ISA or where ever and I would be closer to my goal of FI because once I have FI the options to enjoy life become far greater without the little problem of working 5 days a week!

 

So, the saying rings true, you regret the things you didn’t do more than those you did. I don’t regret having a good time in my youth, but I do regret not taking control of my finances over a decade ago and putting away as much as I could. If I had, I would be wealthier, happier and closer to being financially independent.

However, I am not going to wallow in regret and despair over that, and nor should you. As the Chinese proverb says the best time to plant a tree was 20 years ago. The second best time is today.  Now, where’s my spade?

Payslip calculator

While wondering what to do about my pension a couple of weeks back, and starting a new job, I decided that I had no clue what my new take-home pay would be. I spent some time (a lot of time) making this handy payslip calculator.

Pay-Slip-Calculator-v1

It will calculate the tax, NI, student loan, and pension deductions from your PAYE salary and give an idea of what your take-home would look like.

It is useful for playing around with pension percentages to see what impact it will have on your income without having to ask payroll.

Its very simple to use; just enter your salary, pension % and select the relevant student loan settings and it will calculate all for you.

If your salary is over £150,000, you are very lucky, and this calc won’t work for the 45% rate.

November update

Time flies when you are having fun as the saying goes. October was a big month for me but it went by very quickly indeed.

I finally finished a job I was hating where I had to wait out my three month notice period. I had a week off at home chilling, resetting and getting my life in order before starting at my new job. I am very happy with the move so far. I’m working on some great projects and my colleagues seem super nice so far. Plus I’m paid more which will accelerate my journey to FIRE.

The figures

My net worth has grown slightly to £313,063, a growth of 0.4% month on month. I believe this is due to my cessation of debt paydown (’cause it gon’) and some weird things happening on my pension accounts.  Savings rate wise – I don’t know! I need to start seriously working this out. My budget says I should be saving 65%, but I am not sure what I have actually achieved. I have not been tracking as haven’t actually been saving per sey as I was paying down debts. The goal for next month is to actually nail this down and report properly as I have seen other FIRE people doing.

Financially this month has been ‘bad’ because I took a week of unpaid leave between jobs. Although bad financially, it was good for my mental health and worth the drop in pay. Although oddly, my take-home did not seem to be affected much due to the increase in salary at my new job.

The week off also made me reflect on where my FIRE journey may end up. Although I enjoyed doing nothing for a week, I was beginning to get antsy by Friday. I wondered how I would cope with actually being retired and having nothing to do. I think I realised that I wouldn’t cope that well.

It has made me re-assess my goals to the point where I still want to achieve FIRE, but I may not want to give up working (so long as I enjoy my job!). I think it is important to be doing something fulfilling with one’s time on planet Earth and doing nothing is not going to help one bit.

So, from now on I shall be pursuing FIRE with that in mind.

 

 

Review of All About The Money podcast article.

I just had the displeasure of reading one of the most childish articles on personal finance I have ever read. It’s an article I wrote when I was aged 23.

https://www.bbc.co.uk/programmes/articles/4Gsq4lf46lWz2tB74LH9KQq/why-im-sick-of-being-told-to-save-money

OK, so I didn’t write it, but I probably had the same attitude to money as this young lady back then, and I know what happens when that attitude continues on as you get older. You get in huge debt believing that you will never get old and have plenty of time to make your first million.

As you are reading my site, and I’m sure you are interested in saving money, you are probably left baffled how such an article was published on a mainstream media site arguing against what is logical and reasonable.

On one hand, she is arguing that she has not saved a penny, but on the other has given no reasonable details of actually trying. The one feeble example given was not going on holiday for a year (or an academic year which is apparently 9 months). She attempts to compare a bus holiday to Butlins to going to Amsterdam or Lyon.

While describing her so called fruggal holiday to Amsterdam, she says she got 2 nights for £99. Yes well done great stuff. What about the flights, spending money and eating out (and well its Amsterdam right)? How can spending money to go on holiday be saving money compared to not going and not spending anything?

If you are in the habit of blowing £100 on a night out and eating out several times a week (she mentions running a failed nightclub business) you are not going to save much even if you go to Butlins. I know, I’ve done it (eating out I mean… I’ve never been to Butlins).

I find it particularly frustrating that she justifies having an overdraft because everyone has one. How can having an overdraft ever be justified as ok? I had an overdraft for many years and it NEVER felt fine. I hated paying the fee every month and being in debt to the bank. Being in debt NEVER felt fine to me so I struggle to see how anyone could honestly say they are fine with it.

I think this article is wholly irresponsible and should not be on such a site such as the BBC without a counter viewpoint. I do wonder if the BBC trying to condition young people to spend all their money by convincing them its ok to have zero savings and fall into debt?

I have had many times when I’ve had zero savings and been struggling to pay rent due to blowing all my money when I was in my early twenties. It never felt good! That’s why people say have some savings.

If you have read any of my other posts, you will know I had massive debt (£40k+) and it felt awful. Only once I grew up, stopped spending, and lost my FOMO did I start to feel secure about finances.

Her punchline is: “If I had listened to my bank manager my whole life, I’d be at zero balance in love, life and gallows humour”.

I find this a bizarre statement that tries to justify an immature attitude to life and money. Blame circumstances rather than yourself at your peril. I would be surprised if she has ever met a bank manager. 

The biggest faux pas in this article is her attempt to compare saving money to domestic abuse which I cannot fathom the jump in logic there. Surely saving your own money will mean you are less likely to fall into domestic abuse as you will not be dependant on others and means you can leave the situation you are in.

Establishing frugal habits early on in life such as saving can only snowball later as you gain more income and can save more compared to your expenses. If you don’t get used to a fake Instagram luxury life that you can’t afford you won’t ever miss it. I wish I’d known about FIRE 10 years ago because if I had, I’d be retired by now!

Maybe I’m privileged right now but I worked hard to get where I am – hell i’ve documented part of it on this blog. It’s taken years and years to develop a career that is paid well and I’m proud of what I’ve achieved. I can tell you that since I adopted a FIRE mindset my life has improved vastly. My balance in love, life and gallows humour is infinitely higher than when I was in debt up to my eyeballs and living paycheck to paycheck.

Pension Pondering

 

I had some time on the weekend to consider the best approach to my pension contributions. I found myself going down a rabbit warren of spreadsheets and tax legislation and thought it might be an idea to share what I found.

What are they?

Pension is a term used to describe money which is protected from tax and is intended for retirement. Currently, you may only access your pension funds once you reach 55 years old. Other features include:

  • Mandatory enrolment for all employees who are eligible.
  • Tax-free contributions are limited to £40,000 per year.
  • Max limit of £1,030,000 total lifetime contributions per person.

For more info on pensions in the U.K.; click here.

ISAs are slightly different investment vehicles which are protected from tax but limited to contributions of £20,000 per year. You will not pay tax on any gains on money in the ISA. You may have cash, help to buy or stocks and shares ISAs.  Some more info on ISAs can be found here.

My situation

I have roughly £100k in pension already. So I’m not starting from scratch. After reading a few FIRE blogs that recommend maxing out the pension contributions I built a spreadsheet which allowed me to play around with figures and % of my salary contributions.

Working on the basis that to get the maximum tax efficiency, I should put in all my income above £50,000 which is the level where I pay 40% tax. I would contribute £2533 per month and my employer would contribute £333 per month and it means I could stash away quite a lot very quickly.

Great I thought, let us do it. Then I realised two big problems.

  1. I can’t touch this money until I am 55 (likely to be 57 by the time I get there).
  2. There is a limit of £1030,000 in the pension overall across all funds.

Combined it means I have 21 years until I can touch that money again. It also has 21 years of compound interest growth meaning if I keep contributing to it at that rate, it will vastly exceed £1,030,000, attracting taxes of 45% on withdrawal by the time I get to 57. Not only was it surprising to see how achievable getting to £1m was by age 57, but it was also even more galling that I am having to look at ramping back my pension contributions to prevent investing in a tax-inefficient way.

I worked back to find out the point that if I maxed out my contribution when I should STOP investing. It turned out, based on a 7% annual increase, I would need to invest until I was 41 and then stop completely. The amount left there would grow to £1m by the time I reach 57 and I would not lose money to tax. Although as I will be working and likely contributing to a pension mandatorily, I would have to opt-out and not take up what is effectively free money. It would be foolish to forego that money at a later date. Yes, I understand that if I achieve FI, I won’t need to work but let us not kid myself here, things change and I will be doing something.

Alternatively, I worked out the monthly contribution that I could make until I hit 55 and working back I would pay £1200 pcm to reach the limit by 55. What I should probably do is have a target age for FI, work out the time and the amount I need to contribute to hit the £1m lifetime limit. At this point, I don’t know what age that would be and I am going to assume that I probably won’t really give up working simply because I am FI.

 

I have seen various FIRE bloggers talk about bridging to my pension. Bridging is where you have a pension pot you cannot access until the legal age but use up other funds to get you to the point you can use your pension. I am not convinced by this approach mainly because some of their ideas of achieving this would actually reduce financial independence (remortgage of house and drain resources until you reach pension age). All the time your pension is potentially being hammered by the punitive effect of the 45% tax above the lifetime allowance.

The other issue I have is that on a spreadsheet maxing out my savings like that that is fine, but things like life, family, wanting to buy a bigger home at some point, and actually achieving FI at a young age require money to be available to me at some point before I am 57. Doing these sums has had the unexpected effect of focusing my attention on future life goals and how to achieve them.

I want to be FI but I know that things in life change and what will work now may not work later on in life.

To conclude, for now I am going to contribute 15% of my salary to the pension and in addition, my employer will contribute 5%. I will also put £1666 pcm into my S+S ISA. Any extra (which I think is potentially about £1000pcm) will be saved or invested outside a tax-free umbrella and could make a contribution to a deposit for my next home. I believe that having money outside my pension and maxing out my ISA allowance I will put myself on a better path to FI at an earlier age. It will mean I have a boost from my pension later in life to really live it up! I may also investigate paying off my mortgage, but, as previously discussed, I believe this may not be the most efficient use considering the low-interest rate I am paying presently.
I would welcome any further discussion or advice!