Onwards to freedom!

SuperSecretSquirrel

Thank you all for reading along and posting

Today's mortgage repayment has dropped our balance to £42,217.47. Our savings currently stand at £46,634.04, so we are now £4,416.77 in the lead

That's an excellent resource turtlemoose, but not quite right for me. Benefit in kind essentially increases my salary, but not as far as pension contributions are concerned. There's nowhere to record savings interest either, and adding it as income interferes with NI. I can get close to correct values by rejigging last years numbers a little and comparing against the hmrc calculations, but wouldn't be confident relying on it for this years figures. Thanks anyway, I'm sure it will be very useful for others, and for myself in the future once my work situation has simplified a little For now I've decided to just scale back what I keep to one side for hmrc from 50% to 40%, I should still be slightly overestimating (which I prefer), but not by as much. Bearing in mind my SE earnings are dropping, this should be good enough in the short term

I've given us until the end of the year to hit neutral+10k. If all goes smoothly I think we should achieve it by November, this is based on no huge shocks or expenses between now and then, no SE income, and the stock market playing ball. If I'm honest I hope to beat the target by some margin and end the year at something like neutral+12k. Now that I've said that, I guess I've half talked myself into increasing the target already

SuperSecretSquirrel

I've been reading some more FIRE/ERE blogs recently, and as a result pension contributions have been weighing on my mind. Paying a hefty amount into my pension each month is a huge factor in my net worth growth rate, there's absolutely no denying that. But it's niggling at me that the money is locked away until I'm 55, and there's nothing to stop future politicians pushing it even further out of reach. If I were in my 50's I'd no doubt be putting every penny over minimum wage into my pension right now, but I'm not, I'm 31, and hoping to at least semi-retire well before 55.

In my mind, before I can semi-retire I need to ensure that what I earn then from part time work, plus what I have in accessible funds can bridge the gap to 55. I'd also need to ensure there's enough in my pension to cover from that point on. Seems simple, pay less into pension, put the excess in an ISA. Thing is, even with the negatives of inaccessibility and potential for government meddling, pensions are still attractive to me. It's not the employer match, that's capped at 5% and I would not dream of dropping below that level. It's not the wheeze of dropping below the child benefit or higher rate tax bands, at the moment we are well below both thresholds. It's the tax relief on paying in. We could easily live well on two tax free allowances (2 x £10,600) right now if we had no mortgage, and since that's already gone in my mind, it will definitely be gone in retirement. Therefore it's likely that we could stop working and saving early enough that we'd pay no tax on our pensions on the way out either. Of course if we make it big we'll lose the tax advantage on the way out, but I expect in that case it'll be a zero sum game as opposed to a loss i.e. basic rate tax relief on the way in and basic rate tax on the way out (not basic rate tax relief on the way in and higher rate tax on the way out). Actually, even paying basic tax in retirement would be better than zero sum, there's the tax free allowance to consider on the way out, where every penny going in benefits from tax relief.

Here's a couple of real world examples illustrating pension versus isa investing:

• Pension contribution £554.17pm (£692.71pm inc EC), available for S&S ISA investing £345.20pm, total monthly investment £1,037.91
• Pension contribution £138.54pm (£277.08pm inc EC), available for S&S ISA investing £590.41pm, total monthly investment £867.49

Favouring the pension over the ISA would see me £170.42 per month better off in the short term. Not exactly small change.

Of course, regardless of your income, what's in an ISA is shielded from tax forever (where the definition of forever is just until some politician changes his or her mind), so if expecting to pay income tax in retirement, especially higher rate, I guess ISAs could end up winning.

It seems favouring payments into the pension when earning as a higher rate tax payer is verging on being a no brainer, but as a basic rate tax payer it's not so clean cut! I'm honestly torn as to what to do for the best. For now I'll stick with the higher pension contribution, but am open to ideas and suggestions!

edinburgher

First things first, it would appear to be a government no brainer to tie private pension age to state pension age as proposed during the recent review of all things pensiony (that's not the real name, I forget). I'm just a few months older than you and am assuming state pension -10, so absolute minimum of 58. That leaves you with a slightly longer gap to bridge.

It strikes me that you are mentally separating your ISA and pension money. There's no inherent problem with that, but it may be beneficial to consider a whole of life approach (i.e. it's just one big pot, you just scoop honey from different sides at different points of your life).

If you are confident that you will be able to have a marginal tax rate of 0 in retirement, one way to approach it might be hammering pension contributions until you have a big enough pot to meet your retirement needs (allowing for reasonable growth assumptions based on your portfolio) and then stopping paying into to a pension bar any employer match. That would leave you free to build the buffer (oh Lord, nearly wrote something else that the swear filter wouldn't have liked!)

*If* you decide to go with the pension, do not save extra money into your employer pension, there is every chance that it is overpriced. Open a SIPP.

SuperSecretSquirrel

Hi Ed, thanks for posting

I think the biggest problem is that until very recently I actually have been thinking of our assets as one big pot. I've come to realise that by focusing on the headline net worth value there's a danger that under the covers the "one big pot" becomes a bit too pension heavy, not helpful if planning to scoop some of that honey at say age 40.

If we assume that once the mortgage is gone and there's no childcare to pay we can get by quite happily on the equivalent of today's 1k pm, or 12k pa, that puts our trinity study based magic number at 300k (25 x 12k). I think it's fair to think that when we hit a total net worth of 300k I should certainly feel secure enough to step down/back from a safe but ultimately uninspiring job and move to something a little more personally rewarding. Note that for now I'm happy to include our house in our net worth - a point that's up for some debate on the various ERE blogs, but since this isn't a "never work another day in our lives and never spend any of the invested capital" kind of a plan I think that's fair. I expect the plan will mature as time goes by so I'm not worrying too much about the fine detail just yet. For the sake of having a simple medium term target to aim for, I'm looking to achieve a combined net worth of 300k as soon as possible while enjoying life along the way.

So let's assume a simplified starting position of 36k pension, 4k ISA, other asset/liability balance 132k, total net worth 172k. Let's assume growth at a steady 4% in both pension and ISA investments, and since that's fairly conservative let's say it accounts for inflation and costs. Let's assume zero growth/losses of other assets/liabilities to keep things simple. That's a lot of assumptions I'll use this for my calculations rather than cobble together a hasty spreadsheet - http://www.thecalculatorsite.com/finance/calculators/compoundinterestcalculator.php

• Scenario 1: 692.71pm into pension, 345.20pm into ISA, in ten years time pension=£156,011.39 ISA=£56,963.40 other=£132k, total net worth £344,974.79
• Scenario 2: 277.08pm into pension, 590.41pm into ISA, in ten years time pension=£94,605.95 ISA=£93,190.88 other=£132k, total net worth £319,796.83
• Scenario 3: 0.00pm into pension, 672.15pm into ISA, in ten years time pension=£53,669.98 ISA=£105,267.20 other=£132k, total net worth £290,937.18
• Scenario 4: 1274.58pm into pension, 1.89pm into ISA, in ten years time pension=£241,977.24 ISA=£6,242.56 other=£132k, total net worth £380,219.80

All four scenarios are achievable on the exact same salary, expenses, and assumptions.

If I think of net worth as a single pot with no separation between inaccessible pension funds and accessible ISA funds, I should be putting every penny over our monthly expenses into a pension - after all over those ten years there is a 90k difference between what on the face of things appear to be the optimal and worst approaches! However, in scenario 4, in ten years time we'd still essentially need to earn enough to cover all our monthly expenses as the income from a 6k ISA wouldn't help all that much. All the while we continue to work. Year after year. A further 17 years of leaving that 240k in the pension with no further payments in, based on the same 4% growth assumption, would result in a pension balance of £477,093.67 when I hit 58 and we assume I can start drawing it down. I think perhaps that's too much money for that stage of life (we are not addicted to conspicuous consumption and I very much doubt that will change much over time), and would have come at the cost of prolonging work longer than necessary earlier on in life. It's clearly no good having everything tied up in such a restricted investment wrapper if you need to start scooping some of the honey before it's accessible.

The fact that I don't really want to retire in the traditional sense muddies the waters a bit too. I can't think of anything worse than the cliched idea of spending all day every day playing golf etc. I most likely want retire from employment and just become a laid back part time self employed kind of guy - secure to the point that even if I earn below the equivalent of minimum wage from my endeavours it doesn't really matter and won't have a negative impact on my family. I love the idea of my time being my own to do whatever I like, and that monetary return on my time would barely even register as a consideration. Of course if I were to suddenly decide to take up an expensive hobby like say flying lessons I'd need to work harder to earn more to pay for it, but having the baseline expenses covered from mostly passive income and low stress work would be incredibly freeing. I think I might be underestimating my earning power in semi-retirement too, from all accounts once you hit financial independence and spend your time doing just what you truly want to do, if you're any good at it the money will naturally follow. Anyway, I digress...

I get half way to talking myself out of the pension as the restrictions are unsuitable for an early retiree, but then switch back when I run the numbers and see just how much of an impact the tax relief can have. I guess the problem is I like to find the optimal solution to a problem, but in this case there is no clean cut optimal solution, it's a tradeoff between accessibility and growth. The not knowing quite which approach is the "right" one is frustrating, but I think I'm starting to realise that the best answer is to find somewhere close to a sweet spot that lets you achieve what you want to achieve and just be happy about that. There's nothing to be gained fretting about the path not having been perfect if you arrived at the destination regardless, so long as you didn't veer to wildly off course on your way it's probably no big deal. Just writing this has made it clear to me that I just need to relax and go with the flow a bit more. My realistic choices are scenario 1 and 2 above (or something somewhere in between the two). Paying more than scenario 1 into my pension would simply feel wrong at this age especially in light of ERE ambitions, that gut feel is enough for me right now. Paying less than scenario 2 would mean missing out on employer contributions, and that would be a stupid move. So the answer lies between scenario 1 and 2, and the good news is that although one results in a net worth that's £25k greater than the other, it's not unreasonable to hope that whatever I choose to do, hitting 300k in ten years is realistic. Of course circumstances can and will change along the way, and the forecasting assumptions could all be way out, so nothing is guaranteed, but in the absence of a crystal ball all we can do is make reasonable guesses and try to plan accordingly.

One thing I've not mentioned yet is what I like to call the "of mice and men" effect. The best laid plans of mice and men often go awry. I don't subscribe to the childish notion of using "YOLO" as an excuse for all stupid life decisions, but there's no disputing that a reasonable plan for the future should make allowances for the inherently chaotic nature of the universe. There's lunacy in the idea of working yourself to the bone for 50 years, scrimping all the way along, then dying within a year of retirement, leaving a million pound pension pot untouched. That can't be any reasonable person's plan. But whether it's the plan or not, I'm sure it does happen occasionally. We don't ever really know when our time will be up, so we absolutely have to make sure we enjoy the journey. Personally speaking, our lives are pretty good now, but we are planning for an even better future. I have to accept that there's an (acceptably small) chance I won't actually be around for it. So I guess even though I'm making plans for the future, in the hope that it all goes well, there has to be some YOLO thinking along the way just in case it goes awry. Right, I think that's morbid enough for now, and since this post is getting way too long for most reasonable people to read, I think it's time to stop typing.

PS - Ed, I think I shall rename my S&S ISA account "bu**er" in your honour. I quite like the ring of it - throw some money at the bu**er, go on, build that bu**er up haha

PPS - Thanks for planting the seed regards a SIPP. I think my pension is reasonable regards costs, but I'll look into it properly. I guess the tax relief for SIPP would be handled via tax return as you pay in from your after tax income? Currently all pension payments go via PAYE salary sacrifice, which is extremely convenient, but perhaps that comes at a cost, convenience often does!

gallygirl

Really interesting stuff SSS :T. I agree, option 1.5 seems the best bet for you . As you say, it's a trade off between a more lucrative pension contribution and having to build up accessible money for when you're too young to draw your pension.

Re a SIPP, if you're a basic rate tax payer the tax relief gets added automatically a month or two after your payment. If higher rate you get the basic rate added automatically and then claim the other 1/2 on a self-assessment return.

SuperSecretSquirrel

Thanks gallygirl As a basic rate tax payer the SIPP seems to be about as straightforward as the current salary sacrifice setup. I'll definitely be looking into costs etc soon. I'll mull over dropping my contributions from scenario 1 to somewhere in the scenario 1-2 range too.

Something I missed in the scenarios above is that we'll have a much smaller mortgage payment in two and a half years time, and a further two and a half years later it'll be gone completely, so in theory we should have more money sloshing around to invest in ISAs. Self employed earnings of zero is unrealistic, and I don't factor in what OH saves or pays into pension. I think the scenarios above are likely a bit too pessimistic, I always tend to err on the side of caution with this kind of thing. I hate trying to forecast beyond the next couple of months, anything longer than that is just too unpredictable - maybe loss of employment, maybe another baby, maybe a bad accident, maybe a lottery win, etc. Hope for the best, plan for the worst, that's all we can really do in life

SuperSecretSquirrel

My GPP has a 0.7% annual charge. Fund is managed internally and has no extra charges as far as I can tell from the literature - and I've had the fine tooth comb out. On a 30k pot that's £210pa. It will obviously cost more as the value grows.

There are SIPPs out there that charge as little as 0.3% or a flat £176 annual platform fee. On top on that there would be fund fees to pay. Vanguard LS charges 0.25% I believe.

The GPP is paid via salary sacrifice, resulting in both income tax and national insurance relief, a total of 32% in my case. I can't salary sacrifice into a SIPP, so although I still benefit from 20% tax relief, I think I would lose the 12% NI relief?

I don't think there's an awful lot in it? Happy to have any mistakes pointed out to me, so please speak up if I'm being an idiot!

SuperSecretSquirrel

Excellent magazine article on the BBC news site today:

http://www.bbc.co.uk/news/magazine-32974131

We believe that the real measure of modern success is nothing to do with your bank balance or the size of your house, but instead, the amount of free time you have at your disposal. We think disposable time, as a resource to strive for and spend, counts for much more than disposable income.

You see, time is much more valuable than anything else, be it natural resources such as gold or diamonds, or a man-made commodity such as money. Time is the currency of life itself.

This.

SuperSecretSquirrel

Our short term target is to be 12k ahead of mortgage neutral by the end of 2015. This is only six months away, such a short time horizon makes it reasonably easy to set a realistic aim.

The longer term target is to hit a combined net worth of 300k by the end of 2020. This feels like a million years away, and setting a realistic target is near impossible thanks to the amount of unknowns involved.

I've sketched out a plan that would see us with assets of approximately 125k house, 41k cash, 87.5k pensions, 3.5k cars, 41.5k S&S, and no debt (including zero mortgage and student loan) by the end of 2020, but this involves a huge amount of assumptions.

• Assume no change in house value
• Assume no change in cash interest rate
• Assume no pension gains/losses other than what is paid in
• Assume no stocks and shares gains/losses other than what is paid in
• Assume no premium bond wins
• Assume linear depreciation on cars and no replacements
• Assume zero self employed income
• Assume no change to salaries
• Assume no additional child related costs
• Assume no large house/car related expenses
• Assume no change to regular spending

I don't have the power to predict future house values, savings interest rates, stock market performance, or my own luck. I've assumed no change in house value, no change in cash savings interest rate, no pension or S&S ISA gains/losses other than what is paid in directly, and no premium bond wins. Performance in these categories should hopefully be a little better than assumed, but could potentially be worse.

I assume linear depreciation on cars as it's just easier. I have a fair idea of the current values, came up with a very unscientific gut feel estimate of values in 5 years time, and as a result am decreasing the car values by £150pm (until they hit a floor value). Reality is not so simple, but it's good enough to work with for now. There's a good chance the cars will be replaced during the 5 years though, that has the effect of there being less cash and more depreciating car value in the mix

I assume no self employed income. Reality will almost certainly be better. However, I like the simplicity of treating any SE side income as a bonus, and don't want to figure it into my long term plans. This is the one key area that I have the most control over. If I want to surpass my targets, this is where I could make that happen. Work harder, earn more. It's a balancing act though, I have a family and want to spend my time having fun with them, I don't want to be working too much. My real aim is to boost our net worth so that we end up working less - I must never lose sight of that.

The assumption of no change to salaries and no additional child related costs is naive. There's scope for salary increases over the next five years, but there's also the possibility of redundancies, or even me walking away from a salaried position to take a chance on running my own business. Even bigger than considering future career paths, we would most likely hope to have a second child within the next few years. If we had two children both under school age, we would seriously consider OH being a SAHM for a while. If working, the cost of childcare would be between 60% and 80% of her net income. We'd be looking at either losing a salary, or spending most of that salary on childcare. Even if we don't end up having a second child, I am sure LO will keep getting more and more expensive over time

Assuming no changes to regular spending is naive too. There's every likelihood that council tax, utilities, fuel bills, and general grocery spends etc will increase over five years. The hope is that savings/investments/salaries will keep up with our personal level of inflation.

In addition to all this there will inevitably be some dipping into savings along the way for gifts, holidays, costs relating to maintaining the house and cars, etc. I'm being overly optimistic in some areas, and overly pessimistic in others, I suppose there's a chance it'll all balance out in the end If nothing else, it will be fun to look back over these figures a few years down the line to see how close or far from reality they ended up being

NorthernMonkey1

Do you mind me asking how old you are?