It may be Friday, but this one isn’t frugal as I think I’ve exhausted all my ideas for the moment. I may try to write one once a month, but we’ll see. Instead, it’s time to take stock.
Is FI/RE realistic for me?
Although I talk about FI/RE on this site, in terms of my situation, this isn’t truly realistic at my stage of life. I’ve started too late and unless I am going to put a lot of time and effort into a side hustle, then I am unlikely to have enough money to stop work completely over the next ten years.
I started thinking about this the other day whilst listening to Chrissy’s new podcast. Although it is a Canadian-focused venture I thought that I would check it out. There have only been a few episodes so far, but the most recent one was about the 4% rule or as the presenters concluded, the 4% ‘assumption’. What was interesting for me was they talked about lots of different ways people could achieve financial independence and that when looking at how much money you need, you should consider what your pension would provide when you reach traditional retirement age. Therefore, you don’t always need to make your money last for the rest of your life. You also don’t need to ‘retire’, but could work part time or change your job to something more rewarding, but which doesn’t pay as much.
One of the benefits of working for the public sector is that I have a ‘defined benefit’ pension i.e. I know exactly how much money I will receive when I retire. Nowadays most pension schemes are ‘defined contribution’, so that you put in a set amount, but what you will receive depends on how the market performs.
Although my pension scheme is a good one, I didn’t have a full-time job until I was 32. You might say that I had my period of ‘early retirement’ in my twenties. Whilst others were getting married and having kids, I was living in a shared house, working part-time, volunteering and travelling. Mr Simple refers to it as my time as ‘a bum’. Although life was easy and I didn’t have any responsibilities, neither did I have much money. When I got my full-time job, after going to college for three years, my salary tripled overnight. I then started on the traditional route of buying a car and three years later a house. That wasn’t too far from being paid off when Mr Simple and I moved in together and bought a larger house, with a bigger mortgage.
As you may have seen from my spending reviews I am currently paying off the mortgage by making twice the actual payment each month, as well as saving some money into an ISA and another high interest savings account. I am also paying all of the bills, as Mr Simple’s money is going on the renovations to the house. If we didn’t have any work to do to the house, and Mr Simple and I were sharing the costs, then my savings would increase dramatically. But, there we are. We chose this house and I love it, but it comes at a price.
I am sure that many of you would say that I should stop overpaying the mortgage and invest the money, as with such low interest rates, financially this makes sense. I completely agree with you, but there is just something psychologically comforting about owning the house outright. So, whatever anyone thinks, that’s what I want to do and each of us has to make our own choices.
At the current overpayment rate we will pay off the mortgage in seven years and three months. By that time I will be 57. I would really like to pay it off in five years’ time, but to do that I would need to find an extra £20,000.
Leaving that to one side for the moment, if we now look at my savings. I currently have approximately £34,000. In the FI/RE world that is nothing, but compared to a lot of the population it isn’t bad. If I keep saving at my current rate, even at an interest rate of 4% I will have £71,000 in five years’ time. I give it that low interest rate as although I have some in a stocks and shares ISA, which is currently making 10%, some of my money is in a cash ISA, locked away until November 2021 and it is only earning 1.75%.
In five years’ time all my money would be in investments and hopefully earning more than 4%. When I consider that £71,000 and apply the 4% ‘assumption’ i.e. draw 4% every year, I would get £2840 per year. £2840 divided by 12 is £236. At the moment I am paying all of the monthly bills, but in five years’ time, Mr Simple should be contributing his half again as all of the DIY will be done. If we don’t count the mortgage, this £236 per month would go quite a way to paying my half of the bills i.e. gas, electricity, water, council tax, etc.
How my salary is divided
At the moment I think of my wages in fifths. Two-fifths go towards the mortgage, one fifth towards the bills, one fifth is saved and I live on the other fifth. If I could:
- pay off the mortgage somehow = 2/5ths gone
- Mr Simple starts paying his half of the bills and my investments pay my part of the bills = another 5th gone
I could continue saving and would only have to work two-fifths of the time that I do now i.e. two days a week instead of five.
I hope that you’re keeping up.
A potential problem
One large potential spanner in the works is having to buy a new car over the next five years. Now, when I say ‘new’, I obviously mean ‘new to me’. My car is nine years old and has recently started using more oil than it should do. The garage can’t find out what is wrong with it and in order to do a more thorough investigation they tell me that it would cost £3000, which is probably more than the car is worth. The temporary solution is to check the oil each month and fill it up if it is low. I am also driving around with a bottle of oil in the boot.
At some point I fear that the problem will get worse and eventually I will have to buy a new car. Currently a second hand Toyota Yaris, which is what I have at the moment, is between £7000-£10000. The cost would have to come out of my savings. Best case scenario, that would take my savings down to £63,000, which wouldn’t be quite enough to cover my monthly bills, but would cover a lot.
More than 4%?
There is also the question of whether I could, in five years’ time, withdraw more than 4%, because that figure is chosen as it is believed that at that rate, the capital will last and still increase in value for many years to come. I though, don’t need this to last for 30 years, I just need it to last until I get my pension. My current pension age is 67, but I could retire earlier, say at 60, although my ‘defined benefit’ would be less. It is too far in the future for the pension company to tell me how much I would get if I wanted to draw on it early. They will only say how much I will get at the standard age. It is though a possibility that I could draw 5% from the £63,000 and that would definitely cover my half of the bills.
It therefore seems very likely that I could work part time from aged 55, but I just need to find £20,000 to pay off the mortgage. One possibility is to do AirBnB, which Mr Simple and I have discussed, but at the moment we’d have to pay guests to stay here rather than the other way around. It is a real possibility for the future, although I am not sure how much it would bring in. We could rent out a room and you can earn £7,500 a year doing this before having to pay any tax. Having a lodger for three years would cover the shortfall in the mortgage payments, but on a practical level I would rather have occasional guests than a full time one.
Mr Simple thinks that we should just stop overpaying at that point and just pay the £200 a month that we would owe, shared equally, for the rest of the period. That would certainly be a lot more doable than the £1000 that I am currently paying.
Sorry, that was long. I don’t usually write so much, but this has been a good opportunity to try to set down what exactly I am aiming for, which until now I haven’t been sure about. It will probably change as time goes on, but at least for now I have a goal and can track my progress towards that. As always, I will let you know how I am getting on.
Are you aiming for FI/RE, or are you just hoping to work a little less in the future? I would love to know your thoughts on my plan as well as your ideas for the future.