Tuesday 4th January 2022
Looking back on the year 2021, it's been a year of internal conflict. One month I'm looking to slow down on work, the next I'm taking a new opportunity. Reading back, it's been a difficult read to see so much inconsistency, but it highlights the internal struggle one goes through when following the FIRE Path.
From my own financial point of view, 2021 was a great year. I added €54,000 to my portfolio and my portfolio grew from around €125k at the start of the year to just over €220k. Far better than I could ever have imagined.
However, I am also well aware that we now face a sharemarket that is showing signs of being overvalued and house prices in Ireland have increased over 10% in the last 12 months.
I have recently been able to increase my income by taking new opportunities. This have given me the ability to start putting a lot more into my portfolio each month.
The numbers are pretty incredible based on my new savings rate of €10k per month. If I were to continue saving at my current rate, I am potentially only 2 years away from hitting a portfolio of €500k, or 4 years away from €800k (which would be enough for our family to fully retire.)
None of us have a crystal ball, but one fear I have, is that I push on working at full throttle for the next 4 years or so, look to retire early, only to find that I have been buying into an overvalued market and that my portfolio crashes and I find myself years away from FI again. There is another alternative, known as ‘Slow FI’.
Slow FI is where we slow things down, adopt a more long term view to retirement and start living a more balanced lifestyle.
What is particularly interesting, is that by adopting Slow FI, the total money needed to retire is actually less than trying to retire ASAP. Let me explain this in more detail, firstly by looking at what would happen if I tried to retire ASAP:
Assuming I need €40,000 a year to cover my expenses, and I use a 5% withdrawal rate, I need €800k to retire. Recall from my August update, that I am happy to use a 5% withdrawal rate instead of 4% for a number of reasons.
Because I will be retiring before I can access my pension, I will need to buy some assets outside of my pension, which will increase the tax I pay on my gross income. Based on my current earning potential, I could look to save €10k per month working full throttle and pay around €2k per month in tax. Keep in mind that this money is all kept in my web development company, so I avoid the 50% personal tax rate this way and end up paying corporation tax at around 20%.
Therefore, based on net monthly contributions of €10k a month (€12k gross), and assuming a 5% real return per year, it will take me 4 years to reach €800k. The total contributions I would have made in that time would be €576k.
During the 4 year period, I would also need an additional €160,000 which would cover my wages at €40,000 per year.
Therefore, the total money needed is €736,000.
By now, you should notice that in the above scenario I need to add a lot of money into my portfolio over the next 4, with compounding doing very little of the heavy lifting. With Slow FI, compounding will do a lot more heavy lifting, but I will need to cover my monthly expenses for longer.
With Slow FI, I will assume I will look to retire when I can access my private pension. This will be age 50, and will ensure I can put any new monthly contributions tax efficiently into my pension. So unlike trying to retire ASAP, I don't have to worry about investing within my company and paying any income tax.
If I were to adopt Slow FI today, I would need to make monthly contributions of around €2,000 a month to hit €800k in 12 years, assuming a 5% real return. (The actual figure is actually €2,020 per month, but let's keep it at €2,000 to keep our numbers simple!)
Over a 12 year period, this would be a total contribution into my portfolio of €288,000. Unlike retiring ASAP, I will need to cover my living expenses for the next 12 years at €40k per year. This will mean I will need to cover €480,000 during that time. I’m not worried about inflation in this example, as while this number will increase with inflation, so too will my income as a contractor, so this is indexed accordingly.
Therefore, the total money I will need over the next 12 years if I adopt Slow FI is €768,000 (€288,000 + €480,000).
No doubt you will be surprised as I was, to see that in terms of money needed, Slow FI is only slightly less efficient than trying to retire ASAP.
This has been a groundbreaking realisation for me. I was always under the impression that I would be far better off to retire ASAP, but the numbers clearly show that this isn’t a huge difference in the approach you take. The other big advantage of course, is that the longer period of time gives more room for margin of error. If there is a market crash over the next 12 years, I can adjust my monthly contributions accordingly, knowing that there is enough time to still hit a target retirement age of 50 if things went pear shaped.
I have also been somewhat conservative assuming a 5% inflation adjusted return. Another year like 2021 at some point would make a huge difference to the overall time.
Even more to the point, Slow FI allows me to build my dream lifestyle from today and if I am honest, I am tempted to take this route and I likely will adopt it at some point in 2022 or 2023.
For now, I have taken a new work opportunity and will continue to work through commitments I have made. One other option is that I push on for a few more months and look to save enough to purchase another rental property, but I am still considering all options. I guess the key takeaway here is that there are clearly different approaches and that it isn’t always about having all the answers, but rather just continually pushing on each month and working towards that big FI number.
No doubt I will keep providing updates on my overall strategy as I progress into 2022.
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