Tuesday 4th January 2022
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 - potentially up to €12k a month if I wanted too.
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 €45,000 a year to cover my expenses, and I use a 5% withdrawal rate, I need €900k to retire. Recall from my September 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 build a 50:50 split of half my portfolio in a pension and half outside - which is roughly how my portfolio is broken up now. Based on my current earning potential, I could look to save €12k a month working full throttle.
Therefore, of the €12k a month, €6k would go directly into my pension and the remaining €6k would be invested within my company - allowing me to access it before retirement.
There is a catch of course. The €6k invested within the company would be subject to income tax. My corporate tax rate is around 20% because my company pays an additional income tax known as a professional service charge. Therefore the €6k I have is reduced to €4,800 after tax.
Therefore, based on net monthly contributions of €9,800 a month (€12k gross), and assuming a 7% real return per year, it will take me 4 years and 5 months to reach €900k. The total contributions I would have made in that time would be €636k.
During a 4 year and 5 month period, I would also need an additional €198,750 which would cover my wages at €45,000 per year.
Therefore, the total money needed is €834,750.
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 or so years. 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 €1,733 a month to hit €900k in 12 years and 3 months, assuming a 7% real return.
Over a 12 year and 3 month period, this would be a total contribution into my portfolio of €254,751. Unlike retiring ASAP, I will need to cover my living expenses for the next 12 years and 3 months at €45k per year. This will mean I will need to cover €551,250 during that time. I’m not worried about inflation in this example, as while this number will increase with inflation, so too will my rates as a contractor, so this is indexed accordingly.
Therefore, the total money I will need over the next 12 years and 3 months if I adopt Slow FI is €806,001 (€254,751 + €551,250).
No doubt you will be surprised as I was, to see that in terms of money needed, Slow FI is actually the more efficient route.
This has been a groundbreaking realisation for me. I was always under the impression that the sooner I tried to retire, the less money I would need in the long run, but the numbers clearly show that this isn’t the case. 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.
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.
For now, I have taken some of the new opportunities 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.
With 2021 officially over, I have updated my portfolio page to give the full yearly details on 2021. I ended up making contributions of €54,000 in 2021, averaging monthly contributions of €4,500.
|Portfolio Summary (as at 31st December 2021)|
|Monthly Portfolio Growth Report|
|Capital Gain + Dividend Income from Equities||€1,409.00|
|Real Estate Income||€636.16|
The table below shows the breakdown of my portfolio into the various asset classes:
|Portfolio Asset Breakdown (as at 31st December 2021)|