Sunday 4th July 2021
One of the reasons that I love to share my own FI journey, is that I get feedback from you guys - those who are following my story!
Last month was a great example of this. I made the comment that I thought I was going to need a portfolio of around €1 million in today’s money to retire comfortably and it didn’t take long to get feedback that this was likely too high!
The feedback I received is that if we would be able to put ourselves in a mortgage free position, then there is a good chance we would require a lot less than €1 million.
I worked through the numbers in more detail, and upon reflection realised that I had indeed over budgeted. Obviously this is great news, as trying to get a portfolio of €1 million in today’s money was going to be tough.
I came to the conclusion that if we were mortgage free, that it would be possible for us to live comfortably on an income of €30k per year (in today’s money). This would include some money for travel and an oversea’s vacation or two a year - as well as money to travel around Ireland.
For us to receive an income of €30k, we would need a portfolio of €750k in today’s money, based on the 4% rule.
How about becoming mortgage free? This one is all about taking advantage of the 25% tax free allowance which can be accessed from your pension portfolio on retirement. I was able to work out that by the time I am 55, I will have around €75k left on our mortgage balance. I will look to include a provision in our portfolio an additional €75k so that when I retire, I can use this additional money to pay down the remaining mortgage balance and be mortgage free from that point.
Therefore, our target FI portfolio target has been adjusted to €825k (750k + 75k) in today’s money. I will be adjusting this amount to take into account inflation below.
What was exciting about these figures, is that based on what we have already accumulated, and assuming I continued to add around €1,500 a month into our pension between now and age 55, then I could likely go back to working part time and adopt some form of Barista FIRE approach from today if I wanted too.
One consideration is that there is still 17 years or so before I hit my retirement age, so I need to find a way to ensure that I hit my FI number. I have explained the approach I have since adopted in more detail below.
Yes, 55 is early retirement in the traditional sense, but it isn’t the excitement of retiring in my 30’s or 40’s like we read about in the US. I know in the past, I have found several different potential routes for me to reach FI, however when I sit down and reflect on each of them, I realise that adopting a retirement age at 55 is likely the best path for me.
There are two core reasons for this - children and tax! Let me explain:
My youngest child turned 4 a couple of months ago. He will have just turned 22 by the time I turn 55. He should be at an age where he is in his final year or two of college. My other two older children should be in the workforce and hopefully no longer dependent on my income (if they are still living at home, they will be paying rent!). As our expenses go, we should finally have found ourselves in a position where we are no longer supporting our children financially and this should allow us to live as a couple in our 50’s on a much less.
Ireland can be a high tax country. I say it can be, because unless you utilise a pension, you're likely going to find that a good chunk of your income falls in the 50% tax bracket. I have avoided this by paying myself a salary at the tax cut off rate (the amount just before 50% tax falls due). This results in me needing to invest via a Director’s Pension and through my web development company. It is likely that 55 will be the age that I could access by Director’s Pension, so it makes sense to utilise the pension as much as I can, and retire when I can access this.
So yes, while 55 may not sound early compared to some of the stories we hear over in the US, by Irish standards, it will be at least 12 years earlier than the standard retirement age.
It should be noted that I have recently looked at various different paths to retire early. I managed to find several paths that would have had me retire in as few as 5 years - however all resulted in workly significantly harder for the next 5 years at least, were not tax efficient and would have had a serious impact on my stress levels and mental health - not forgetting the fact that I would miss out on some serious family time. While this approach will take me less time than other paths to reach FI, it will result in me needing to save a lot less than €4,500 a month, and will be a far less stressful route to take.
I recently posted a poll in the Limerick FI group asking what age they planned to retire. It was interesting to see that even in a group of people who were specifically looking to retire early, half planned to be at least in their 50’s before they retired.
The reality of living in Ireland, is that because ultising a pension is the most tax efficient way for us to retire and given we can’t access the money until we are 50, it is likely that for most of us, early retirement in Ireland means retiring in your 50’s!
I would have been curious to see how Irish people would approach FIRE if we had access to something like ISA in the UK.
I mentioned above that in theory I could adopt some form of Barista Lifestyle from today. I am going to explore this - I have ideas such as working longer over the winter months, and less over the summer months and just trying to give myself the flexibility to structure work around my lifestyle as much as possible.
I am also very conscious that we currently have over inflated asset prices. This means that there is a good chance of a correction in the next number of years. I needed to find a way to find a balance between ensuring I hit my FI number by the year 2039 and enjoying some aspects of Barista FIRE now.
I decided the best way to do this was to calculate how much I would need each year between now and the year 2039 to hit my FI number. I would use the 31st of March as my annual date, as this is the month before my birthday.
For this experiment, I am going to use an annual inflation rate of 2%, which is the top level of the European Central Bank inflation target. I am aware that inflation could run higher in the near future (it is currently running at 1.7%), and thus I will adjust this on an annual basis if inflation does infact run higher than 2% in any particular year.
I am using a 4% real return rate, which is the return after inflation (6% actual return, minus 2% inflation = 4% real return).
The nice thing about adopting this approach, is that it doesn’t matter what return I actually get year on year. If returns are down one year, I simply need to add more capital. If they are up another year, I can take more time off on that particular year. This allows me to enjoy a Barista FIRE approach and monitor my portfolio on an annual basis to check that I am inline with my forecast.
At the end of March, my portfolio was valued at €166,356.94, so I will use this figure as the starting number.
30k in today’s money, will have the purchasing power of approximately €43,000 in the year 2039 (based on a 2% compounded adjustment).
Therefore, my inflation adjusted portfolio amount for the year 2039 will be:
43,000 X 25 = 1,075,000
+ 75,000 for the mortgage balance
It is somewhat sobering seeing the impact inflation has on your FI number.
Based on these numbers, I will need to ensure my portfolio hits the following target on the 31st March each year:
|Year (as at 31st March)||Portfolio Target|
To summarise, I can now review my FI number on an annual basis, knowing that I have an annual target for the 31st of March each year to try to hit.
My current target is to ensure my portfolio hits at least €198,218 by the 31st March 2022.
As I mentioned earlier, this table assumes inflation runs at 2% per year. If inflation runs at higher than that, I will update this table to reflect this.
One downfall of this approach is that it might seem that I am over reliant on equities. There are options for me to diversify within a pension, such as buying property through a pension, and I will explore this as I go. I hope to provide more insights into this in due course.
Let’s jump over to the numbers:
|Portfolio Summary (as at 30th June 2021)|
|Portfolio Capital Gain + Income||€3,692.17|
Because I have adopted a Barista FIRE approach with a planned retirement age of 55, my yearly target is to have a portfolio of €198,218 by the 31st March 2022. I am €11,672.68 away from this target.
This is a strange report, because I group capital gains and income together. Because we are ultimately withdrawing 4% (either via income or selling assets), it doesn't really matter how the portfolio grows. Therefore, this report records the changes based on asset types within the portfolio for the month:
|Monthly Portfolio Capital Gain + Income Report|
|Capital Gain + Dividend Income from Equities||€3,220.74|
|Peer to Peer Lending Income||€2.65|
The table below shows the breakdown of my portfolio into the various asset classes:
Please note - I have regrouped my asset classes, adding a new category called "Environmental Investments", which includes investments in Native Woodlands, Christmas Tree Farms & a Tree Planting Start Up.
|Portfolio Asset Breakdown (as at 30th April 2021)|
|Index Funds (Equities)||€85,067.67||45.60%|
|Peer to Peer Lending||€1,648.75||0.88%|
Finally, it isn't all just about money! I also work on projects because I want to make positive changes to the world! Here are some projects I am part of:
I launched The Irish FIRE Podcast in June 2019. While I did run ads back on the podcast when it first launched, these days I run the podcast as a passion project. The podcast shares my story on my journey towards financial independence.
An Dúlra Co-Op is an Irish initiative hoping to make a positive difference, by establishing Irish native woodlands. Irish residents can become shareholders of the co-op and become part owners of newly established Irish forests. I co-founded the co-op in September 2020. We are still looking for new investors, so definitely check it out!
Portfolio Tracker is designed for those who are pursuing financial independence and are looking for a software that will add accountability to your FI journey. Portfolio Tracker is a simple, flexible investment software that will allow you to see the growth of your portfolio over time, without being complicated to maintain. Click here to track your own portfolio.
I helped co-found four new hockey clubs in North Munster, introducing over 300 children to the game of hockey. Interested in your children playing hockey? Feel free to bring them along to any of the following hockey clubs - Castletroy Hockey Club, Ennis Hockey Club, Nenagh Hockey Club and Thurles Hockey Club.