June 2024 Portfolio Update
Friday 5th July 2024
Hello €600,000!
I don’t usually start a monthly update with a portfolio update, but this month we hit a big milestone - we reached the €600,000 mark! Every 12 months I look to revalue our investment properties based on changes in the property market. This was probably the hardest time yet in terms of revaluations. The Limerick property market has entered what can best be described as a bubble. For example, a similar house we purchased in 2022 in Cappamore, Co. Limerick for €155,000 was recently listed for an asking price of €195,000 - fair enough you might say! It turns out there are currently three bidders on that property, with the most recent bid at €243,000. This has made it difficult to value our properties, however in the end, I leaned on the side of caution. All in all, I added around €10,000 to the valuation of each of our properties, and with another decent month of stocks, our portfolio hit the €600,000 mark for the first time. I will provide further updates in the usual monthly portfolio update below.
The Theory of FIRE
One of the most interesting things about FIRE is that most of what we are planning for is simply based on theories. We use tools such as the 4% rule and the ‘Die with Zero Calculator’ to work out our FIRE number, based on an assumption that our portfolio will continue to return on average 4% for the next 60 years!
It is actually a strange thing that we put all our value on such a tool. Obviously no tool is perfect, and we have to calculate any sort of early retirement on assumptions and at some point just hope for the best (or be prepared to reduce our spending or go back to work at some point) - this is all part of the course.
I have been reflecting a lot recently on the core differences between FI and RE. The reality is, most FIRE bloggers do the first part, and not the second. And it makes me think more and more about how FI and RE are different. I know I have already brushed on this in my April and May updates.
But on further reflection, I realise they are two different things. FI is a point where, on paper, you no longer have to work again. The RE side is actually looking to move from the theory to the practice.
This is why so many “early retirees” don’t really retire. They hit FI, sure, they leave their 9-5 job, sure, but they keep working. Perhaps scared that things won’t work out as planned, but more than likely just satisfied with finding meaningful work and being content with that.
As Mr Money Mustache mentions in this article:
“It turns out I didn’t need all that money, because my needs and wants will never be more than I earn from my natural desire to do useful work.”
He is, of course, talking about the fact that he hit FI, left his day job and ended up not actually needing to withdraw from his portfolio. He gives further background in this article:
“We quit our jobs as software engineers just about the time our first baby was due. But we didn’t quit working altogether. I started a little company to build custom houses (since building things was always my most cherished hobby), while she started some very flexible part-time work with another company.”
Infact, MMM goes on further in this article:
“Although I will never lose my love for an efficient and simple lifestyle, I’ve actually got a secret plan to get quite a bit richer over the next 40 years… the trick is simply that I’ve been maintaining a positive savings rate, even in retirement.”
What this means is that MMM became FI, “retired” and then continued to allow his portfolio to grow - or even add to his portfolio at times - knowing that it would grow far further than what was needed for his current lifestyle.
It seems for most people that hit FI, the fear isn’t running out of money, but more transitioning to “retirement”. I am looking forward to sharing my own story once we hit FI.
My Original Purpose
I know I have spoken about this a few times in the last few updates. I have been reflecting on my last six and a half years recently, and as part of this, even reread every one of my updates since I started writing about FIRE.
When reflecting on all of this, I tried to remember what my original purpose was six and a half years ago when I started my FIRE journey. Was I looking for FI, or early retirement? For so long, I have put them as one in the same, using the two terms interchangeably at times.
In fact, if you look through my original articles, I talk of wanting to hit FI. At some point, I seem to exchange that with the term “early retirement” - using both as if they are the same thing. Of course, they are actually two different things.
In the end, I found the answer when reading the home page of The Irish FIRE Podcast:
“I was sick of selling my time for money and realised that through the power of compounding interest, I could work towards financial independence. For me, the most important thing my money can buy is freedom for myself and my family. My ultimate goal is to build a portfolio that can cover our annual expenses - at that point, we will be truly financially independent. “
So there you have it. My real mission the whole time has been to hit FI. Early retirement has been a little bit of an afterthought. This is largely why I have always reported on the size of our portfolio, not the cashflow. A big portfolio will make you FI, for early retirement, we need cashflow.
An interesting other point is that I talk in the quote above about “buying freedom”. FI brings both a sense of financial freedom, but more importantly time freedom - which is what this whole FIRE thing is really about.
I suspect for most of us, the FI will naturally come first. Especially if some of our FI portfolio exists inside a pension, where we might have to hit a certain age before we can access it. Or in our case, we have a mix of pension and 4 investment properties - would we liquidate those properties if we had to? Sure, we could, and when putting numbers into a spreadsheet to determine if we are FI or not, the calculations assume we would - but the reality is, we would likely push to live off the rental income instead (thus why we are currently aggressively paying down the mortgages on at least 2 of our investment properties.) So for most of us, the day will come where we are FI on paper, but not ready yet to retire as our portfolio won’t allow us to without major liquidation.
Of course, there is always a chance you might hit RE first. This is what the Money Flamingo website often talks about - the state of semi-retirement, or even better, true early retirement.
Say I had focused on property from day one, rather than stocks, and simply purchased 3 rental properties, paid down the mortgages and lived off the rental income. The properties might only be valued at €200,000 each, a total equity of €600,000. Not enough to say I am technically FI in an FI calculator, but the cashflow would allow me to cover most of our families expenses. So it is possible that the RE can come first.
And as mentioned earlier, for anyone living that semi-retired lifestyle and adopting Coast FI, then some element of this is taking place.
What is my point of all of this? My point is, that recently I have been focusing so much on defining my FI number, that I am missing the wood for the trees. Hitting FI isn’t about working out every little cost and putting that all together. It is really just about making enough assumptions to feel secure and seeing if we hit FI or not, based on the size of our portfolio and expected return.
Updating my FI Definition
I talked last month about Lean FI and defining FI based on this - and 100% that is all theory. No one is ever hitting Lean FI and never working again. However, after getting some feedback from the Limerick FI meet up group, I realised I was wrong to assume financial independence based on covering our own living costs.
Instead, I realised that we just need to propose an amount which would cover our average spending and go with that. It doesn’t need to be exact, but it needs to be enough to cover more than just a Lean FI budget.
I decided I would go ahead and make some assumptions about our own spending. It won’t cover all the one off expenses - those trips to New Zealand, the kids college expenses and the like, but it will make a general assumption on the following:
1. €40,000 is enough for our family of 5 to live comfortably and be enough to continue to pay off our mortgage. Our kids will eventually no longer be financially dependent on us, and there will be plenty then for holidays and any other surprises that come up.
2. Once I turn 60, our mortgage on our own home will be paid off, reducing our annual expenses by €10,000 per year.
3. When we turn 68, we will have access to the state pension, worth around €25,000 per year in today’s money for my wife and I.
With all of this factored in, let’s forecast our journey to FI based on the fact we are now 6.5 years in:
So as we can see, assuming we cut down our monthly contributions to €5,000 from next month, and assuming an average 4% after inflation return on the lifetime of our portfolio, we are on track to be FI based largely on our current spending habits in about 18 months time.
Last month I defined “Financial Independence” based on the official definition. However, on reflection, (and with the help of Chat GPT) I have defined “Financial Independence” as:
"Financial independence is the stage where your accumulated assets generate sufficient income or can be strategically sold to sustain a comfortable lifestyle indefinitely. This is achieved through a safe withdrawal rate and by accounting for conservative annual returns."
In other words, as long as I have built a portfolio that can provide income or be drawn from by selling assets, and I maintain a comfortable lifestyle with a conservative return and a 4% withdrawal rate, then I can declare myself and our family financially independent.
What does this mean in practice? Well, firstly, let me repoint out that this is all theory based. Note my numbers are actually smaller than when I reported this back in January. This time around, I am not trying to crunch every little expense like I did back then. I am giving myself a ballpark and I am content with that - because we are looking to simply cover a standard enough lifestyle - but also knowing that even a minor change in return (say 4.5% instead of 4%), makes a massive difference to the numbers long term!
This process has also helped me to understand that I will either hit FI or semi-retirement first - but I need to stop making contributions when I hit one or the other. I have Tina from Money Flamingo to thank for this, who pushed the idea of not over saving. To confirm, here are my projections:
1. I am FI when our portfolio hits €750,000, based on the results from the ‘Die with Zero’ calculator (based on a 4% inflation adjusted return).
2. We are ‘Semi-Retired’ when we produce enough portfolio income to cover most of our expenses and can simply work 5 - 10 hours per week to cover any difference.
3. In the short term, we don’t plan on liquidating our assets to cover our expenses and are happy to work a little to make up the difference.
It is likely that we will hit FI first. At this point, I would scale back work further (likely moving to working 3 days per week), cover our monthly expenses and wait until the two mortgages were paid off by the rental income to a point where I can embrace semi-retirement - although I would be open to referring to myself as semi-retired if I was only working 3 days a week!
Either way, at this point, we will be FI and semi-retired - but not fully retired. And this is OK - it has become clear that this was never about stepping away from work completely. FI has been the real goal since day one, and it will be wonderful to show that this is all possible in an Irish context!
As a final reminder, it isn’t to say we couldn’t retire in the traditional sense. We could 100% restructure our portfolio, sell some investment properties and retire. We just know that some work is an important part of a happy life, so until we decide otherwise, we can remain semi-retired.
Hello Lean FI!
Where things get fun is when I started to plug the numbers in based on my Lean FI assumptions. I mentioned last month that our Lean FI expenses are based on a budget of €30,000 per year. Based on the same assumptions as above (mortgage paid off at 60 and State Pension at 68), it turns out that we actually just hit Lean FI!
Of course, this assumes that we would need to sell some of our investment properties and invest that cash in stocks etc to ensure we have enough liquidity - but again, this is all theory based, I suspect no one would actually retire at some point without some sort of causal work at a minimum.
Here is the chart confirming our ‘Lean FI’ status:
The Diminishing Effort of FIRE
The final point I would like to make is why I am looking to scale back on our monthly contributions. I wrote back in April about how I had taken on another project. It has increased our monthly contributions from €5,000 to €7,500 per month. At the time, I was under the impression that we needed to pay off three mornings in order to retire. I hadn’t come to the conclusion that we were going to hit FI well before that point!
In the end, the additional €2,500 we are saving is not worth the extra effort it takes for me to earn that money. I am working an additional 2-3 hours per day to earn that money, yet when you actually look at the numbers, this isn’t worth my time.
Let me expand further. Assuming a 6% return from now until we hit a portfolio balance of €750,000 it will take us 14 months to hit a portfolio value of €750,000. If we reduce our contributions to €5,000 per month from here, then it takes 18 months - only 4 months more. Note, I used a 6% return as this is roughly what we receive from our rental income each month at the moment.
Is working an additional 2-3 hours per day for 14 months, worth me saving 4 months of full time work? I think on reflection, absolutely not. I would much rather have an easier 18 month period than stay on my current path.
We see diminishing returns in so many things in our daily lives. For anyone that has ever tried to lose weight, losing those first few kgs might be easier, but we eventually find the effort of trying to lose those last couple of kgs takes far more effort.
Our FI journey is the same. Early on, we don’t mind grinding as we see progress and we need to do the heavy lifting. But at some point, we need to let the compounding take over for us - and thankfully the numbers suggest that with enough critical mass, eventually our monthly contributions don’t really make such a difference to us hitting our FI number!
The result of all of this is that I plan to finish up my additional project as soon as I reach a natural stopping point - I expect this will be in the next month or two.
€600k Breakdown Over Time
When I hit the €500k milestone back in Janurary, I presented a breakdown of how long each €100k had taken me. I thought it would be nice to update this based on the €600k portfolio:
| Amount | # of Months |
|---|---|
| €0 - €100k | 36 Months |
| €100k - €200k | 10 Months |
| €200k - €300k | 13 Months |
| €300k - €400k | 7 Months |
| €400k - €500k | 8 Months |
| €500k - €600k | 5 Months |
What can I say? But yes, I agree with you that it is 100% insane to see €100,000 added to a portfolio in 5 months. That big compounding snowball just keeps growing!
June 2024 Portfolio Update
Last month was the best month in my portfolio’s history. Equities were up big time, our contributions were good and obviously the readjustment of our housing portfolio.
Our monthly contributions were slightly up as our older son celebrated his Confirmation in May and decided to invest €700 of his Confirmation money into our portfolio - just showing this is a real family affair!
I thought it might be a good idea for me to break down the housing valuations to show how I worked out the new valuation:
| Property | Valuation | Mortgage Value | Total Equity |
|---|---|---|---|
| 1. | €270,000 | €140,914.27 | €129,085.73 |
| Notes: Properties in the estate are now selling with an asking price of €290,000. I valued the property at €270,000 to account for real estate and solicitor fees if we ever sold, as well as some money for improvements if the property were to be sold. | |||
| 2. | €190,000 | €105,097.85 | €84,902.15 |
| Notes: This is our Cappamore property. As mentioned above, this one is likely well below market rates, but I valued it conservatively at €190,000. We purchased the property in 2022 for €155,000 - though we have had to do a heap of work to the property to bring it up to standard. | |||
| 3. | €200,000 | €57,068.17 | €142,931.83 |
| Notes: This property is in Shannon, Co. Clare. It is a huge 5 bedroom property and we have valued it at €200,000. We purchased the property in 2022 for €165,000, however Shannon has experienced some decent growth over the last two years. We have been paying off this mortgage aggressively and are due to be mortgage free on the property in early 2025. | |||
| 4. | €195,000 | €124,231.91 | €70,768.09 |
| Notes: We purchased this 3 bedroom property last year for €185,000. We had to do some work to the property, including installing a new boiler. I revalued the property at €195,000, but actually because of the new boiler cost and high legal fees, we actually lost money on revaluation of this property. Still, it is important to be conservative with these revaluations, as there would be legal and auctioneer fees in the event of putting a property on the market. | |||
| Total | €855,000 | €427,312.20 | €427,687.80 |
| Notes: How interesting to see that we own nearly exactly 50% equity in all four properties! Just note, I also have €1,000 shares in An Dulra, thus why there is a €1,000 difference between this equity and what is reported below - I part own native woodlands as part of my investment with An Dulra. | |||
Here are the overall portfolio numbers:
| Portfolio Summary (as at 30th June 2024) | |
|---|---|
| Opening Balance | €562,508.01 |
| New Contributions | €8,200.00 |
| Portfolio Growth | €37,543.05 |
| Closing Balance | €608,251.06 |
Monthly Portfolio Growth Report
| Monthly Portfolio Growth Report | |
|---|---|
| Capital Gain + Dividend Income from Equities | €7,591.45 |
| Real Estate Income + Capital Gain | €29,938.28 |
| Interest on Cash Savings | €13.32 |
| Total Growth | €37,543.05 |
| % Return | 6.58% |
Portfolio Breakdown
The table below shows the breakdown of my portfolio into the various asset classes:
| Portfolio Asset Breakdown (as at 30th June 2024) | ||
|---|---|---|
| Equities (Stocks) | €177,570.25 | 29.19% |
| Real Estate | €428,687.80 | 70.48% |
| Cash | €1,993.01 | 0.33% |
| Total | €608,251.06 | 100.00% |
2024 Year to Date Returns
Here is a summary of my year to date returns for 2024.
| 2024 Year to Date Growth Report | |
|---|---|
| Opening Balance | €498,900.39 |
| New Contributions | €43,200.00 |
| Equities Capital Gains + Dividends | €24,085.70 |
| Real Estate Capital Gains + Rental Income | €42,015.58 |
| Interest on Cash Savings | €49.39 |
| Closing Balance | €608,251.06 |
| Portfolio Return | €66,150.67 |
| % Return | 12.20% |
Lifetime Portfolio Returns
Here are my returns since I started in 2018.
| 2018-2024 Growth Report | |
|---|---|
| Opening Balance | €0 |
| Contributions (Money Added) | €385,067.78 |
| Equity Release* | €41,220.21 |
| Real Estate Capital Gains + Rental Income | €133,155.71 |
| Equities Capital Gains + Dividends | €52,622.70 |
| Interest on Cash Savings | €49.39 |
| Other** | -€3,864.73 |
| Closing Balance | €608,251.06 |
| Lifetime Portfolio Return | €181,963.07 |
* In 2020, some of the new contributions came in the form of an equity release, as we turned our primary residence into a buy to let and purchased a new home to live.
** In 2018 & 2019 I made several bad investments in peer to peer lending, forex trading and unregulated investments, which resulted in losses overall.