Monday 3rd April 2023
I wrote last month about how I was concerned with how I planned to withdraw funds in early retirement. I mentioned that I didn’t want to have to sell our investment properties (at least until we are much older) and that I was concerned with how I could actually look to retire and withdraw €40k per year.
Calculating a withdrawal strategy is an interesting thing about FIRE. It doesn’t seem to matter so much earlier on, but as hitting my FI number gets closer, planning for how I can withdraw is becoming more and more important.
Thankfully, the investment properties that we own do have strong rental yields, so we will be able to hopefully just withdraw from the rental income in retirement - rather than needing to sell the properties to release the equity.
That isn’t to say that I am against selling some of the investment properties in the long run, more that I would rather do that at a time where I no longer wish to deal with the hassle of being a landlord, rather than being forced to for the sake of needing to withdraw.
I see income and equity as two sides of the same coin. For me to be comfortable to be able to fully retire, I need to ideally have a clear withdrawal strategy that doesn’t involve selling our investment properties, but also I need to hit the €800k FI number that we have defined as our “enough”.
I decided to explore this further and have come up with four different options which would allow us to withdraw €40k a year in early retirement, without needing to sell our investment properties.
The first plan is effectively what I mentioned last month. The first aspect would be to pay off two of our mortgages on our investment properties. The second aspect would be to build our stock portfolio to €300k (currently valued at ~€132k), which would allow me to withdraw €1k a month (4% per year) from that portfolio.
My stock portfolio could be a mix of being in my pension and outside my pension, with the idea being that eventually I will hit an age where I can access my pension, and will move from withdrawing from my pension at that point. I discussed this idea back in an update in September 2022.
Under this plan, we would look to pay off all three of our mortgages on our current investment properties. The reason this plan isn’t ideal is that one of our properties is owned by us personally, so we would be subject to 50% tax rates to draw down the funds. However, this would mean that we wouldn’t need to touch our stocks in early retirement and allow them to grow in the background. The current balances on our mortgages are around €360k, thus the gross income needed for us to go down this route is actually more than Plan One.
Plan three involves also not drawing down from stocks, but instead involves us purchasing another rental property and looking to pay off that mortgage, as well as the other two mortgages which are owned by our company. We would still have a mortgage on the property in our own name, however we would have three paid off properties overall which would generate the cashflow we need.
The big advantage of this plan is that it allows us to live off the rental income while our stock portfolio and equity grows in our investment properties. Combine this with some causal work in retirement, it would give us the peace of mind we need in the event that a tenant stops paying rent or other property expenses come up.
Plan four involves not paying off any mortgages and simply purchasing more property. It was the plan I discussed on the recent podcast episode “Planning for Withdrawals in Early Retirement”. The idea is simply to continue buying property, but ensure that there is sufficient cashflow from any deals we put together. This could mean doing things such as renting on a per room basis rather than on a per property basis to ensure sufficient cashflow.
Since releasing the podcast episode, I am in two minds about adopting this approach, as I feel that while this would be better for me in the long run, it is also considerably more work managing more properties.
There isn’t really a right answer to any of these four plans, and in truth I’m not too worried about which one I end up adopting. The key thing is that I am thinking about how I can withdraw without needing to sell our properties at this stage.
We are currently looking for another investment property, though the market is tougher than it was last year. The property market here in Ireland is in a strange place, caught between sellers looking for higher prices and buyers who are dealing with higher interest rates and less leverage as a result of that. We are definitely finding it more difficult to find deals that meet the bank's requirements.
One of the nice things about our position is that we don’t have to buy another property. ‘Plan one’ or ‘Plan Two’ are both viable options which can be implemented without us needing to purchase another property. In many ways, this has led us to be a little more picky than we were last year, as we are keen to find the right property, rather than purchase something just for the sake of it.
So we will enjoy the process, continue saving more cash over the next few months and building up our cash fund, so that we have the option to purchase again if the right deal comes along. We don’t need to decide just yet what plan we will adopt, though I suspect we will need to pick a plan within a few months as we get to a stage where we need to decide where to put any excess cash - either into a new property, or starting to pay down one of our mortgage's.
Back in March 2022 I first mentioned the idea of opting a Barista FIRE approach when my portfolio hit €750k. As it is, I am still keen to build a portfolio to €800k either way, as I think this is a big enough number to allow me to be truly financially independent. How my retirement and withdrawal strategy fully plays out from there will depend on several factors, including how much I end up working in retirement.
Given it is likely that I will work a little bit in retirement anyway, I could account for this in my FIRE plans. For example, assuming I was happy to work a little as a freelance software developer in retirement (working say 5 hours per week on a casual basis), I could simply look to withdraw €32k per year in retirement (4%), while looking to cover the additional €8k a year through work.
As my children grow up and become less dependent on us financially, €32k per year will be enough for my wife and I to live fully, so the need to work will no longer be required.
Another option is that we look to pay off two mortgages and start living off the rental income from two properties. This would give us annual income of €24k per year. I would need to work a little to bridge the difference, bringing in a working income of €16k per year. The advantage of this approach is that it allows me to semi-retire a lot sooner and even though we are withdrawing rental income from our portfolio, the portfolio will continue to grow as the property equity and stock portfolio grows over time.
I think for anyone with young children and high expenses because of raising children, knowing that your expenses will be reduced in a decade or two, a Barista FIRE approach can be a great option, which still allows for full early retirement once your children hit adulthood.
I was featured during March on the Money Flamingo website. It was a great honour to have my story shared, but also Tina crunched my numbers to determine when I could retire. You can read the first article by clicking here, and the second by clicking here.
I am still on track to cut back my working hours at the end of April. This is going to reduce the amount we save from €10k per month, to around €5k per month, but the trade off will be well worth it, as I will have so much more time freedom than I have now.
As a reminder, I made the decision 18 months ago to work harder and longer by taking on extra work where I could. This resulted in a huge increase to my hours each day, however it resulted in us saving significantly more money.
I am excited about scaling back from work and seeing what the next chapter of my working life will bring. I definitely am not going to refer to myself as “semi-retired” just yet - I would prefer to refer to this new phase as “lifestyle-first”. It will be different from what I have been doing over the last 18 months, which was very much a “money-first” approach. So while I still will be working full time, I will be working significantly less than I have been over the last 18 months and will instead focus on a far better work-life balance, including projects that I find far more enjoyable, which have flexible working hours and generous deadlines where I can work at my own pace.
Beyond that, I am not so sure yet. As it happens, my reduced working hours will likely coincide with me hitting Flamingo FIRE, which is the point where I am halfway to my FI number. This gives me so many options, including reducing my working hours to part time and adopting semi-retirement at anypoint from now if I wanted to. I plan to check first how sustainable this new work situation goes, but I am open to reducing my work hours further if needed. Either way, my slow transition to semi-retirement is ready to begin.
We consumed 281 KWh of electricity during March, buying 148 KWh's. Our solar panels covered 47% of our electricity usage, saving us €49.21 before depreciation (based on 37c per kWh). We received a credit back of €6.30 from supplying 30 KWh's to the grid. Our total savings accounting for depreciation was €32.41, giving an annual return after depreciation of 4.08%.
Here is a breakdown of our solar panel usage since they were installed in July 2022:
|Solar Panel Return - August 2022 to March 2023|
|Month||Percentage Covered by Solar||Electricity Saving (after depreciation)||Credit from Supplying the Grid||Annual Return|
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