FIRE starter

[Mia85]

This is a thread for discussing FIRE (Financial Independence Retire Early) and supporting each other in planning for the future.

For anyone new to FIRE, the idea is that you live significantly below your income and invest the surplus, usually in low cost funds. The aim is to amass enough that you can live off the returns. At that point you are finanically independent and you are free to spend your time as you wish (which might include working if you want to do that).

There's a huge amount on the internet about it. Lots of news stories e.g. here and here One of the main gurus of the movement is Mr Money Mustache and his website is a good starting point www.mrmoneymustache.com

A lot of the FIRE discussion out there seems to be very US based and/or men in their 20s with no kids trying to retire extremely young so I though it'd be great to talk here and hopefully find likeminded people.

Lol. Yes I hesitated against mentioning it, as mostly irrelevant here and can't be bothered explaining. But now I'm on the subject, it also guides me away from Vanguard into specialist etfs and funds. There's an etf for everything these days!

Hello ladies.

I need your right thinking. I have a few thousand ear marked for holidays next year and the year after. It is currently in a bank account. I am considering sticking it in my ISA and investing it, because I don't want to miss out on the growth (in broad based etfs). But obviously it is a risk. Please help me think it through.

Also I am considering playing with crypto. I keep looking at it and not doing it (I've done this for several years now...). But I think I need to scratch the itch, whilst accepting the money may be gone forever. Which platform is best for fees? Coinbase Pro? Binance? I will probably keep it in there as it's not worth having a ledger at the levels I will invest at.

Hi Starface, I am probably a bit cautious but I wouldn't put anything earmarked for spending in the next couple of years in investments because of the risk of having to pull it out at a poor time and so realise the loss. That said, I think it depends on the situation and whether the amounts are unusual in the context of your other spending. If you're likely to be able to use other sources to pay for it and/or delay the holiday till the market recovers then it's not such a risk. It's the risk of forced sale in poor market conditions that would worry me.

On crypto. I also did the same thing of wondering for a while. I signed up with coinbase which is absolutely not the cheapest for fees but felt one of the most trustworthy and intuitive for a beginner with small amounts. Once you are signed up you can also use the same account for coinbase pro which is much cheaper. My aim is to do this once I feel confident to do so. You also get mini tutorials on different coins which you can watch to 'earn' small amounts of them, which is a nice way of understanding what is out there. Obviously I'm hoping one of these becomes the next big thing and my £3 of free coin will be worth thousands!! So the coinbase/coinbase pro set up works for me but that is very much as an amateur. PM me if you want a referral link where we both get a few pounds of bitcoin free

Just thinking about the holiday money point again, I think the question you should ask yourself is what would happen if the money halved in value in that time? If your answer is that you'd be happy to delay or pay from your cash savings instead that is fine. If you would be forced to cash out at a loss I wouldn't.

I certainly wouldn't put money for the next year or two's 'serious' commitments e.g. school fees or a major payment on house into investments. A holiday may be a bit different depending on your attitude.

@Mia85
Thank you for your thoughtfulness. Actually you are bang on the money that we are also thinking of moving next year, so whilst otherwise I'd be happy to rely on other cash savings if there was a drop, right now I'm not sure how much of that I'll end up spending on the move. And income is a bit precarious short term because I'm having a bumpy return from long term sick, though in the long run I think my income is pretty secure. Maybe I'll split the difference and invest half, and save the rest for back up back up. It's not helped by the pandemic uncertainty and the fact I won't book anything. Uncertainty multiplied. School fees not an issue thank God. I don't think I could stomach the uncertainty of those too.

I think one of the most interesting aspects of FIRE is when do you know that enough is enough and you can 'retire'. I know they say 25 times your annual living expenses. But as most of the material is American based so would it be different for us UKers.

Yes @whysotriggered
Its also very different when planning involves defined benefit pensions kicking in at different stages, plus state pension, plus LISA and ISA, plus private pension.

The UK based podcast mentioned upthread is better on this - Meaningful Money I think. One useful way of thinking I took from him was to plot a timeline with big expenses, plus what age you (or you both in a couple) will be against those expenses. E.g. new car, kid uni costs, finishing work etc. You can then think about which pot the money will come from and roughly how much is required (in today's money). You will need to have a good understanding of the access and tax rules around each savings wrapper. But in the long run you need to understand this stuff to get the best out of the system anyway.

This helped me to see I might need X amount in an ISA if I want to retire at 59, which I wasn't saving for, and that we need some money there for first year uni costs before we get access to a particular lump sum.

Because of these complexities it is hard to give a simple multiplier in the UK. It will be individual.

Oh sorry, I meant to say, the guide in the UK is something like 2/3 your salary income. (Compared to 25 x salary). Check on Which pension guide.
You need to think about when your mortgage is paid off, whether you will be paying income tax still (or paying for Ni credits to get full state pension), and whether income tax applies (depending on which pot you are pulling from). Remember also Income tax is progressive, your first £12k or so is tax free, so you will pay less on 2/3 your salary than you pay on your full salary. And also, you won't be paying into pensions/savings, so that budgeted chunk will not be needed.

@starface thanks for your insight. I really need to sit down and get to grips with what my expenses are and will be in the future. The investing/saving part is almost the easy part!!

It is complicated.

You are right. Saving itself isn't hard (once you get over the psychological difficulty of doing it).
Investing is very easy with Vanguard.
You need to understand the UK wrappers, and their in/out rules and tax.
And then your life plans, which are much easier once you have completed your family. And of course subject to events, so you need built in resilience.

Meaningful money is actually very good. The blog posts are written as a series that you can work your way through.

Today I got my quarterly statement from Vanguard which is obviously nice to get, but what has made me so happy is that it prompted my very sceptical DH to open his too.

DH is highly risk adverse and I struggled to get him to open an account with Vanguard as they weren’t a trustworthy high street bank and stocks and shares ISAs aren’t protected like savings accounts are. Eventually I persuade him to try £100 a month and have been sending him positive articles about Vanguard ever since.

Anyway today he is also looking at his statement and he was really impressed and voluntarily upped his amount to £300 a month and has said he will review it again next statement!

I know it doesn’t sound a lot, but if I can get him onboard fully we could be maxing these out, so this is huge progress!

@Dashel glad to hear he's getting on board.

I’d forgotten all about this useful thread!

@Starface I recall seeing lots of posts on MSE forum discussing how to know when enough money - is enough money…! Some people were carrying on working as they were caught up in the ‘building it up’ mindset; whilst others had experienced a bereavement or illness and it had been a warning to them to slow down and / or stop work and enjoy their retirement. I am see I will want us to retire as early as possible and don’t feel we will need to be jolted into quitting!

@Dashel I remember you. Sounds like your DH is coming around to your way of thinking regarding investments, that’s great .

I should probably also review the finances this summer…

My current conundrum is the pension versus ISA split… you get greater tax benefit of a pension as a higher rate tax payer especially when you’ll be a lower rate tax payer on retirement - but there’ll never be any tax to pay on an ISA! Currently we are paying nearly £1k month into DH pension, and just hoping the rules on pension taxes don’t change too much in the future but it’s a bit if a gamble isn’t it?

@PensionsYes

Re ISA vs pension. It's a bit of a calculation.
Generally I think yes the government may change things, but likely with a fair bit of notice for pensions.

Things to think about:
With a pension:
you get the growth on the 20%, even if you pay 20% tax on the way out.
Yes you get greater benefit if you are a 40% tax rate earner, but even with the 20% rate, you get 25% tax free so you are well up.
It can pass to inheritors tax free if you die before 75 (or something like this, I'm hazy on the details - it's a way off for me).
Also beware the Lifetime Allowance - the max you can have in your pension (I believe including growth) before a punitive tax rate kicks in. There might be ways to mitigate this. I'm not sure. Also a while off for me. You can estimate this using compounding calculators, trying different assumptions.
Meaningful money might say more on this, and says something like "don't let the tax tail wag the investment dog". I would seek advice if this is an issue for you.

A big differentiator is timing. The pension isn't accessible until particular times. The ISA is accessible earlier. So depends when you need the money. I found planning out key dates, like when we might need new cars, when kids go to uni, relative to access dates for pensions etc was a helpful exercise in this regard. It helped me direct money to different wrappers.
ISA doesn't have income tax applied, but does have inheritance tax applied. So not quite no tax.

Hope this is helpful in thinking it through!

I'm currently considering a huge life change. A close relative was recently diagnosed with terminal cancer and is only early 60s. Their partner also has major health issues. I am 55, have a personal pension pot of £321k, am paying into USS (last 2 years, salary of £50k) and have lgps pension cetv of £50k. My mortgage is around £78k. I'm knackered (various reasons), need a couple of months off work to recover. My employer is going through a restructure and there is a very slight possibility of redundancy in the next few months. Payout would be around £6k.

Life is so short, and the older you get the more health issues you can face which mean you can't travel, or be as active as you think you'll be in retirement.

I'm considering working the next few months, seeing how the restructure goes and then looking at getting a CETV on my USS pension (im hoping it will be similar to the lgps figure as I'll have the same service and contributions are the same %). Then transferring it into my pension pot, paying off the mortgage, having a couple of months out, living on my emergency fund, then getting a part time job. Then leaving my pension pot alone, to grow over the next few years while I balance things by working part time but also having more free time to do the things I enjoy. For example, I'm looking at a side hustle idea of an online business, either blog based, or doing some kind of coaching.

The other option is to go part time where I am, but this would mean still having a mortgage - and therefore living on less money with the same bills. Being mortgage free means a lot to me and I think psychologically would be very freeing.

Either way, I'm intending to retire earlier than my state pension age - much earlier, as I'd like to retire before I'm 60 (npa of 67) so I'm not in the camp of working as long as you possibly can to build up a very generous pension pot - which I might never get to benefit from properly.

Interested in everyone's thoughts on this?

I think what you plan sounds sensible. You are right that life is actually quite short and we just don't know health-wise what is around the corner. My only question - Is USS a final salary scheme and if so would it be better to leave it there?

@chimichangaz

Are either lgps or USS defined benefit pensions? If so, usual advice is not to transfer out as the benefits are so secure. Your USS one might be defined contribution. Also, if defined benefit, what age do they kick in at. Might be 67, or might be 60. Find all this out.

The biggest problem I see with your strategy is tax and mortgage repayment fees. If you try to take out 78k in one year to pay off the mortgage, it will be highly taxed as income. Plus you have to take more than this out to have something to live on. And check your repayment terms to make sure you don't also pay a big fee.

There is also the lesser question of whether your interest on the mortgage is likely outweighed by investment gains over the remaining mortgage term. This is small beans compared to mental freedom though.

However, to achieve a similar mental freedom, could you make a plan to pay off your mortgage using money from your personal pension over a few years keeping under the 50k income tax threshold (where you tip into the 40 % rate). You then have the mental freedom of knowing it is "paid off" (not a chain around your neck), but don't pay unnecessary tax. Can you access the personal pension now at 55?

Once you have planned that out, you can figure out what personal pension you have left.
Then you can decide whether to go part time topped up with drawing down some pension to pay mortgage. Or part time somewhere else, or trying those other ideas.

I personally would hang on for the redundancy payment if possible.

You also might be able to just take a few months out from work on a sabbatical or career break (check policies) if you need it, rather than needing to resign to achieve this break.

Anyway, those are a few thoughts. But yes, life is for the living, not mindless accumulation.

Oh another thought. Do a timeline. Look at when other benefits, e.g. state pension or defined benefit pensions kick in. You might be able to spend relatively more from your personal pension earlier, to be balanced by other pensions kicking in later.

chimichangaz you may already have looked into this but my understanding is that if the DB pensions have a CETV of over £30K then you are legally required to get financial advice on the decision before you can transfer out. I have read that (but not personal experience) advisors are very reluctant to advise a transfer out and that pension providers often refuse transfers in unless there is a positive recommendation from the IFA for the transfer. I think it's also the case that the advice can be v. expensive and for a relatively small pension amount it might not be worth doing it. You might already have looked into this but I'd consider the costs and effort of the process before you rely on using the DB money.

Which article about transfers www.which.co.uk/money/pensions-and-retirement/company-pensions/transferring-your-company-pension-apxs62n5bwyx

I completely understand why you'd want to make the most of life now and why you're thinking of having a complete change of pace. Taking the next few months to think about it and plan (whilst waiting to find out about the redundancy) sounds a very good idea. The worst thing to do would be to rush things and then find yourself forced to compromise your plans for finanical reasons. Starface's post raises some really important points on tax efficiency etc. Have you seen an IFA to talk your plans through?

Starface's idea of a time line is really excellent. If I were you I'd spend some time working out exactly what I think I'd need to spend each year (using your current spending as a starting point) including the current projected mortgage payments. Then work out all your sources of income in retirement and work backwards to see how much of a pot you're likely to need to meet the shortfall.

On the pension income side. Make sure you get all the info you need. Have you already built up full state pension entitlement? If not get a pension forecast and find out how much you have to go. On the current DB schemes, I think USS is a 1/75th scheme so I guess you must have built up a pension of c£1350 a year through that already. Looking at the terms the current pension age is 66 and it's only just gone up to that. Even if your eventual state retirement age is 67, you might find that you can access your existing benefits with no/little reduction at 65 or 66 as I think existing contributions keep the retiremement age that they were paid in at. Check all this with your pension's office. I can't tell so much from your LGPS CETV alone, do you have a forecast of how much it would be and when it is payable? Do you have any other DB pensions?

If you have c£9k a year from state pensions plus c£3k from defined benefits then you have a £12k a year 'guaranteed', inflation linked income from 67 (and possibly some a bit earlier) which would give you a reasonable safety net for your older years if markets don't perform well. I would explore keeping the DB pensions and then working out how much you need in your pension pot to get to your desired income in post 67 retirement. You can then work out how much of the pot you could draw down in the next decade to help see you through if you take time out/move to part time.

Nb thinking about it the lgps is much more generous than Uss so I guess you have built up more as an annual amount there which would make sense with the highish CETV.

This thread is great. Just popping in to say hello.

The government provide a free pensions advice service which might help, not sure how good or in-depth it is.

@Starface @Mia85
Just popping on to say I read your replies with interest - I've been decorating my home office for the last few days so have had plenty of time for thinking!

Your thoughts are very interesting, and certainly some of them I hadn't thought of - like the timeline idea, and also using the personal pension money to pay off the mortgage over a few years.

To answer a few of your questions:
Yes I've built up full state pension entitlement
Yes USS is a DB scheme (my estimated pension at 66 is approx £8.4k subject to me continuing to pay in of course, with a £25k lump sum)
Yes the mortgage interest is outweighed by investment returns but as you say, small beans compared to mental freedom!
Yes if I can (and if indeed there is a payment) I would prefer to hang on for a redundancy payment
No I can't take a sabbatical (not worked there long enough)
I haven't seen an IFA yet but I have an advisor that manages my personal pension so I will run my idea past him and see what he comes up with
I believe I can withdraw 25% of my pension(s) as a lump sum with no tax implications? Will check this
Interesting point @Mia85 about advice, and pension companies unwilling to accept a transfer in without a positive recommendation. I'll ask my FA about that too.

The biggest 'problem' (not a problem at all, I know I am very very privileged) is that leaving those pensions where they are, assumes that I will make it to pension age, and be healthy enough to enjoy them. Whereas if I transfer them now, I face the 'cons' you've outlined (paying for the advice, taking the risk myself of investment rather than via a DB scheme) but I also have that time freedom to enjoy my life while I am still young, and healthy enough to do so. I have a health condition (diagnosed over 30 years ago), controlled by medication but nonetheless which puts me at higher risk of certain cancers, or even my condition deteriorating and affecting quality of life, at some future point.

Can't help but think that my relative with terminal cancer is only 6 years older than me, and will not get to benefit from their pensions, and still had so many plans for life that will now be unfulfilled. This is uppermost in my mind at the moment as I think all of this through, but I also realise I need to be rational, and not impulsive.

I think my next step is to contact my advisor to run it past them.

Incidentally, I can request a CETV from USS free once every 12 months. I don't want to 'waste' it by requesting it now, and then having to pay, should I decide to go ahead with my plans. I tried to look up how to calculate a CETV but it said something about calculating your future pension at approx x20, which is ludicrous as it gives me something like £170k. I expect I need to calculate it on what my current estimated pension is x 20, and not what my future pension would be, if I keep paying in - anyone got a way I can work that out?! I'm due to get a statement from USS hopefully in the next month, as my last one was after I'd only been in the scheme 6 months, March 2020 (which feels like a LIFETIME ago!)

@chimichangaz

Another thought has occurred to me. You might be able to take your DB early, with actuarial reduction. You could then preserve the certainty and security aspects whilst also retiring early. It would be an alternative to cashing out. You might be able to find the calculation for this somewhere. I'm sure I saw it once. It was something like a loss of 25% for taking it 5 years early. I'm not sure it's what I'd do in your circumstances but is another option.

The DB calculation is your yearly benefit x 20. So roughly speaking you can get 50k per annum before incurring the lifetime allowance tax charges. 170k looks about right on 8.4k per annum. But I am NO EXPERT here. This is my own surmising from the internet. How much do you accrue each year? If it's a CARE at accrual rate of 1/54 per year, youve banked 1851 income per annum at 50k salary (50k divided by 54, then multiplied by 2), with a rough CETV of 37k (1851 multiplied by 20). Again no expert and if I'm wrong I want to be corrected to understand this better. You have to know the details of your own scheme.

A colleague recently had a very useful chat with the government pension advice service. He has a complicated set up with bits of pensions and is semi retiring (accessing pensions) in 6 months. You could also try them as advised above. He had all sorts of what sounded like mad ideas to me, and they gave him good input I think.

I hear you on the family member dying early. I lost a parent close to retirement age, who had carried on working and ended up only truly taking a truncated year of retirement with a terminal illness. It wasn't necessary. The other parent is still angry about it. It prompted me to over analyse my own situation with a plan to at the very least retire at 60 and I might never now go full time before that (my version of semi retire early). I value my time really differently now. I demand to be paid so much more to work more than necessary because my time is precious to me. I watch the careers of those around me, and the stress, and hear the "oh you'll get a ton of money if only you will do xyz" and I literally thought "is money all you have to offer me?". You get one go round in life. Time is finite. Use it well. It sounds like you have good provision. I really hope you enjoy your life.