UK Retirees At Risk Of Running Pension Pots Dry

We spend a lot of time looking at ways to become financially free and retire early should we wish. We regularly look at ways to slash unnecessary spending, boost income, invest better, reduce taxes, implement early retirement strategies and more.

And today we’re looking at an in-depth review of the current batch of retirees to see if we can learn anything that will help our own finances and retirement preparations.

Standard Life Aberdeen, an investment company, have surveyed 2,000 UK adults who were either due to retire in the next 12 months, or had retired in the past 12 months.

The report they’ve published is a treasure trove of information looking into the minds and finances of those retiring. In this video we’re going to share with you all the key points, so we can learn from those who’ve done it. Let’s check it out…

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Redefining Retirement

Only a few a years ago, before 2011, employers used to be able to force workers to retire at 65 (known as the Default Retirement Age). A few years later saw the most radical changes to private pensions for a generation, as everyone was given more choice in how they take their private pensions – previously they were almost always forced to buy an annuity.

These, plus many other factors have contributed to the changes to what it means to be retired.

We’d say there used to be a perception that retirees were sitting around and waiting to die – let’s not forget that it wasn’t that long ago when they were frequently called old age pensioners, which isn’t the most flattering of terms.

According to the Standard Life Aberdeen report, there is a noticeably growing trend towards flexible retirement and continuing to work in SOME capacity.

56% of the 2021 retirees don’t plan to give up work altogether, and 27% will work part time to support themselves. It’s not clear whether they are doing this out of necessity, but we suspect that many want to work a little.

We’ve long said that work is not the problem. It’s the number of hours of forced labour that you have to endure every week that’s the issue. It leaves no spare time to relax and enjoy yourself, but working on your own terms is a very different story.

If we apply this logic to our own early retirement plans, then maybe we don’t need to build such a large freedom fund after all. Maybe we should be looking to partial FIRE instead. FIRE stands for Financial Independence Retire Early.

Back to the report, 6% of the retirees want to set up their own business and 45% are looking forward to learning new skills. We can totally relate to this having ourselves always wanted to start a business, and the fact that these retirees now have more time and far less financial risk should they fail, means they can finally do what they always wanted.

What Does It Mean To Retire In 2021?

The average age of the retirees in the survey was 60. Three quarters were married or in a relationship, and the rest were not.

The average value of their pension pots is £366,000, which in our opinion seems a very good haul considering most people are very lax when it comes to retirement planning. Worryingly though, a third have less than £100,000, which has no chance of lasting for any meaningful amount of time.

On average, the retirees plan to spend £21,000 per year in retirement, so £100,000 for sure wouldn’t go far. £21,000 is almost £10,000 less than the average UK household income. Presumably as the average age is 60 most of them will own their home outright, so don’t have the largest household monthly expense to worry about.

So, what does it mean to retire?  The quintessential meaning is “spending time doing what I want”. That sounds like freedom to us and that is also exactly how we describe it.

44% see retirement as giving up work completely and 30% see retirement as never setting an alarm again – now that sounds good. And 19% plan to do charity work or volunteering.

We think it’s fair to say that retirement is about living life on your terms. No more doing soul-destroying work for a boss and job you hate, no more commuting in darkness bumper to bumper, and no more losing friends and relationships due to lack of time.

Will Their Pension Be Enough?

Ok, so far, we’ve mostly looked at the positive side of retiring but is all that affordable?

We’ve seen that the average planned spending is £21,000 a year, and according to Standard Life Aberdeen retirees would need around £390,000 in savings to retire at 60 on top of their future State Pension income, to cover their expenses over the course of a 30-year retirement.

Presumably that’s based on holding most of their investments in low risk, low return assets such as bonds and on running the pot down to zero, which differs from what we need in the FIRE community who might need our pots to last 50 years or more.

So, they need £390,000 but the average as we’ve seen was just £366,000, meaning some of them are in serious trouble. We can’t imagine what it might feel like to be 80 and broke.

The report says, two thirds of the retirees risk running out of money in retirement based on the average spend of £21k a year. It was a similar dire story no matter where they live in the UK.

We hate to say this as ambassadors of financial freedom but some of them – like the ones with only a hundred grand – should probably struggle on working a few more years. Every extra year worked is more time contributing to your retirement fund, more time for it to grow, and less time withdrawing from it. This might be easier said than done as things always seem to get harder when success is in touching distance.

For the rest of them, and assuming they’re invested in lacklustre assets, they just need to accept more investment risk to reduce the chances of them outlasting their money.

These are the estimates of what someone today might need at different levels of retirement as quoted in the report:

The minimum looks to be impossible, and we wouldn’t wish this on our worst enemy. How anyone can live off £850 a month in the UK is a mystery to us.

What’s being considered a moderate retirement is £20,200 a year for a single person. We might just about agree with this, but it really depends on whether the retiree owns their home.

The current state pension is just over £9,000 a year, so goes part of the way to covering their essential bills but that still leaves a lot that needs to be covered by their own savings. Disturbingly, 1 in 20 plan to rely the state pension alone.

Do They Feel Financially Confident?

37% are worried about not having enough money to last throughout retirement. And we think they’re right to worry.

As we’ve seen, most of them have not collected enough nuts for winter. Most of you reading this post still have potentially decades to correct this. Personally, worrying about money is one thing that we don’t want eating away at us, so we’ll certainly be aiming to overprepare.

48% plan to reduce their spending habits to support themselves in retirement. We don’t think this is as easy as they might think it is. Free time is often spent, literally. While you’re at work you probably aren’t spending much money, but when your diaries clear you will likely be out spending more – a lot more.

27% will work part time to support themselves in retirement and 21% plan to sell their property or downsize to fund retirement. We think downsizing is a great way of freeing up some money if needed. As the kids will have hopefully flown the nest, you don’t need to have all that capital tied up in a 5-bed castle if there’s just 2 of you.

Sources Of Income

The report only briefly covers this, so we don’t get that much insight. Almost one in five retirees say they plan to rely on one form of income. Not surprisingly pension pots are without a doubt the most popular option. We put this down to a few reasons:

  1. The government push pensions as the main retirement vehicle. This is truer today than it’s ever been with policies like auto-enrolment.
  2. Most people have a lack of financial discipline, so any money available in accessible accounts such as ISAs or savings accounts is probably spent on cars, holidays and house extensions long before retirement approaches.
  3. Most people never consider establishing multiple sources of income. Throughout their lives they’ve only ever had one – usually from a job, and so having one in retirement is normal to them.

If you watch our YouTube channel or read these blog posts regularly, you’ll know we always encourage having multiple streams of income.

How To Know If You’re Financially Ready?

The report gives some good advice about how to calculate when you’re ready to retire and it’s essentially the same as what we say here at Money Unshackled. Although, one major exception is everything they say is geared towards the retiree getting financial advice. Whereas we think most people are fully capable of running their own finances if they are prepared to do some research.

The 3 steps are:

  1. Estimate your annual cost of living. Take what you spend now and make some adjustments for the things you will no longer have – goodbye expensive slave unforms and commuting costs, and hello new costs like world cruises, or maybe more likely care costs.
  2. Calculate how much you have. Check all your pensions, ISAs, savings, and insurance products, and don’t forget to check what state pension you’re entitled to. You might even have the potential for an inheritance.
  3. Plan your estimated income. Here they encourage you to check out online calculators or speak to an advisor. If you’re hoping to retire young as WE do, we suggest you read up on the 4% safe withdrawal rate, which we’ve covered on our website and YouTube channel numerous times before.

What Are They Most Excited About?

The 3 things they’re looking forward to most are all forms of freedom:

  1. The freedom to have their own schedule.
  2. Simply not having to work.
  3. Spending more time with their family and friends.

Who Gets Retirement Advice?

Before we read the figures from the report our perception was that most people feel overwhelmed with investing and managing their personal finances, so when it comes to a big life event like retirement, they think a financial advisor can do it better.

The report found that 40% of soon-to-be retirees have already sought financial advice and 16% say it’s on their to-do list. Only 44% don’t intend to get advice at all.

Before the internet, learning about investing or anything for that matter was much harder, so professional advice was probably a good idea. Nowadays, you could spend a little of your time and learn everything you need to know and probably do it better yourself.

55% of the retirees research their options online, 30% ask friends and family for advice, and 23% get support and information from their employer. Just be careful getting advice from friends and family. It might be the blind leading the blind.

Words of Wisdom

And finally, is there anything we can learn from last year’s retirees? Their words of wisdom include:

  • “Theres a whole new happier world out there.” – we knew this all along.
  • “Factor in a little bit more [money] for the unexpected items” – sound advice for retirement and through life.
  • “Have a plan B” – again, invaluable advice. That’s why we aim for multiple streams of income.
  • “Have projects to keep you busy” – this one really is important. Make sure you have a plan as boredom really is a killer.

What are your retirement plans? Join the conversation in the comments below.

Written by Andy

 

Featured image credit: Timofey Zadvornov/Shutterstock.com

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How To Get £1000 Cash Fast – 10 Ideas

So you need an extra £1,000, and you need it quickly. How can you do that? In this article we’re brainstorming 10 ideas to get your hands on £1,000 as fast as possible.

We’ll cover a bunch of legitimate ways for you to earn that money swiftly – often from the comfort of your own home – plus the smartest ways to borrow a grand without screwing up your finances. Let’s check it out!

Alternatively Watch The YouTube Video > > >

#1 – Cashback Offers

The internet is littered with cashback offers, and we’ve collected a whole bunch of them into one place on the Money Unshackled Offers Page.

This page has hundreds of pounds of cash bonuses, mostly for opening investment accounts, or switching energy or home insurance provider.

You can also get cashback offers by switching your bank account, the best current deals being on moneysavingexpert.com.

At time of filming, HSBC were giving away £125 cash plus a £20 Uber Eats voucher just for switching, and First Direct £100 cash – why not take advantage of both over a couple of months?

After exhausting these, you can take a deep dive into topcashback.co.uk, where you get cash back from purchases when you shop online. Obviously, this should only be used to get paid a little back for things you were going to be buying anyway.

#2 – Matched Betting

Matched Betting is almost risk-free (we have to say almost, since you may not follow the instructions correctly), and these can be found in our guides here.

You use the bookies’ websites against them to milk them of their cashback bonuses by placing bets on both possible outcomes of a sporting event. So in that sense, you can’t lose!

But you can make a lot of money – when I tried it I was able to make £500 a month in the first 2 months by spending just over half an hour a day placing bets.

If I had doubled up my efforts I have no doubt that I could have made £1,000 in the first month.

Indeed, that’s exactly what lots of people do. Matched betting is an easy way to make extra income each month in your spare time, and a fast way to earn £1,000. And if you now work from home, there’s nothing stopping you doing this on your boss’s time!

To do it properly you need to sign up to a matched betting site, like OddsMonkey or Profit Accumulator.

We have introductory offers for the top matched betting, including 60% off the first month or the first 12 days for just £1 (normal cost £19.99 a month), which more than pays for itself if you do the maths.

For more information about how you too can profit, check out our full video guide here.

#3 – Credit Cards

These next two ideas discuss ways to get your hands on £1,000 or more quickly, but by borrowing it over a long, low interest repayment period, rather than earning it.

As such, they should be approached with proper respect and financial literacy. Debt is like fire – if you don’t know what you’re doing you’ll get burned, but if you can use it effectively it will both cook you a steak and run you a hot bath.

Not all credit card debt is created equal.

The way we’ve successfully got money out of credit cards in the past is to use either 0% Money Transfer Credit Cards, or 0% Purchase Credit Cards. Both typically have long interest-free repayment periods of 20 to 36 months.

A Money Transfer Credit Card is good for accessing money immediately, as they literally transfer thousands of pounds into your bank account.

It’s like a 0% loan, but there is a small fee to do the transfer which gets added to the debt.

I have held a balance as high as £15k on this type of card at one point, as I used the cheap borrowing to help me to buy rental properties with.

A Purchase Credit Card might have a similarly long interest-free repayment term. But the way you get cash from it is you use it to buy your everyday outgoings – things like your food shop and petrol – and pocket the cash you would have spent.

In both cases, you need a plan for how you will pay back the balance before the end of the interest-free period.

Putting a few grand in your pocket at a key financial crossroad in your life might make all the difference to your future. It’s a balance of risk you have to weigh up for yourself.

#4 – Cut Back Without Cutting Out

One obvious way to get £1,000 fast is by selling some of your stuff. This is aften a non-starter for most people as they don’t want to sell any of their trinkets, and in any case, they need their Louis Vuitton clutch purse with Damier Ebène canvas and natural cowhide trim.

But we’re not suggesting that you go without – but think about the cash you could claw back quickly by switching out your existing stuff like-for-like with less expensive alternatives.

One easily tapped area is cars. Can you trade in your 3-year-old BMW for a 3-year-old Mazda? You might make several grand on the transaction.

Can you sell your iPhone 20 Pro Max on the second-hand market, and buy a second-hand Samsung Galaxy S9? You could be up several hundred quid.

Also, go through your house and single out things which no longer give you joy, and whack them on Facebook Marketplace. Do you need 3 sofas? Is that £500 of home gym equipment still doing it for you?

#5 – Trading Stocks

Next up is stock picking, and the tool we use for this is Stockopedia. While long-term investing seeks steady long-term returns of around 8-10%, stock picking CAN result in 100%, 1000%, or even higher returns.

Stockopedia works by first serving you up a series of stock suggestions based on specific criteria – such as growth, dividends, mirroring an investing guru’s methodology, and more – and then tells you pretty much everything you need to know about a stock’s financials all on one page.

Stocks are ranked by Value, Momentum and Quality out of 100, and you can easily find stocks that excel in all areas.

While highly ranked individual stocks are by no means guaranteed to be winners, historical rankings have had a high correlation overall with whether stocks performed well or did badly.

Try Stockopedia for free for 14 days using this link, and see what you think. The link gets you a 25% discount too, if you stick around for more!

#6 – Crypto Mining

Now here’s a way of taking advantage of the crypto craze without feeling the need to buy speculative investments. All you need is some graphics cards, a computer, and an internet connection, and you can set your computer to mine cryptocurrencies while you go off and do something more fun,

Mining crypto can pay hundreds or even thousands of pounds a month, and scales with the number of graphics cards you own.

You might already have the equipment if you have a gaming or video editing machine. With just one graphics card you might make a couple of hundred quid a month. Add this on to some of the other ideas in this article and you’re on your way to 1 grand. Invest in several more graphics cards and you’re already there.

For a more in depth look into crypto mining – check out this article next on the 3 Big-Money Side Hustles To Start In 2021.

#7 – Use Your Assets

Do you own a driveway? Rent it out for someone to park on. Do you own a car? Get paid up to £100 a month for placing an advert on your car at carquids.com.

Do you own your home, whether outright or with a mortgage? Then rent out a room or two to lodgers, for hundreds of pounds a month each.

I once rented out a room in my home for £400 a month over an 18-month period, netting me over £7,000 tax free.

An asset doesn’t have to be physical, or even something that costs money. Do you have a risqué story to tell, that a magazine or newspaper might pay good money for?

Gossip magazines love this rubbish. According to frontpagestory.co.uk, you can get £10,000 or more for a good bit of goss.

Similarly, if you’ve caught a unique video or photo on your phone, someone in the media might want to buy that too – preferably of a politician eating a sandwich in an unusual manner (sorry, Ed!).

#8 – Online Jobs

Next up are a whole bunch of ways you can make money online from your sofa, while reruns of 90s sitcoms play away in the background.

Anything you can do online that trades your time for money is really a second job, but there’s nothing stopping you having several online “second jobs” at the same time, and anyone can qualify for them.

PeoplePerHour is a popular site which matches paid project work with people who want to do the job. Here’s some current trending examples of work on offer.

Do you have a skill that you can use in the evenings and weekends to bring home some extra cash from doing online project work? This might range from being able to type to being able to code. The rarer your skillset, the bigger the bucks.

Then there are sites like usertesting.com, who pay you to test websites and apps.

You might also try your hand at designing stuff for sale on Etsy or teespring.com – stuff like this sweet MoneyUnshackled Wage Slave mug. Of course, people would actually have to want to buy your products for you to make any serious money fast…

Finally, you can make fast money from online surveys and market research video calls. Someone we know who does this in their evenings in front of the telly made over £1,600 over the last 12 months, split out like this. The pay-out rate varies wildly, with household name YouGov amongst the stingiest.

12 months of actual returns from various Survey sites

#9 – Physical Side Hustles

And then, there are real world physical side hustles that almost anyone can sign up to and start making decent money fast in their spare time.

These include gig economy jobs like Deliveroo and Uber that you can do in your own time, product testing where you get sent stuff in the post to report back on, being a mystery shopper, and cat sitting.

#10 – Medical Trials

People are also paid good money to take part in medical trials – a quick google cites numbers of £100 a day to £4,200 per trial.

Medical trials don’t normally get to the testing on humans phase until they’ve been thoroughly laboratory tested in all other regards, and can range from initial human testing through to a box ticking exercise before a new product goes to market.

The medical testing companies all cite ensuring your safety as their main concern of course, but that’s a judgement call for you to make.

What other ways are there to make £1,000 fast? Join the conversation in the comments below!

Written by Ben

 

Featured image credit: Inked Pixels/Shutterstock.com

Also check out the MoneyUnshackled YouTube channel, with new videos released every Wednesday and Saturday:

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Are You Spending Too Much? What The Average Household Spends In The UK

Do you ever think you might be spending too much? We usually cover ways to boost your income and make money on this channel, but today we’re focusing on spending, and how your spending habits compare to the rest of the UK.

I’ve been thinking a lot about spending goals recently. Depending on your life goals, making sensible cuts can drastically change your quality of life for the better.

Saving an extra £500 a month might knock 15 years off an average person’s working life, according to our Retirement Calculator.

If you’re keen on clawing back some years of life, then it helps to compare your spending level to others’.

But maybe you’re happy with your level of spending and just want a nosey into your fellow countrymen’s finances. We’ve got you covered for that too!

Commission-free trading platform Stake are giving away a free US stock worth up to $100 to everyone who signs up via the link on the Money Unshackled Offers page, so be sure to check that out!

Alternatively Watch The YouTube Video > > >

The Data

The data in this video comes from the ONS, and covers the cost to households over the period April 2019 to March 2020 – i.e., the most recent period before the pandemic started messing with peoples’ lives.

These figures are therefore a representation of spending during normal times, which hopefully we’ll be heading back to soon! Famous last words…?

Average Monthly Household Spending

The average UK household spends £2,548 each month from their disposable income, which the ONS considers to be their take home pay. This is income after payroll taxes, student loan and pension contributions have been deducted. Spending does not include amounts saved or invested.

Here’s the breakdown by headline category:

By far the biggest expense at £849 a month is Housing, which includes rent and mortgage interest.

It doesn’t include mortgage capital repayments, as these are considered as investments in an asset and not a real expense, though if we were to include them, this figure would go up £122 to £971 a month.

Nor does it include so called “value added” home expenditure, such as extensions and new bathrooms and kitchens.

As it stands, housing is a third of the average household’s outgoings.

The next most significant chunk of money to hemorrhage out of your bank account each month is likely to be Food and other perishables – if we add eating-out into the mix, this makes up 27% of average outgoings, or £689 a month.

The next biggest cost is Cars and Transport, at £354 a month. Unlike houses, the ONS includes the cost of actually buying the car, as well as running costs – quite right too as cars depreciate to zero within a couple of decades while houses do not.

Also considered in here are non-car transport costs for those who take public transport.

Next up are gadgets, subscriptions, sports and other recreation which come to almost £300 a month. Then a monthly equivalent of annual holiday spend at £272 a month. And finally, £87 of miscellaneous.

Let’s now look at these figures by age, to make it more relevant to you:

There’s quite a difference in spend as people age, with costs falling across the board the older you are.

Older people are more likely to have paid off the mortgage, become a 1-car household, and tend to have less spare cash to fritter on gadgets, restaurants and holidays.

If we look at this same data in a table instead, we can easily see that a 30- to 49-year-old is at the most expensive stage of their lives according to the stats, with spending on everything except housing up massively from their under 30s counterparts – lifestyle inflation in action! As they earn more, people tend to spend more too.

Annual Household Spending

Let’s now look at the same numbers but annualized. This allows us to demonstrate a psychological blind spot that we have long suspected was at play in reported savings figures, but can now confirm.

In a previous article, “What Percent Of Your Income Should You Invest For Financial Freedom”, we talked about how much the average person reports that they save, and the average for someone aged 30-49 was just under £3,000 a year.

Looking at the same data as above but annualized, this age group is spending about £34,700 a year. In the middle of this age range, the average household disposable income for 35- to 45-year-olds is just shy of £38,000, making for annual real household savings of about £3,300 a year. The average household contains 1.8 adults, so that’s £1,800 per person.

That’s 40% less than what people report they save! Which means they’re in fact spending a good chunk of what they consider to be savings.

Their mistake is that they are including their “delayed spendings” in their savings figures, probably without even realizing.

To us, this shows that people do not understand the difference between savings and delayed spendings, and that the average person is spending way more than they think they are.

Cutting Back – The Easy Wins

If you’re spending more than the average household at your age and want to do something to address that, you might be tempted to go for the low hanging fruit: subscriptions, holiday budget, coffees, day trips out and so on.

But as we’ve seen, these are unlikely to be a significant part of your total spend. And, your Netflix subscription and holiday plans are probably the things that help you get through the working week with your sanity intact.

Instead, to make the biggest impact on your monthly spending you might want to make just 3 simple changes.

The Big 3 Life Expenses

Looking back at the first chart, there are 3 obvious categories that arguably have the least impact on your overall daily happiness, and yet cost the most money: Housing, Food, and Cars. If you want to reduce your spending, these are the main areas to focus on.

Major Life Expense #1 – Housing

Housing is likely to be your biggest expense, and here’s the averages broken down by subcategory and age group:

For a 30-49 year old household it comes to over £1,000 a month.

If you’re thinking that this figure looks low at £550, remember that it doesn’t include mortgage capital repayments. Also, if your household is closer to 30 than 50 then your mortgage costs might be more like £700, as the people who’ve paid off their mortgages by 50 start dropping out of the dataset.

This average gas and electric bill is interesting – it shoots up for the over 30s, suggesting the presence of kids. My gas bill certainly took a beating once I had to run a full bath every night to clean spaghetti sauce out of my little girl’s hair.

And then when the kids leave home and people get older and retire, and so are in the house more often, we guess that they run the heating more.

The cost of housing is not uniform though across the UK, as you may expect, and there are savings to found by upping sticks and moving somewhere less expensive.

While the UK average is £849 a month, the cost of housing is massively higher in London, the South East, and the East of England.

Every other region of the UK is below the national average, but if you’re looking for a saving of at least £100 above the average you could look to relocate to Yorkshire, Scotland, the North East or Northern Ireland.

You might also choose to downsize to spend less. This image from Netflix documentary The Minimalists shows a heatmap of typical home use:

If you find yourself in a 4- or 5-bed house, ask yourself how much of that space you actually use. The cost savings on your housing spend from downsizing could be hundreds a month.

We all take it for granted that we should be able to afford a big 4-bed house in our 30s, but why is that? Is it worth buying a big castle, if you find yourself chained to a desk every day trying to pay it off?

One way to course-correct from having already bought a big house is househacking, or using your house to make money to offset those large housing costs.

This could take the form of renting out one or more bedrooms to lodgers, or it could be by extracting some of the equity you’ve built up in the property to use to invest in other properties or the stock market.

I myself have done both, previously renting out a room in my 4-bed house to a lodger for 18 months, and taking tens of thousands in equity out to buy rental properties with.

Major Life Expense #2 – Food

The next biggest cost area is Food and other basics, which includes all food and drink, clothing, footwear, hygiene products like toothpaste and shampoo, and tobacco:

It’s the Food and drinks part of this segment that should get your attention. The average 30-49 year old household spends £509 a month on food and non-alcoholic drinks, with 40% of this cost being from eating out.

How does your monthly restaurant and café bill compare with the average household? Is it an area you can cut back on without sacrificing happiness? Would swapping a Five Guys takeaway for a McDonalds make you significantly less happy?

If your goal is financial freedom like ours is, it’s worth noting that saving even an extra £100 a month could shave years off your working life – so it might not even be right to think of it as a sacrifice.

Maybe you could think of it as trading a night out now for a few extra weeks of financial freedom in the future?

Major Life Expense #3 – Cars and Transport

This one really is an easy win, if you’re used to buying new cars or taking out lease cars on a monthly payment, which is essentially the same thing in terms of money wasted.

According to the AA, the average new car will have lost 60% of its value after the first 3 years – 8% being lost in the first mile, according to edmunds.com.

Is a 3-year-old second-hand car materially worse than a new car? Not really, especially when it’s been cleaned, valeted and serviced prior to purchase.

A good car that’s well maintained can last 15 or 20 years, so why would you buy a new one every couple of years? Let some other sucker take the hit from depreciation, and buy second hand.

You might also consider the quantity of vehicles that you own. As I now work from home churning out blog posts and videos, my household no longer needs 2 cars. Moving to a 1 car household would save us £200-£300 a month, as we wouldn’t need to maintain, tax, insure or replace a second vehicle.

Thousands of households, possibly including your own, have moved to a ‘Working From Home’ situation during the pandemic, with many companies now coming out to say they won’t expect employees to come back into the office for more than a couple of days a week.

Are you splashing money up the wall each month by having 2 big lumps of metal sat idling outside your door for the majority of the week?

Missing Out On Compounding

As we’ve said throughout this video, our goals are early retirement and financial freedom. The route there involves increasing our incomes, but also decreasing our outgoings where we can.

Where we make savings, it’s always with happiness in mind – there’s no point being miserable just to save money.

If you have a similar goal in mind and worry that you are spending too much, then be reassured that any steps you do take to reduce your spending will have a double benefit.

First, any spending cuts you make can compound as extra additions to your investments over the years to bring your retirement date closer.

And second, any spending cuts that you can make and maintain into retirement will mean you need less money in your ISA and pension accounts in order to retire, because you’d need less investment income in retirement to cover your now lower outgoings.

These early retirement topics are covered more in these two articles (FIRE1 & FIRE2), so check them out if you haven’t already.

Finally, remember that savings cuts can only go so far. Sometimes it’s more realistic to make additional income. Check out this article next, for 3 awesome ways to make a few hundred extra quid each month and reach your financial freedom goals faster.

What’s your biggest downfall when it comes to your outgoings? Join the conversation in the comments below!

Written by Ben

 

Featured image credit: Art Stocker/Shutterstock.com

Also check out the MoneyUnshackled YouTube channel, with new videos released every Wednesday and Saturday:

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The Early Retirement Danger Zone | Hack The 4% Rule & Hold Onto Your Money Forever

Followers of the FIRE lifestyle will have heard of the 4% safe withdrawal rate and will be aiming to build an investment pot using this rule that’s large enough to provide them an income when they’ve retired.

The problem with the 4% rule is that it lulls us freedom fighters into the false sense of security that following a simple formula will guarantee us a set level of income in retirement.

But because your freedom fund contains a range of investments, the value of your pot will be volatile. What is worth £500,000 today could be worth £400,000 tomorrow. Or £600,000. You just don’t know.

The first 5 years of your FIRE retirement are what we call the Early Retirement Danger Zone. You have no state pension to fall back on because you’re too young, so you need your investments to perform.

But what if they don’t? What if there’s a market downturn? Using the S&P 500 Index as a measure, there have been 16 bear markets since 1926, averaging once every six years.

Today we’re going to tell you how to hack the 4% rule, force it to work for you, and make sure you can safely retire early while holding onto your money forever!

Special offer: New users to Genuine Impact will receive 1 month’s PREMIUM access for free when you sign up via this link. Genuine Impact is research and analysis app that provides insights for investors. Be sure to check them out!

Alternatively Watch The YouTube Video > > >

The 4% Rule And The Problem Of Retiring Early

As a brief recap, the 4% rule says you can withdraw 4% per year of the value of your retirement pot on retirement day, adjusted each year thereafter for inflation.

The origins of the 4% rule started with the famous Trinity study, which backtested the performance of retirement portfolios built from a range of different stock and bond mixes and withdrawal rates covering the period from 1925 to 1995.

The stock market studied was America’s S&P 500, and it was determined that portfolios built from 100% stocks or a 75/25 stocks to bonds split had around a 95% chance of surviving for 30 years.

The study was set up to provide answers for people retiring in their 60s, hence why a 30-year portfolio survival period was chosen.

Unfortunately, this implies that those retiring earlier are at risk of running out of money during their retirements.

With a 95% success rate, this means 5% of people should expect their freedom funds to run down to zero within 30 years of their FIRE date, based on the history.

Here’s a chart that shows the results of a 100% stocks portfolio with starting dates in each of the years from 1871 to 1989:

6 out of 119 tests resulted in going bust. But even if you DON’T run out of money after 30 years, you still might easily end up in the 24% of people whose portfolios’ values were down – people who wouldn’t be able to keep withdrawing enough to live on without eventually depleting their investment pot.

In almost all cases, the damage was done in the initial years, and whether a pot survived its owner or not came down to the events immediately following the retirement date.

Sequence Risk

The greatest risk to your portfolio comes in the first 5 years or so after retirement.

This is because if the stock market were to fall in those early years, it would likely reduce your pot to below the level at which you could safely continue to draw from it at the same rate. Even when the stock market recovery eventually comes, your pot may be too far gone to recover while also sustaining your withdrawals.

While for example, if your first stock market crash came a decade after retirement, you would have built up a 10-year buffer of growth that could happily be eaten up by a future bear market without your withdrawals being affected.

This risk is known as Sequence Risk, and it is the risk of the good times and the bad times happening in the wrong order, or the wrong “sequence”.

According to AJ Bell, the average time it takes for the stock market to recover based on the last 10 bear markets prior to covid was 648 days – nearly 2 years.

The shortest recovery in history was the covid crash, which lasted only 4 months.

While the longest was 1,529 days – just over 4 years – following the 2008 financial crisis.

If you can set a plan in place to protect yourself for the first 5 years of retirement without needing to eat into your pot, this would nip the sequence risk in the bud.

You’d be covered for repeats of the historic worst-case scenarios, plus a bit extra. Get past this opening phase of your retirement, and you should be into clear waters.

Your FIRE Number

First, you need to know your FIRE number. This is calculated as your required living expenses in retirement divided by 4%, if you are using the standard safe withdrawal rate.

You can calculate this easily and get more information including the years until you can retire by using our free FIRE Calculator.

Try playing with it to see the effect of tweaking the rate of return on your investments, or by cutting your expenses a little, or adopting a higher or lower withdrawal rate. The difference will likely shave years off your working life.

The FIRE number is the size that your savings and investments need to be before you can retire. The usual assumption amongst those seeking early retirement is that this number, once reached, is set in stone.

But what if the stock market falls the day after you reach your number and quit your job, and what was once a £1m pot is suddenly worth only £700,000?

You’ve stopped working to start living. Do you have to change your plans and forget about retirement? Stop living and start working?

Protecting Your Nest Egg

The 4% rule can be adapted to protect your financial freedom fund in those first years of retirement, in case the market goes south right after you’ve told your boss that they’re fired.

We just need to add on one or two extra rules into the mix.

Both of these rules are fairly common sense, but the first time we saw them named and singled out for discussion was in Kristy Shen’s book “Quit Like A Millionaire”, so due credit to her.

Rule #1 – The Cash Cushion

The very worst thing you can do in a stock market crash is sell. And yet, as a retiree living off your investments, you may have little choice but to do exactly this.

This is where the cash cushion comes in.

Say your FIRE number is £1,000,000 – the amount you’d need to retire, covering your outgoings of £40,000 a year at the 4% rule.

You need to be able to avoid selling investments for up to 5 years.

To cover your outgoings during this time, having a cash cushion of £200,000 would mean you could eat this up first without ever having to touch your investments.

£200,000 sounds like a lot of extra cash to have to build up. But hold up. A balanced portfolio might already include cash in the region of 10%, so you can splurge on opportunities, but also to cover you in scary situations exactly like this.

So, a £1,000,000 freedom fund might already contain £100,000 of cash, meaning you need to find just another £100,000 to cushion you in your early retirement years.

As a counterpoint, it’s worth noting that if you did save up an extra £100k before you retired, you could invest it instead, and it would reduce your required withdrawal rate from 4% to a safer 3.6%. But it’s not clear that this would be safe enough if you were making withdrawals during an initial market crash.

In any case, while you’re building your pot, it probably makes sense to keep that extra money invested in the stock market so it can grow, rather than being held as cash, and convert it into your cash cushion just before you retire.

Rule #2 – The Yield Shield

Still, having to increase a freedom fund by £100,000 seems like a lot of extra hardship. We can get this number down significantly if we build a yield shield.

The yield shield brings in dividend stocks to your portfolio to give you extra protection in the first 5 danger years, after which point you can switch back to your preferred allocations.

Stock market returns are a combination of capital growth plus dividends. Stocks which are likely to provide decent capital growth but little dividends are called growth stocks. Stocks which provide little capital growth but good dividends are called dividend stocks.

The theory is that dividend stocks can better hold their value during a downturn due to being stable, established companies, and in most cases should continue to provide a dividend to you regardless of what is going on with the share price.

Normally we prefer growth stocks, as their total returns tend to be better and they avoid all dividend taxes (including the nasty foreign dividend withholding tax). But during the early danger phase of your retirement, less volatile, cash flowing dividend stocks may help you to better hold onto your money.

The yield shield works by switching out your portfolio on retirement day to a portfolio that keeps a similar geographic mix to what you already have, but focusing on high-yielding dividend stocks.

After the first 5 years, you’d switch back.

In practise it could work like this. If you’re currently tracking a global stocks index with a fund like the Vanguard All-World ETF (VWRL), you could temporarily swap it out for the SPDR® S&P® Global Dividend Aristocrats ETF (GBDV).

This ETF tracks an index of top-quality dividend payers, with a weighted average yield of 4.85%, while the Vanguard All-World ETF typically yields around just 2%.

In the event of a downturn, you would in theory be ok as the 4.85% yield covers your 4% withdrawal rate, although in practise some of the companies would stop paying dividends.

This specific Dividend Aristrocrats fund though only admits companies with a 10-year track record of payouts, so you’d hope this effect would be minimal given bear markets happen more often than that, roughly every 6 years.

The yield shield means you don’t need nearly as big of a cash cushion – in theory, none at all, though we still think it’s sensible for diversification and risk reasons to hold 10% of your pot in cash regardless.

This is therefore a good alternative solution which allows you to retire on your FIRE date with your standard FIRE number and with peace of mind.

The 3% Rule

Much of the stress around retiring early could be resolved by adopting the 3% rule instead of the 4% rule.

A recent continuation study into the safe withdrawal rate extended the Trinity study period to 2017, and here’s the results:

The 4% rule for a 100% stocks portfolio still has around a 95% success rate after 30 years, now down slightly to 94%, and tails off over the decades.

But the success rate of a 3% withdrawal rate does not tail off – even after 40 years, it remains at 100%, meaning that EVERY portfolio tracking the S&P 500 since 1926 would have survived for at least 40 years.

But for us, we don’t want to be running to the safety blanket of the 3% rule.

This is because, using the MU Fire Calculator, a £1m required FIRE number becomes a £1.33m target by moving the withdrawal rate slider. And for this particular example, the years until FIRE move from 14 years at 4% to 18 years at 3%.

Could you be bothered to work an extra 4 years and build up an extra £333k if there was a smart alternative such as the cash cushion or yield shield, which meant you could retire today?

What’s your FIRE number and are you relying on the 4% rule? Check out the calculator, and join the conversation below!

Written by Ben

 

Featured image credit: Einstock/Shutterstock.com

Also check out the MoneyUnshackled YouTube channel, with new videos released every Wednesday and Saturday:

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Getting to 200 Grand – What I’d Change About My £200k Portfolio

When you reach an investment milestone like £200k, it’s good to reflect on your achievements so far, but more important is to course-correct before your past mistakes become any more ingrained.

Normally, for investors who only invest via online investment platforms or from an app on their phone, fixing a portfolio can be as simple as clicking the sell and the buy buttons in the right order.

But if you hold illiquid assets this isn’t as easily done. You might even have the first-world problem of holding assets which have such high returns that you can’t justify selling them, even though your strategy has changed since you bought them.

In this post, I want to share with you the details of my Financial Freedom Fund, so you can get a feel of how someone might come to accumulate £200,000 in just 5 years starting from almost nothing, and also to arm you with my experience so you can replicate this milestone while avoiding my mistakes. Let’s check it out!

I first started investing in stocks and ETFs on Freetrade, and it is still one of the best places to invest and grow a wicked portfolio.

As the name suggests, Freetrade doesn’t charge any trading fees, making it perfect to experiment with different combinations of funds and stocks without feeling trapped by fees.

Also, Freetrade are giving away a free stock worth up to £200 to every new customer who opens an account with them and funds it with at least £1. The offer is only available when you use this link.

Alternatively Watch The YouTube Video > > >

My £200k Portfolio

Let’s quickly look at the detail of this portfolio. Here’s the financial freedom part of my net worth, broken down. What should be glaringly obvious is that most of it is invested in Buy-To-Let property, specifically high cash-flowing terraced houses owned with mortgages, which were my first serious investments since committing to early retirement:

It’s this section of the portfolio that has seen the most capital growth, up by over 30% in the last year alone, and over 50% in total. It currently makes up 2/3rds of the pot.

I’ve consolidated most of my stocks and ETFs into a single Stocks & Shares ISA.

My old workplace pensions are likewise consolidated into a single SIPP. I might have regretted how small this slice is relative to other people in their early 30s… if not for the fact that I was purposefully diverting every penny I could from my wage into buying properties, which I saw as being of greater value.

There is also some small allocation to Peer-To-Peer Lending investments, and some commodities. And as we say at Money Unshackled, every portfolio needs a bit of cash.

There’s a red stain on the portfolio in that I partly financed the properties with 0% interest credit card debt.

Getting to £200k – Investing In Order Of Return

The original plan with this Freedom Fund was to invest my money in order of whatever assets could provide the greatest returns. I would worry about diversification later.

The answer for me lay in leveraged rental property.

My rentals give out pre-tax rental returns in the region of 11%, which is a higher return than the stock market, especially once leveraged annual capital gains of around 12% are added on as well.

My gamble of investing early on for maximum return rather than diversification has paid off so far – it provides a high second income AND incredible capital growth, and it has pushed the portfolio up to £200k in about 5 years. But it is now time to worry about diversifying.

Course Correction – Investing To Diversify

I got to £200k by leaning heavily on property, but I now need to focus on diversification. For the last year I have been ploughing all my investable money into the stock market, rather than hoarding it in cash ready for the next property.

A well-rounded portfolio should invest across multiple asset classes, but also many positions within each asset class.

As it stood, apart from some small-change, this portfolio held 4 assets – all being rental properties, and all serving the same demographic in similar locations to one another. It was NOT diversified.

Owning multiple rental properties offers some protection in case one tenant stops paying rent, but to be truly diversified you need to own the world – and that means owning stocks.

My small but growing equity portfolio contains 9,000 stocks, achieved by owning just 3 equity funds in my ISA and 2 in my SIPP, plus a smattering of individual stocks. There are also holdings in gold and silver.

The plan is for the allocations in the Stocks & Shares ISA and SIPP to grow over the years by drip feeding income into them monthly, until they catch up to the property slice.

Risk

If we look back at the portfolio, the portion invested in equities is what we would consider to be relatively safe and secure, due to good diversification and liquidity. The part representing just 4 individual properties is at far greater risk.

If I had desperately needed cash during 2020, I may have struggled to sell a property to save my bacon. But if I’d owned more shares, I’d have been fine – though they may have dropped in value.

Likewise, in a downturn I could easily lose all 4 of my properties’ incomes if tenants could not pay rent, while the odds of all 9,000 of my stocks failing to perform would be very low indeed.

The risk in my portfolio is therefore much higher than someone who owned purely equities or a mix of equities and bonds, which is probably most investors. But are the returns on this portfolio proportionally high too?

Return On Investment

Here’s the expected future weighted average returns on this portfolio:

For property, the return is a mix of 8% after-tax rental profits that I’ve been achieving consistently, plus 12% expected capital growth on the equity.

A very brief explanation for why these 2 numbers are so high is because I’m leveraging my equity using a mortgage, so the returns get amplified because I only need to invest about a quarter of the house’s value. 

After inflation that’s a 17% real return. The equities are expected to perform at historical market averages, while P2P and cash are assumed to continue at current levels of performance.

The weighted average real return of the portfolio overall is expected to be 12.8%.

This compares very favourably to a portfolio built using unleveraged assets such as stocks, and provided I continue to be fortunate and not succumb to the risks that low diversification brings, this asset mix should power me towards my Financial Freedom target at a fast pace.

The properties I already own should multiply on their own as well over the years, as I can extract equity from the growth to buy more properties with, which will lower the risk while increasing the returns.

If you take away one thing from this review, let it be that you too should consider getting some rental property in your own portfolio early on, for the boost to returns that it brings.

Effort

That said, why would anyone want to decrease their portfolio average return by diversifying away from property towards stocks? Part of the reason of course is risk. But also, you have to consider the effort involved.

£200k is a good start but it needs to grow to around £900,000 to give me and my family the lifestyle we’d want in early retirement.

This is my household’s FIRE number – FIRE standing for Financial Independence, Retire Early.

To find out how big your pot needs to be to retire early, check out the Money Unshackled FIRE calculator. You can tweak the returns based on your own portfolio’s asset mix, and it will tell you when you can retire and what your FIRE number is.

You might be happy to put more effort into managing your investments upfront, if they give you a head start on your FIRE journey. It might just shave some years off your goal. But if you have other commitments, understandably you may not want the hassle long-term.

Right now, big percentage returns are important to me because I need all the help I can get to grow my pot fast. But once the pot is built, I could tolerate a lower percentage return in exchange for a higher return in pounds, by virtue of the pot being a lot bigger.

Owning rental property is many times more effort-intensive than investing in ETFs. Even with the use of property management agents, there’s still a fair bit of ongoing admin to do.

This all runs contrary to my desire to sit in a hammock staring into space from no later than the age of 40 onwards.

The Stocks Allocation

A portfolio based mostly around passive equity-based ETFs can be automated. If we dig into the equity section of this portfolio, this is predominantly made up of the Money Unshackled Ultimate Portfolio, covered in detail here.

The MU Ultimate Portfolio: Geographies

Above is the split of the equities in the ISA by geography, and the portfolio covers the top 99% of market capitalisation in those countries. When this £200k portfolio grows into a £900k portfolio, the intention is that this component will be the largest chunk.

Money gets drip-fed into this section of the portfolio regularly and is automatically allocated into the pre-planned allocation of global funds. When I reach my FIRE date, I will simply drip-feed money OUT of it regularly instead.

That’s as complicated as investing needs to be.

The equity investments in the SIPP follow a similar idea of owning a diversified cross-section of the world, but with a slightly different set of funds.

A good strategy is to draw an increased income from the rest of your portfolio first when you FIRE, such as your ISA and properties, and access your SIPPs and other pensions from when you’re allowed to, which currently for our generation will likely be at 58.

Be sure to check out this article which shows you how to draw up a retirement income plan using a combination of ISAs and Pensions.

The Portfolio I’m Aiming For

Seeing as I have already done the hard work of establishing a property portfolio, I’m happy to hold on to them for their high returns, and even add to them over time – I’d be happy at around 30% of the total pot:

My main task between now and my early retirement date is to plough money into the stock market, bulking up my ISAs and SIPPs to reflect the green and yellow portions of this pie. You can see the specific weightings of the top countries for the equities, with the US making up 25% of the pot, or half the equity.

Above is another way to look at the target equity split, showing off the small cap and emerging markets elements. With a full 20% invested in the emerging markets and small cap stocks, this is hardly a low-risk portfolio. But it will have a good balance of diversification, liquidity, and returns.

The expected real rate of return shifts from the current 12.8% to 7.5%, still far higher than a stocks-only portfolio which might average 5% after inflation.

Actual vs Target Splits

Portfolio Financing

If you too like the idea of starting out with a higher risk strategy of targeting the highest rates of return first, it might help you to know that the way I got started with rental property was to optimise the use of good debt.

My first 2 rentals were paid for in part with money I had borrowed on 0% interest Money Transfer Credit Cards, but even MORE so by remortgaging my own home and extracting equity from it.

Much of this goes against the grain of what you are told you aren’t supposed to do, and this definitely shouldn’t be considered advice. But to get ahead in life, it’s worked for me to ignore the mainstream guidance.

What do you need to change in your portfolio, or are you happy with it as it is? Join the conversation in the comments below!

Written by Ben

 

Featured image credit: Vitalii Vodolazskyi/Shutterstock.com

Also check out the MoneyUnshackled YouTube channel, with new videos released every Wednesday and Saturday:

Go To YouTube Channel

Want To Retire Early? Pick Your FIRE Strategy (FAT/LEAN/COAST/BARISTA)

The Financial Independence and Retire Early movement is not very old but it has gained a lot of traction in the investing community.

If you’re a financial freedom enthusiast, you’ll have probably heard of FIRE. But have you heard of Lean FIRE, or Fat FIRE, or the other types?

We can all focus too hard on retirement and forget that the journey is supposed to be enjoyable too.

The method of FIRE you apply will require sacrifices, whether that be in time, effort or luxuries, so it’s good to know that a number of options are available for you to choose from which all arrive at some variation of the same end destination – financial freedom.

By the time you’ve read this post, you will know what kind of FIRE plan is right for you.

Commission-free trading platform Stake are giving away a free US stock worth up to $100 to everyone who signs up via the link on the Money Unshackled Offers page, so be sure to check that out!

Alternatively Watch The YouTube Video > > >

Many Routes – Same Dream

Freedom means different things to different people. For some it is the freedom to leave a high stress career in favour of doing something you’d enjoy, but which doesn’t necessarily pay well.

For others it means nothing less than the jet-set celebrity lifestyle starting ASAP, and never having to do a day’s work again.

Others still crave the end of employment but don’t need the fancy car or the big house and can find happiness on a campsite or on the road.

There’s a FIRE solution for each and every one of them. So, what are the main broad paths you can take to financial freedom?

#1 – Barista FIRE

Barista FIRE is FIRE at its most basic – it doesn’t even necessarily end in you leaving the rat race.

All it buys you is semi-retirement, but it is much more achievable because of that.

The idea is simple. You accumulate your freedom fund to cover some of your expenses, but not all.

This might involve setting a target retirement fund size of say £250,000 to pay you a £10,000 a year income in retirement at the 4% safe withdrawal rate. And you make up the difference between your investment income and your outgoings with part-time or enjoyable work.

For many, nothing short of full financial freedom will be good enough. But for those who don’t hate work, Barista FIRE offers a sensible half-way-house approach to freedom that’s doable for everyone.

In practise, it would work like this – any money you invested during your life up until the age of, say, 50, would be working for you and paying you out a small income thereafter.

If you need £20,000 to survive on in your early retirement, and your investments are giving you an income of £10,000, you only need to earn a further £10,000 from employment once you leave your main career behind you.

The effect this could have on your lifestyle is massive – the difference in happiness between a high powered corporate career and a £10k job can be worlds apart.

A job that brings in just £10k might involve 3 days a week doing something less pressured, or even enjoyable.

Or for those of you making the big bucks, making up a £10k shortfall might involve putting on that business suit for just a few weeks in the year as a contractor, and living the retired lifestyle for the rest of the year.

The second way to Barista FIRE is to let your spouse continue working while you put your feet up, though it would take a special kind of partner to tolerate that set-up!

But as long as SOME money is trickling in from employment to supplement your small investment income, you would technically be doing Barista FIRE.

And FYI: the name “Barista FIRE” comes from Starbucks – one of the original US companies to offer part-time workers health insurance, which makes this strategy possible in America!

#2 – Coast FIRE

Coast FIRE is best described as investing enough money at a young enough age so that you can stop contributions mid-career, live affluently for the second half of your working life, and still achieve financial independence sometime in the future just by “coasting” along.

The goal behind Coast FIRE is to massively increase your savings rate early on in your investing journey by piling money into your portfolio.

There is a mathematical tipping point where the money invested is enough to grow with compounding returns to an amount big enough for early retirement without needing any additional contributions.

If you start early enough, and are in no great rush, you don’t need that much invested because you have decades worth of time for it to grow without further effort on your part.

For instance, both of us at Money Unshackled could switch to Coast FIRE fairly soon and it would be job-done.

Our existing portfolios are almost big enough that they would grow over the next 20 or 30 years so that we would be able to retire with a basic lifestyle.

Someone aged 20 could spend 10 years squirrelling away £150k and then stop worrying about investing – 25 years later they could be retiring in their mid-50s with the equivalent of £500k at today’s value of money, factoring in inflation.

By choosing Coast FIRE, they could then massively increase their standard of living in their 30s and 40s by not needing to invest further.

So, Coast FIRE is for investors who are happy to buckle down and scrimp-and-save hard in their 20s, and then forget about their investment pot and live life to the max while remaining in work.

In a way, it’s the middle-class dream, but without the poverty in retirement that comes from spending all your wages on conservatories and BMWs and forgetting to invest. And all it costs you is a few years of initial financial responsibility.

#3 – Lean FIRE

Lean FIRE is for people who prioritize leaving the workplace over a comfortable retirement. You want to retire in full, asap, and are prepared to live a minimalist lifestyle in retirement as a consequence.

For this kind of FIRE you probably need a pot of around £300k – what is probably the baseline to survive in retirement, which provides a small income but with practically zero home comforts.

For investors on the Lean FIRE path, the baseline is also their finish line.

The principles remain the same as other FIRE types. You save enough money to cover your expenses in your retirement using the 4% safe withdrawal rate.

The main difference is that you have to save much less than people on other forms of FIRE who are going for full early retirement with a good standard of living after the magical retirement day.

The defining characteristic of the Lean FIRE approach is frugality. People that reach for Lean FIRE tend to get there by being very careful with their outgoings and by pinching pennies.

Achieving Lean FIRE is generally well within the means of people with medium incomes.

A 20-year-old Lean FIRE investor aiming to retire at 50 would only need to regularly invest 36% of their required retirement income over the 30-year time frame to reach their goals.

That would be £600 a month for a £20,000 required retirement income, using average stock market compounded returns.

But there are also people with very high incomes that seek to achieve this goal who can be happy with a basic lifestyle in retirement. For them, it might be a case of saving 50%+ of their salaries and FIREing in just a decade or less.

Other solutions involve driving your required early retirement income down by planning to move somewhere cheap, like a Northern town or even another country.

Or sack off the main cost of living – housing – entirely, and live life on the road in a campervan, Scooby-Doo style.

However, for most people, Lean FIRE probably means sacrificing too many things. Is it possible to retire early and not live on the breadline?

#4 – Fat FIRE

If Lean FIRE is the frugal path, then Fat FIRE is the polar opposite. This is the plan you should be following if you plan on being a big spender in retirement.

Fat FIRE allows you to live in the most expensive cities in the world, retire with a big house, give your kids and grandkids lavish private educations, travel when and where you want to, drive a nice car, dine out at nice restaurants, and support your parents or your kids if they ever need help. In short: proper, fulfilling retirement.

Once again, the basic FIRE principles apply – the difference being that you will need a much bigger net worth to be able to retire.

If you’re planning on spending £100,000 a year or more in retirement and living a full and activity packed life, you’d need at least £2.5m stashed away to be able to retire on the 4% safe withdrawal rate. That is a lot of money you’d need to accumulate.

If you feel you need a lavish retirement, you’re probably not the type to penny-pinch and clip coupons for 30 years in order to get there.

For this reason – coupled with the fact that spending cuts can only go so deep before hitting bone – you will need to focus on growing your income instead.

To get there fast, a normal job isn’t going to cut it – for Fat FIRE, you’d need to be a highly paid professional or business owner (or have several lucrative side hustles).

As for how much of your income you’d need to set aside to Fat FIRE: to live a lifestyle based around your current income level, investing around 30-40 percent of your current income over 30 years, or 70 percent over 20 years, should be enough as a general rule of thumb. These are big numbers – if you want to live more lavishly in retirement than your current income would allow (if you stopped saving), you’re probably being unrealistic!

You can get to Fat FIRE faster if your business or side hustles will continue to make you money after you’ve retired.

It might be that you don’t need to bother with investing at all – just focusing all efforts on building up a successful business to be your legacy might be a faster (if riskier) solution.

Alternatively, you can get to Fat FIRE the slow way by first getting to Lean FIRE, and then continuing to work and invest for another couple of decades.

Say that Lean FIRE to you is £500k, and Fat FIRE is £1.5m. The first £500k will be by far the hardest part of the journey.

Money breeds money and turning £500k into £1.5m CAN be done, for those willing to wait.

By this point, your monthly contributions will likely pale in comparison to the huge, compounded returns you’re getting from the invested funds, and you may decide to stop making contributions at this point and just let the market take care of your pot’s growth, Coast FIRE style.

£500k turns into £1.5m in just over 20 years at an 8% annual rate of return, assuming inflation of 3%.

Maybe you aim for Lean FIRE, but keep open the option to switch to Coast FIRE mode and enjoy a semi-retirement with a more laid-back part-time role for 20 years before retiring in full Fat FIRE glory.

#5 – The Middle Ground – Regular FIRE

We’re aiming for a middle ground – regular FIRE, somewhere between Lean and Fat. We aint living like paupers in retirement, but nor do we feel the need to work our butts off to get to multimillionaire status.

Though if Fat FIRE were to come within our reach, we may decide to go grab it.

For now, we’re aiming for the middle ground by first securing that Lean FIRE baseline and then building from there for a few more years to make our early retirements comfortable and fun.

FIRE to us is full retirement before 50 at the latest, so Barista and Coast FIRE are not ideal for us.

We want our freedoms ASAP, but we’re willing to work a little longer to get a freedom that involves a few home comforts!

Which FIRE route are you taking? Join the conversation in the comments below!

 

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What Percent Of Your Income Should You Invest For Financial Freedom? | Planning For FIRE

What percentage of your income are you saving or investing each month? If you’re like most Brits, it won’t be anywhere near enough.

We know this because the average Brit retires at age 64. If they were saving properly for retirement, we’re betting FEW would willingly choose to limp on into their mid-60s.

But how much of your income do you need to be saving each month to reach your goals?

In this article we’ll assume that your goals are a comfortable retirement, on your terms, starting sometime in your 40s or 50s.

We’ll look at what the financial gurus recommend, we’ll look at what most normal people are doing, and finally what you need to do to set yourself apart from the slow-laners who follow the mainstream media narrative.

It might even be that the whole notion of saving a percentage of your income is flawed. Maybe there’s a better way?

Alternatively Watch The YouTube Video > > >

What Percent Of Their Income Do Other People Set Aside?

The average UK citizen saved just £2,292 in 2020, according to Charter Savings Bank.

The average salary in 2020 was just under £26k, so from this we can calculate that the average person saves around 11% of their job income, after taxes and other pay-slip deductions.

We also know that the average person retires at 64 – the average retirement age is expected to keep climbing, and will probably be well into the 70s by the time our generation gets to retire.

If we know the average person currently retires at 64 and the average person saves 11% of their income, it seems that saving 11% is not going to be good enough for you.

For you to reach financial freedom before your 70s, you’re going to need to be putting aside more than the average Joe.

Though to be fair, the majority of these savings will not be invested in wealth building assets – instead, they will have been left to fester in a low interest bank savings account.

But as we’ll soon calculate, even when properly invested, 11% is still far too low.

We’re also very sceptical of these savings statistics – far too often, what people describe as their “savings” are really “delayed spendings”.

What they count as savings today goes on fixing the car tomorrow. Our definition of saving is putting that money aside and never touching it again until retirement.

Savings % By Age

You’d think that when you’re younger it would be harder to save or invest a high percentage of your income, because you probably don’t have much of it. Any money you bring IN goes straight OUT again on rent.

There’s some truth in that – but people in their 20s actually save above the national average, probably because they don’t have families to pay for:

Savings % By Age (Sources: ONS, & Charter Savings Bank)

People in their 30s are able to save the most, as most people are established in their careers by this point and raking in the big bucks.

For whatever reason, saving tails off once people pass the age of 50 – perhaps they are putting money into pension accounts as well that is not reported in this data. But still, these numbers are very low.

Is Anyone Investing Their Savings?

Of course, to get anywhere in this world, you need to be INVESTING your savings, not stashing them in a bank account.

Cash accounts earn less than nothing due to inflation and low interest rates. The stock market on the other hand is widely quoted as having an average return of 8% since records began.

A person who saves 10% of their after-tax income in a Cash ISA will fare FAR worse over time than a person who invests 10% each month into a Stocks & Shares ISA.

But the most recent data tells us that for the tax year ending April 2019, just 22% of ISA subscriptions were Stocks & Shares ISAs, compared to 76% for Cash ISAs.

What Do The Financial Gurus Say?

JL Collins, author of The Simple Path To Wealth, recommends you aim to save or invest a full 50% of your income.

While he admits that he hasn’t always been able to do this himself, he credits the setting of this target as having been essential with helping him to become financially independent while still young.

Andrew Craig, author of Live on Less Invest The Rest, suggests people should invest 10% of their income as a minimum, and anything over and beyond that will also be beneficial.

We find this a bit unambitious personally, though we do respect most of what this guy says. 10% is simply no good for retiring before your 60s. But it’s better than nothing.

Most commentators agree that the answer lies somewhere between 10 and 50 percent. Some in the FIRE community take it to the extremes and invest over 70 percent of their incomes.

Some are doing this by living like tramps, while others are able to set aside so much by pursuing a higher income. Let’s now look at how hard it is to increase your savings percentage.

Is Saving X% Really So Hard?

The average UK citizen who earns £26k is in the top 3%, richer than 97% of the people on Earth. So in theory, saving money really shouldn’t be that hard.

The reason you may not feel this well-off is though is because you are used to a certain lifestyle and standard of living.

You choose to live in expensive accommodation. You choose to have the big TV, ten monthly subscriptions and a new car on finance.

We’re not saying any of this is a bad thing – we’re just pointing out that in this country, saving for our futures is often a choice that comes second place behind our lifestyle priorities.

Saving a higher percentage gets far, far easier the higher your income is. This is because the range of money that most people need to live on is quite similar, while incomes can vary wildly.

You probably only need around £20,000 after tax income to live a moderate lifestyle in most cities – anything earned over this could in theory go straight into your early retirement fund.

You’d probably find that moving from saving 10% of your income to 20% is easily done if you were to get a promotion or move jobs.

Assuming these numbers are all after tax: 10% of a £25,000 income is £2,500. 20% of a £30,000 income is £6,000.

If you’d just moved up the career ladder from £25k to £30k, your salary would be up by £5,000k. But your savings per month only need to go up by £3,500 to double your percentage of income saved.

You just got an extra £5k of income, so doubling your savings rate in this scenario is EASILY achieved. So long as you don’t succumb to too much lifestyle inflation!

But if you are not able to increase your income, the only option left to you if you want to increase your savings percentage is to cut back.

But to reach anything like 50%+ and join the top ranks of the FIRE community by only cutting your outgoings, you’d have to make some radical lifestyle changes.

But let’s assume you don’t want to live on rice and beans for the rest of your working life. What’s a more realistic amount to be saving each month?

How Much We Think You Should Invest Each Month

The correct answer is, you need to work backwards from your target wealth goal, choose a timeframe that you can stomach, and aim to save and invest at least the percentage that this calculation tells you to.

For both of us, the goal is a minimum £500,000 per person in a household.

This would bring in an annual income per person of £20,000, using the famous 4% Safe Withdrawal Rate rule – what we think is enough for one person to live a basic lifestyle.

Say you start investing at age 25 and your salary is £30,000 after tax.

Let’s further assume that the absolute maximum you’re willing to tolerate slaving away for would be 15 years, gaining financial independence at age 40:

Example Scenario: Required Savings % To Retire Either 15 Or 25 Years From Now

You would have to invest 57% of your income over this timeframe to reach this goal, with compounded average stock market returns.

While the same person allowing themselves an extra decade to reach their goal, with a target freedom date at age 50, need only save 21% of their income.

Alternatively, the correct answer is as simple as; “if your goal is financial freedom, you need to save as much as you possibly can, because freedom ain’t cheap”.

As a footnote to this rule, you may believe you are already saving and investing as much as you possibly can. But are you really? Or are you in fact just investing as much as your lifestyle allows you to?

The Slow Lane Mindset

Unfortunately, the rot of “the 10% savings rule” has spread widely across the mainstream media.

Next time you see a financial expert on the BBC they’ll likely quote this number like it’s some kind of gospel truth.

This doesn’t help anyone though and is just a form of talking down to the audience.

Quite a number of other outlets including Experian are now citing the 50/30/20 rule, which is an improvement.

It suggests spending 50% of after-tax income on essentials, 30% on non-essentials, and leaving 20% aside for your savings pot.

But to us this still lacks aspiration. Especially while you are in the first half of your investment journey, how much you can save each month is far more important than your return on investment.

And yet we see investors worrying about the difference between an 8% and an 8.5% return, who are only depositing a few quid a month.

As we showed before, investing around 20% of your after-tax income is probably OK if you want to retire in 25 years’ time.

But who wants to be forced to work for 25 years?

25 years is long time. Every percentage that you can edge that savings rate higher will shave years off your career.

Switch To The Fast Lane Now

Also common in the mainstream media is a total disregard for investing.

Newspaper articles about home finances will only quote the latest Cash ISA interest rates; the BBC’s coverage of individual investors paints us all as uninformed chancers who jump onto bandwagons like GameStop and Crypto.

But most of the viewers of these shows and readers of these magazines are stuck in the slow lane of cash savings – the media are just talking to their audience.

You need to switch into the fast lane of investing, and we’re not talking about some scary Wild West where you gamble your savings on a single stock or the latest fad.

A “Do-It-For-Me” investing platform like InvestEngine invests into diversified funds FOR you. It’s as simple as answering a few questions about your risk tolerance and target time period, and hey presto – you’re delivered a portfolio of diversified funds covering stocks from around the world, both big and small, with some precious metals for protection against downturns. And the total fees are tiny at just 0.25%!

Find your way to InvestEngine via the link on the Offers Page and they’ll give you a £50 bonus upfront!

What percentage of your income do you set aside for early retirement? Join the conversation in the comments below!

 

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Also check out the MoneyUnshackled YouTube channel, with new videos released every Wednesday and Saturday:

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Why Every Takeaway Costs You £1000 | The Huge Retirement Cost Of Spending Decisions Now

Today we want to get you thinking about the opportunity cost of your outgoings. The difference between a rich person and a poor person usually lies in the life decisions they make.

Over the lockdown, it’s said that half the country got fit with Joe Wicks, while the other half got fat with Ronald McDonald.

We ourselves have racked up significant takeaway bills during this pandemic, with the main culprit being Dominoes at around £25 a pop.

Added up, the nations’ newfound love of takeout comes to a hefty cost, probably a few hundred quid every month on average. But that’s not the real cost.

As investors, we know that this money could have been put to work for us in stocks or the property market.

The returns we’re missing out on as a result adds up to a mighty opportunity cost over a lifetime.

In this post we’ll show you the real cost of a takeaway, amongst other things, and how much you could be better off in retirement if you made different life choices today.

And if you think this number is scary, you won’t want to know the real cost of that new car you bought last year!

Commission-free trading platform Stake are giving away a free US stock worth up to $100 to everyone who signs up via the link on the Money Unshackled Offers Page, so be sure to check that out!

Alternatively Watch The YouTube Video > > >

The Opportunity Cost

A common term in accountancy, which might be why most normal people have never heard of the concept.

After all, any conversation with an accountant usually ends in a boredom-induced coma.

And yet, if everyone learned about opportunity cost in school, we believe we’d have a nation of dedicated savers.

The opportunity cost casts a light on what could have been, by magnifying the effect of spending decisions over time.

At its core, it compares the return you get by spending money one way, such as the return of a full and satisfied stomach from a takeaway, versus the return you get on the best available investment opportunity, such as 8% in the stock market.

Why A Takeaway Costs You £1,000

To work out the real cost of a purchase, you need 3 ingredients: the price, a rate of return, and time. Let’s look at a Joe’s most recent order from Dominoes:

Dominoes wanted £25 out of Joe’s freedom fund in exchange for their product. The historical rate of return in the stock market is 8%.

Joe is 20, and plans to hold his investment portfolio to retirement, so let’s say he lives at least into his 70s and regrets his decision to buy that pizza for the next 50 years.

£25 compounded at an 8% return over 50 years is a total cost of £1,173. That’s one expensive pizza! Nice, though.Is 8% Compound Growth Realistic?

Absolutely. The stock market is widely quoted as returning around 8% per year on average as a whole. However, some investments can do even better!

Since America’s S&P500 opened as an index in 1926 when it had 90 stocks, it has returned on average 10-11% per year.

And US Small Cap stocks had an average annualized return of 11.9% from 1972 to 2020, while US Large Caps returned 10.8% over the same period.

Over long periods of time, the stock market performs better than property, bonds and commodities.

And since you can easily invest in stocks from as little as £1 from the same sofa that you would annihilate that pizza, it’s an appropriate alternative to a Dominoes pizza box as a place to store your wealth.

Other Scary Numbers

Obviously, it’s not just takeaways – that’s just a silly but illustrative example that we chose. Even scarier is the full opportunity cost from life’s big decisions, such as buying a new car.

Millions of office workers choose to buy new cars with their middle-class salaries, believing themselves to be rich as a result. The opposite is true.

By the same logic as the Dominoes pizza purchase, a new car worth £25,000 could set you back by £1.1m over your working life.

British holiday makers choosing the Bahamas over somewhere closer to home like Portugal could easily burn an extra 3 or 4 grand – which may add up to over a £160,000 loss in retirement.

Here’s those same numbers over some different retirement timeframes:

Opportunity Costs Of Various Activities

One takeaway doesn’t really make a difference – yes, you’re £1,000 poorer in retirement, but for a 20 year old retiring at 70 that translates to just £4 a month lower income using the 4% safe withdrawal rule.

One takeaway every week for one year could set you back by over £60k in retirement, which translates to £200 a month less income during retirement. And that’s just if you do it for 1 year.

The number that makes us blink most though is the loss to future potential income that comes from buying a single new car while you’re young. And not even a particularly expensive new car.

You could be nearly £4,000 a month worse off! Maybe instead, get that money invested, drive an old banger for a few years, and THEN buy a decent motor.

We want to stress that we’re not saying there’s anything wrong with spending your money on new cars or pizza. You can do what you like with your money.

All we want to do is open your eyes to your options.

You need to know that by deciding to make a purchase now, you’re effectively choosing to forgo big increases to your income in the future.

The Flip-Side – Anyone Can Be A Millionaire

Over a career, anyone who passed on the chance to buy a new car in favour of stashing that cash into the stock market could very likely be a millionaire in retirement.

We just showed that buying a new £25,000 car really costs you £1.1m on average over 50 years. Over 40 years the cost is still £540,000.

And of course, if you’re buying new depreciating cars every few years, that could easily add up to multiple millions of pounds of sacrificed investment growth.

The point is, becoming a millionaire in the future can be as simple as making the right choices in your 20s and 30s.

Maybe that involves stashing a potential house deposit for a first home instead into BTL investment property, or whacking a big bonus you got from work straight into the stock market.

Time will work in your favour to set you financially free later.

Should You Live On Rice And Beans?

Some money savers do take the theory of compounding to the extremes. Stories abound in the FIRE community of people saving 75%, even 90% of their salaries to invest for retirement.

FIRE stands for Financial Independence, Retire Early, and for many, Early means within the decade.

You can bet THEY won’t be buying takeaways!

Followers of FIRE mostly get to retire young by penny-pinching their way through their 20s and 30s, but this lifestyle isn’t for everyone.

It certainly isn’t for us. Try as we might to resist the fast-food industry, or the delights of a 65-inch 4k TV, we are only human.

Surely there’s a better solution to scrimping and saving that allows you to buy whatever you want, and still build up a mighty Financial Freedom Fund?

Don’t Cut Back – Make More Instead

We’re firm believers in the abundance mindset, which is making the choice to make more money rather than cutting back. So, we’ll have the takeaway – so long as we’re making good money elsewhere.

The choice doesn’t need to be between having fun now and having fun later.

Just adding a side hustle to your main income stream could easily fund your chosen lifestyle, while allowing you to invest more of what you make from your job.

Here’s our most recent post about top side hustle ideas for inspiration.

Quickly, though, here are 3 of our favourite ways to make more money to fund a better lifestyle.

#1 – Invest First, Treat Yourself Later

As we alluded to earlier, you could get your money working for you first and pumping out returns, and then focus on saving up money to buy your lifestyle choices with.

MU’s Ben drove a smelly old 2003 reg Ford Focus for years before buying his awesome current car. That meant he could get thousands and thousands of pounds working for him during his 20s.

Basically, it’s delayed gratification. Which for all you investors out there, should come as second nature!

#2 – Side Hustle

A great side hustle open to anyone to make a bit of extra cash is matched betting, which we’ve both tried out and made a decent bit of regular money from.

We have a handy guide on how to milk this income stream, linked here: Guide To Matched Betting.

#3 – Start A Business

The best way to improve your income is to not have it be filtered through your employer’s organisation, losing a slice here to shareholders, a slice there to fund your boss’s promotion, and so on.

When you own your means of income, i.e. by owning and operating your own business, you keep all the profits.

You should make it your medium-term goal to move away from being an employee working for someone else for crumbs, and work for yourself, so you get the whole pie.

Or should that be, the whole pizza?

Are you getting a takeaway tonight? Join the conversation in the comments below!

 

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Checklist For Financial Freedom!

“Let me tell you something. There’s no nobility in poverty. I’ve been a poor man, and I’ve been a rich man. And I choose rich every f***ing time.” ~ Jordan Belfort: Wolf of Wall Street.

We hear you Jordan. We’re working our butts off towards financial freedom, but how can we measure whether we’re making that dream a reality? What needs to be done between now and that magical financial freedom date?

Everyone loves a good checklist – a set of actionable steps that can be ticked off once complete. With each small accomplishment you’re a step closer to achieving your wider goal.

That’s why we’ve compiled for you this checklist for financial freedom!

Alternatively Watch The YouTube Video > > >

Clear Your Bad Debt

Let’s keep this one brief as it’s the most overly preached rule in wealth building.

The borrower is slave to the lender. We’re not religious but this is a valuable lesson straight from the bible.

If you are indebted, then you have an obligation to the lender to pay it back, plus interest. Bad debt includes short-term loans, overdrafts and credit cards with a high interest rate.

However, we draw the line at paying down all debt right now because GOOD debt is a tool that when used correctly can help to set you free. This is low interest, long term debt like mortgages and UK student loans.

We agree that the borrower is slave to the lender, but we also acknowledge that most people will be a slave to money until they become financially free, which sadly is at old age retirement for most people, as they are bailed out by state pensions.

We ourselves hope to become financially free in our 30s but until then we are money slaves.

Therefore, while we are enslaved, we will utilise good debt to help us achieve freedom faster. Good debt can be cleared later if you wish.

Checklist action point: if you’ve paid off all your bad debts, give yourself a tick!

Maximise Savings-Per-Month (SPM)

The most important aspect of wealth building for financial freedom is your savings-per-month. In the short to medium term the amount you can save is more important that your return on investment.

Your return on investment becomes the key factor later when your pot begins to swell. As an illustration, an 8% return on a £10k pot is just £800, but 8% on a £300k pot is £24k.

This goal can be broken down into multiple smaller goals, which can be ticked off as you progress:

  • Save £100 a month.
  • Save £300 a month.
  • Save £800 a month.
  • And so on…

If you’re happy that your level of SPMs will get you to your endgame, tick it off the list!

For most people who have predictable incomes from a job and if you’re budgeting correctly, then you should be able to save roughly the same amount each and every month.

If you’re wondering how on earth this can be achieved when you have things like Christmas or an annual holiday in some months, then you might get something from our Lazy Guide To Budgeting.

Although we call it savings-per-month, a more appropriate name would be investments-per-month. Any financial freedom or retirement money, or indeed any long-term savings, should be invested.

If you save in cash, you are likely never going to achieve freedom because inflation will decimate the pot.

Secondly, it would be extremely difficult to build wealth based on your work alone. The compounding effect of money invested will supercharge your wealth building ability.

Master Investing

This leads us nicely into the next goal, which is to master investing. If you’re new to investing or don’t have any interest in the subject, then don’t worry. This might even be an advantage for you.

Constant meddling and trying to beat the market are usually the reasons why people suck at investing. We ourselves are aware of this and are conscious that our own involvement could damage us.

Hence why the vast majority of our investments follow our strict rules-based approach, which you can follow or use as inspiration.

We both invest into what we call the Ultimate Portfolio.

It’s a portfolio consisting of 5 funds, getting positions in stocks from both developed and emerging economies, and also adds in smaller companies as they tend to grow faster.

The portfolio is finished off with some gold and silver to hedge against economic disaster.

We love this portfolio because it allows us to invest with conviction.

We don’t need to worry about short-term crashes in the market because it tracks a series of indexes that are essentially tracking global prosperity.

If mastering your own portfolio seems to be too daunting or you really can’t be bothered, then as an alternative check out robo-investing. Robo-investors quiz you and then build a suitable portfolio for you on your behalf.

One platform we’ve tried and tested and were really impressed with was Nutmeg. They even have a great welcome offer for customers who use our link. Use the link on the Money Unshackled Offers page and you’ll get 6 months with no management fees.

Whether you go down the robo-investing route or build your own portfolio, make sure you invest every month indiscriminately. It’s what’s known as pound cost averaging.

The idea is that by investing regularly, some months you will happen to buy when stock markets are expensive and other times you will happen to buy when they’re cheap.

By buying consistently, these highs and lows are averaged out.

And to tick this checkbox, you need to be able to say with conviction that you can ignore the news.

Every year there is a major event that screams “panic, sell your investments!”. But doing so would cost you dearly.

For as far back as the data goes, we have seen stock markets continue to climb upwards over the long-term. Selling and trying to time your re-entry is an awful idea.

Most people cannot do this and oftentimes they end up watching from the sidelines as everyone else gets rich around them.

Congratulations, you have now mastered investing. Check!

Hey, wait a minute, what about stocks? Stocks can be fun, and we do invest a little into individual stocks.

The problem with stocks is you could end up rich but equally you could end up poor.

We are confident that with index investing you will become rich one day, although of course there is no guarantee.

Insure Against Disaster

There’s probably a long time between now and your freedom date in which many things can go wrong. We know that insurance can feel like a waste of money but if the risk is too great, then insure against it.

That’s exactly what we’ve done. Ben (MU co-founder) has life insurance, which ensures his wife and child are okay if he was to die.

And Andy (MU co-founder) has income protection insurance that guarantees him an income if he is unable to do his job here at Money Unshackled. We see this as locking in your financial freedom today.

With insurance it’s best to speak to an expert and we’ve tried and tested Assured Futures who specialise in the field.

If you are considering insuring against disaster, check out our Lifestyle Insurance page and lock in your financial freedom. Peace of mind is a lot cheaper than you think.

Establish Multiple Streams Of Income

Ideally this would be to establish multiple streams of passive income. This should definitely be a longer-term goal but more imminently you need to establish any streams of income that you can.

Each income stream needs to be sizable enough that it makes a meaningful contribution to your monthly income.

Having 1 stream that provides 99% of your income and another just 1% doesn’t give you good enough diversification in your income sources.

Your first target for example might be to establish 2 income streams of at least £500 each.

One of these could be through Matched Betting, which can be easily done in your spare time to earn £500 or more. Here’s our simple guide on how to do this.

The next goal might be to establish 4 income streams of at least £600 each.

We have a built a business with over 20 income streams and counting, which ensures that the loss of any one stream wouldn’t put us on the streets.

Most people have one income source, which is their job. Having one source of income makes you a slave to your job master. They know that you are dependent on their crumbs and that is all you will ever get.

Do you have an adequate number of backup income streams? If so, check this one off the list!

Be Prepared For The Unexpected

No matter how much you plan, life will throw some curveballs. Maybe an unexpected breakup will shatter your finances, or you underestimated the cost of having children, or maybe a contagious disease will devastate the economy.

Whether the next curveball is specific to you or a wider event, you need to be prepared for it.

You’ll never predict exactly what the next problem will be but if your finances are in good shape then you will survive it. In part this means you will have built up an emergency fund that will see you through.

If you’ve built up a substantial emergency fund that will see you through a few months of hardship, then feel free to tick this one off the list too.

Diversify Your Skills

If you do depend on one job, then you might also want to diversify your skillset. You need to work on improving your transferrable skills.

Today you might be a taxi driver by trade but when autonomous cars ultimately replace you, can you easily apply yourself to something else without taking a devastating and unexpected blow to your income?

The unexpected isn’t necessarily out of your control either. It could well be that you’ve been doing your well-paid but boring job for far too long and need to try something different.

Remember that financial freedom is likely years, even decades away. You’ll probably need extra skills to fall back on over that turbulent time horizon.

Tick this off your checklist if you’ve learnt something new and useful that can be drawn on in the future, like a second language or computer programming.

Having a diversified skillset means you don’t have to feel like you have to stay in a high stress job even if it means financial freedom is more quickly achievable.

Going from a lawyer to an entry level job as a website designer is likely to begin with a huge pay cut. Although in the short term this will harm your financial freedom plans, it’s better to do something you enjoy.

No matter how much you want financial freedom, if you’re waking up in bad mood for too many days in a row, then something needs to change.

It could well be that you’re trying to save too much per month. In which case, loosen up the budget and retire a little later than originally planned. At least you’ll have fun on the way.

What are your significant income streams? Let us know in the comments below.

 

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Check out the MoneyUnshackled YouTube channel, with new videos released every Monday, Thursday and Saturday:

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ISA Year End Coming! Will You Join The 3%?

The tax year in the UK doesn’t run from January to December like a normal year. Instead, for arcane reasons, it starts on the 6th April.

The ISA year is the same, since the purpose of holding an ISA is to shield your savings and investments from the greedy taxman.

Every year you are given an ISA allowance, which you must either use, or discard – you can’t carry it forward into future tax years.

You will want to make the most of your ISA allowance before it’s too late.

We’re going to tell you what you need to be doing with your savings and investments before the end of the ISA year, your options for the new ISA year, what we’ve done to get prepared, and answer some common questions our viewers regularly have about using their ISAs correctly.

Alternatively Watch The YouTube Video > > >

Why An ISA?

An ISA (individual savings account) is a type of savings account where you don’t pay any tax on interest, dividends or capital gains. Over the years, this tax benefit can save you tens or even hundreds of thousands of pounds.

The maximum amount you can deposit into an ISA each year is £20,000, and as your ISA balance grows it remains free from tax year after year.

You could in theory, and some people have done exactly this, build your ISA to in excess of £1m and there would still never be any tax on it.

Who’s Taking Advantage Of Their ISA Allowance?

The most recently released HMRC ISA statistics shows a downward trend in people taking advantage of ISA accounts since the financial crash of 2008, when interest rates were slashed:

The fall is mostly in Cash ISAs, probably for this reason of falling interest rates. But 11.2m people were still choosing to protect their wealth from HMRC as of April 2019 – roughly 17% of the population.

But of the 17% of the UK using an ISA, only around 20% of them use their full allowance, so are receiving the full benefit – this tiny band therefore reflects just over 3% of the UK population.

We did a full study on ISA statistics in this video here, including splits by gender, income, and average savings per year, so check that out next if you love statistics as much as we do!

Do You Even Need An ISA?

The general publics’ view on ISAs seems to be that they are pretty much pointless.

If they are only offering 0.5% interest rates, you may as well just have a savings account, or even a high interest current account, right?

This is sort of true for Cash ISAs – not so for other types. Let’s look at Cash ISAs first.

For most people, any interest they will likely receive these days in a savings account will be so small as to be untaxable anyway – whether that’s in an ISA, or not.

Most people in the UK get a personal savings allowance (PSA), separate to any ISA accounts, which means all interest you make on savings are likely to be tax-free.

Basic 20% rate taxpayers can earn up to £1,000 interest a year without needing to pay tax on it, meaning you’d need £200,000 of cash earning 0.5% interest before you’d begin to be taxed.

Higher 40% rate taxpayers get an allowance too, but it is lower at £500.

So, Cash ISAs do look pretty pointless. What about Stocks & Shares ISAs?

Again, there is limited benefit to be gained from an ISA if you only have a small amount invested in the stock market, since everybody gets dividend and capital gains allowances too.

The dividend allowance of £2,000 means you’d need £50,000 in stocks earning a 4% yield before dividends became taxable.

You would likely be safe too from capital gains tax at this level, since you can sell stocks for profits of £12,300 in any one year before tax is due.

In many cases a general account may be better if your provider charges you to use an ISA.

But if your goal is to grow your wealth over the years, we think an ISA is almost essential. Part of the strategy of long-term wealth building via ISAs is getting your money into it each year while you can, up to the full ISA allowance.

You can’t just drop £50,000 into an ISA – you have to add it in gradually over a number of years.

And if you can’t think of anything to invest in right now, that’s fine – you can deposit into a Stocks & Shares ISA and hold that money in there as cash for as long as you want.

When you’re ready, which might even be in a future tax year, you can use the cash that you previously deposited into your ISA to buy investments with.

Just make sure you use up your allowance, and you can worry about investing later!

Do You Need To Inform The Tax-Man?

Also, using an ISA avoids the need to declare your dividends and capital gains on a self-assessment tax form at the end of the tax year.

Any profits made in an ISA have a privileged status in that the tax man legally doesn’t need to know anything about them.

You only need to tell HMRC about dividends and capital gains on shares made outside of ISAs if they are above the relevant allowance thresholds.

How Does The Allowance Work?

As we said earlier, none of your £20,000 allowance rolls over, so for example if you only put £15,000 into an ISA, you can’t carry the remaining allowance of £5,000 into the following year.

Basically, it’s use it, or lose it.

Amounts that are deposited and then withdrawn in the same tax year still usually count towards your allowance.

Say you deposit £15,000, then a couple of months later withdraw £10,000, leaving you with £5,000. The most you could then top your ISA up by in this same tax year would be a further £5,000.

In total HMRC says you have saved £20,000 and used your full allowance, even though in reality you’ve only saved £10,000.

Some providers do offer flexible ISAs allowing withdrawing and redepositing, but these are less common.

Finally, any dividends, capital gains and interest you make in the ISA don’t count towards your allowance, so don’t worry about profits holding you back – they won’t.

What Are My ISA Options?

#1 – Cash ISAs

So, there’s Cash ISAs – for the reasons already mentioned, we personally don’t see much point in these.

A further (and we think the main) point against them is that the returns are lower than inflation, making them terrible as a means of growing wealth.

The top Cash ISAs currently available offer between 0.4% and 0.62% – find these on MoneySavingExpert.com – and remember while you do so that inflation is typically 2-3%!

Premium bonds currently average a better return than cash ISAs and are also tax-free, so for whatever cash you have to hold, premium bonds might be a better place to store it.

#2 – Stocks & Shares ISAs

Your next, and in our view, best option is a Stocks & Shares ISA. You can invest in the stock market while being protected from capital gains tax, dividend tax, and tax on interest from bonds and cash.

That’s all the major taxes covered, but you’ll still receive some foreign dividends after the deduction of foreign dividend withholding tax.

The stock market has returned around 8% annually on average over the last 120 years or so – quite a bit more than inflation. The downside is that this has to be seen as a long-term commitment, since some years will see your money go down, alongside the good years.

The main thing to watch out for in a Stocks & Shares ISA is fees – the main ones on your radar should be the platform charge, any management fees on funds, and trading and FX fees when you buy and sell investments within your ISA.

We’ll soon mention some investment platforms that offer low fee ISAs, which have minimised or removed trading fees entirely.

#3 – Lifetime ISAs (LISAs)

First-time homebuyers saving into a Lifetime ISA can save up to £4,000 into this account each year tax-free, and the government will top it up by 25% – up to an extra £1,000.

They come in both Cash and Stock Market varieties.

They are also seen as an alternative to a pension, since they are designed for the dual purposes of house purchases and retirement planning. Withdrawals for any other purpose will be penalised.

We think on balance a pension is still the best place to hold your old age retirement pot for most people.

#4 – Innovative Finance ISAs

The Peer-to-Peer Lending market is slowly opening up again after the pandemic, and we still have several welcome offers for free cash rewards on the Offers page from Peer-to-Peer providers, most of which offer Innovative Finance ISAs.

This ISA type protects your Peer-to-Peer Lending investments from tax.

An important point on ISA types is that you can deposit into multiple ISAs each tax year, but only into one from each type.

And your total deposits must not exceed £20,000 a year across all of them combined.

Time To Switch ISA Provider

The start of the ISA year is a great time to switch ISA provider. If you’re in the market for a new, better ISA, there’s one thing you should never do.

NEVER withdraw money from your ISA account to put it into your new one. If you do, you’ll immediately lose its tax-free status and waste your new year’s allowance by redepositing money that was already sheltered.

Instead, you need to follow the simple transfer process. Make sure that the new provider you want to use accepts transfers – not all do – and then fill in the ISA transfer form with the new provider.

ISA transfers should take no longer than 15 working days for transfers between cash ISAs and 30 calendar days for other types of transfer.

Top Stocks & Shares ISA Providers

Stocks & Shares ISAs come in different flavours, the main difference being between “Do-It-For-Me” providers and “Do-It-Yourself” providers.

If you want an easy life or don’t know enough to feel confident about investing, Nutmeg are our favourite “Do-It-For-Me” platform.

Check out our Nutmeg overview at the Best Investment Platforms page, and if you sign up via the MoneyUnshackled website, they’ll knock your management fees down to 0% for the first 6 months as a special offer.

If you want to manage what goes into your ISA by yourself, on this page you’ll also find overviews of our favourite “Do-It-Yourself” ISA providers – some of which also have welcome offers. There’s also a comprehensive cost comparison table.

Don’t Forget The Kids

Junior ISAs, known as JISAs for short, are tax-free havens for kids that work in a similar way as the adult versions of Cash ISAs and Stocks & Shares ISAs.

But the amount you can save into one tax-free each year is less at £9,000, and you or they can’t withdraw from the account until the child is 18. And the money is legally theirs – no take backs!

We can’t give you advice, but we would only consider a Junior Stocks & Shares ISA for a child. Nothing else makes sense.

Over the long-time frame of 18 years, the stock market will almost certainly reap huge returns for your kid, while cash is almost guaranteed to lose value to inflation.

We’re Ready For The New ISA Year

We're ISA Ready!

We’ve already deposited our full ISA allowances, so we’re now waiting eagerly for the new ISA year to kick start on the 6th April.

In doing so, we happily join the 3% of Brits who are taking advantage of this sweet incentive to grow wealth. Will you be among them too?

What are you doing to prepare for the ISA deadline? Join the conversation in the comments below!

 

Featured image credit: Serge Vo/Shutterstock.com

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