February 2020 – FIRE v London

How much is enough?

2020-02-232020-02-28 FIRE v London58 Comments

The title of this blog is that fundamental question: how much is enough? Much of the thinking around FIRE boils down to answering this question.

And as with so many good questions, the answer depends on perspective. And perspective itself depends, among other things, on height. And I think height is a useful metaphor for explaining how much is enough for me.

Ceilings vs floors

I remember my scorn about twenty years ago for my friend W, who was my most earnings-focused mate, when he told me that “I couldn’t live on a salary less than £100k”. At that point I earnt less than half that and very much saw £100k as a ceiling, not a floor.

In any case, these days I’m afraid I would now regard £100k p.a. as definitely a floor. And I mean £100k post tax, of actual money that I could spend. It would fund my ‘needs’: groceries, utilities, transport, medical bills, household cleaning and maintenance, and such like. It would also pay for my investment expenses, though obviously there is a ‘circular reference’ here (as the more that is ‘enough’, the higher the expenses that ‘enough’ needs to fund!).

My ‘needs’ are based on relatively low housing costs. I don’t have a mortgage on my home. I am also ignoring my house as an asset – so it is not part of the ‘enough’ calculation either.

Based on a 4% Safe Withdrawal Rate (a.k.a. the 25x rule), £100k p.a. needs a pot of £2.5m. Tax would complicate that somewhat, but assuming I remain married, and that the current allowances remain in place, I am prepared to ignore tax, for the moment. Certainly I know people earning almost £90k who have <10% tax, and I think as a couple we could make the tax at £100k p.a. relatively minimal.

Or perhaps one should think of the tax liability as roughly equivalent to the state pension/benefits which, in other respects, I am ignoring for the purposes of ‘enough’ calculations.

In actual fact, whether £2.5m turns out to be enough depends on two key questions:

What return does the portfolio deliver in the long term, and
In what order (or sequence) – i.e. if it alternates 15% and -5% every year, you do much better if you begin with a +15 and not a -5.

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Fighting complexity

2020-02-082020-02-16 FIRE v London16 Comments

As I mentioned in my January 2020 report, January is the tax deadline month in the UK. And it is the annual tax filing process where the overcomplexity in my financial affairs becomes most visible, and any problems created by that complexity become urgent and pressing.

In previous posts here and here I’ve discussed the complexity that has arisen in my financial affairs. Partly this is a quality problem, reflecting my higher than average net worth, and the journey I’ve taken to build my wealth. Partly this is deliberate strategy on my part – to diversify across providers, to make use of tax sheltered accounts where possible, to spread funds between me and Mrs FvL. And partly this is just creep – the equivalent of middle aged spread: it happens without you really noticing, until one day in January somebody takes a snapshot of you and you realise how unappealing the image is to outsiders!

Reflecting on the consequences of my overcomplexity, I think three problems nag at me:

The burden I shall impose on my executors. I struggle sometimes to manage my finances. My other half, or my family/friends, or a trained financial/legal professional, would be left with a genuine labyrinth to navigate.
The time I spend managing my money. As it happens, I am sad/bored enough to quite enjoy this. But I suspect I would enjoy it just as much if it took half as long, and I would find more productive/enjoyable things to fill my time.
The hassle/time/expense of the annual tax filing process. Let me dig into this a bit below.

I have used the same accountant for years. She knows my affairs pretty well and we have developed a reasonable system/way of working over the years. My limited company has a separate accountant and process, who/which I am largely ignoring in this blog post. Here are some stats from my personal tax filing process for the last tax year:

82 files that I’ve sent to my accountant. These are statements, EIS certificates (for the UK angel investing tax breaks), payslips, etc. These 82 files do NOT include some important material my accountant gets direct from my broker/private bank.
69 pages: the number of pages in my tax return.
110 emails, exchanged between me and my accountant, over the last 12 months. This is going to cost me….
570 rows in my investment tracking spreadsheet, covering both me and Mrs FvL. One row represents one holding in one account across all our publicly traded investment accounts. We have about 200 holdings in total, so each holding is coming up in almost 3 places (e.g. in my ISA, Mrs FvL’s ISA, and my General Investment account).
10-20 hours a year of my time is spent specifically working on my tax admin each year. Plus at least double this on tracking my activities.
1800+ investment-related transactions for just 12 months in my tracking system on Quicken. This covers me, Mrs FvL, and my personal limited company’s liquid portfolio. Every single one of these transactions has been typed in by me. Of these, about 500 are of a dividend payment of less than £50.

I reflected over the Christmas break on what I might do to curb this complexity.

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Jan 2020: borrowing to pay taxes

2020-02-01 FIRE v London1 Comment

What happened in the world in January? A variety of things, which impact the Australian environment a lot more than my portfolio.

The month began with Australia on fire. The month ended with China’s Coronavirus making the world hyperventilate. The latter, 10,000 km away, seems more to blame for the AUD currency dropping 5% to its post Brexit low. Australia’s (worldwide commodities-centric) equities however have risen symmetrically to compensate. The environmental damage may be shocking, but you’ll need to look elsewhere than the markets to see the impact.

Closer to home, as I write this the UK is no longer a member of the EU, and I have lost my rights to live, work (unlikely, to be fair), or retire to (that’s more like it, obvs) 26 countries (and retiring to Ireland is not very appealing). The last couple of weeks of Brexit newsflow have seen the Tories approach knock the FTSE-100 back a bit. This UK equities decline is bucking the wider positive trend.

Bonds, in the meantime, have had a good month. Flights to safety, I imagine, plus various central bank noise that I tune out of.

The markets I’m in, net of currency fluctuations, moved up just over half a percent in Jan. My portfolio dropped about half a percent, even though AMZN is one of its largest holdings and has just popped its $2000/share cherry. Off the top of my head, I’m not sure why my performance is lagging my benchmark – but the headline of ‘not much to see here’ is really what matters.

In the UK, January is the month when you won’t bump into accountants. 31 January is the annual tax deadline. My tax bill this year was the highest for years, thanks to a flurry of windfalls a couple of years ago. This presented me with a six figure cashflow crunch, as in a few days’ time I am due to receive a seven figure sum for selling my old house.

I solved my cashflow challenge with my portfolio loan facilities; I have, without a murmur or delay, withdrawn the six figure sum I need to settle with Her Majesty’s tax collectors, knowing that within two weeks I should have more than enough to repay the portfolio loan in its entirety if I so wanted.

Using this loan has tilted my exposures vs my target allocation slightly, but I have ended up very close to target on all fronts:

Deltas from target allocation, as at 31/1/2020.

As it happens, another way I think about this portfolio loan is that it has allowed me to ‘borrow money’ from the taxman over the last year or two, after I crystallised my windfalls. Rather than pay the tax in advance (which, in Switzerland where rates are negative, they charge you a penalty for), or set the tax due aside in a ‘no risk’ (i.e. no return) account until due, instead I’ve had it invested. In effect, I’ve borrowed money from the tax man. This tax due, as it happens, has earnt about 20% return. Now’s the time to ‘pay back’ the taxman, but in the meantime he hasn’t charged me a penny of interest and I get to keep the five figure sum I’ve made out of his money.

I know it isn’t customary to go into debt to pay your taxes, but it feels like it’s working for me.