Guest Post by Stephen Scrupps from finance55.uk.
In this article, Stephen gives an account of his own personal finance story. I am delighted that Stephen will be talking about his journey here on Wall St Nerd. Let's go in!
It’s a good idea to have goals
I retired early, about 4 years ago now. It wasn’t really, really early, and I’m not sure if you could say I followed the principles of FIRE (Financial Independence, Retire Early), but I had always wanted to stop working by the time I had reached the age of 55, and so I did.
Because I had given myself the deadline of 55 years young for retiring, I guess that focused my mind a little during my working life. The state pension isn’t available to me until I am 67 years old, and even then, it’s not really enough for me to have the sort of lifestyle that I want. So to achieve my goal I would need to be able to fund myself from 55 to 67 years old and then further supplement the state pension from 67 onwards.
Throughout my life, I never felt that I was doing without, or living especially frugal, but having my goal probably helped me to make some ‘better’ financial decisions. Having goals can do that for you. It’s a good idea to have goals for all sorts of things in life, and goals around finance are particularly important, as money really CAN make you happy, despite what some might have you believe.
I should have tracked my investments closer
In my late 20s I started a pension scheme, initially a personal one and then a company one. I also started a stocks and shares ISA (it was called a PEP then, but essentially the same thing). An ISA is a U.K. product, and it stands for Individual Savings Account. However, there are a number of different varieties of ISA and the stocks and shares ISA enables you to invest up to £20,000 per year in the stock market and all gains and income are completely tax-free. I didn’t know much about pensions or ISAs at the time, and I just invested regularly in the default funds. When I say regularly, I mean monthly, either through work or direct debit. I hadn’t thought about the concept of ‘compound interest’ or carried out any forecasting to see how much I should put away each month to achieve my goals; I just put away small amounts that I could afford at the time and increased them as I could afford more. It felt like a strategy that made sense if I wanted to be able to accumulate wealth and retire early. Every few years I would have a look at what I had accumulated in my investments, and although I wasn’t looking at total net worth, I could see that accumulated wealth was increasing over the years. In hindsight, I should have tracked my investments closer, tracked net worth over time and monitored progress towards my goal a little better.
Putting money into my pension and ISA was a habit
I then worked for around 30 years, focussing on my career and family, and didn’t think much about my investments. Putting money into my pension and ISA was a habit. I put in what I could afford and when my company offered to match a higher pension contribution it seemed like a good idea, and so I increased my contribution to the maximum they would match. Here’s a tip; check your company pension scheme and if they will match your contribution at a higher level than you are currently contributing at, then this is free money you should be taking.
Decided to consolidate a number of company pensions
In my late 40s and early 50s, I started thinking about my retirement goal of 55 a little more seriously. I started to focus on the value of my investments and how realistic my goal to retire early was going to be. I decided to consolidate a number of company pensions that were spread across a number of pension providers. I checked first that I could do this without penalty and then moved them all to Hargreaves Lansdown where I then had complete control over what they were invested in. This also gave me greater visibility and understanding of how much I had and helped me to start thinking about what I needed to do, to enable me to reach my retirement goal.
I needed my funds to produce an income
Previously, all of my investments, both in my pension and my stocks and shares ISA were in the default accumulation funds. When you are looking to grow your investment, an accumulation fund is fine. This type of fund will automatically reinvest any dividends or interest back into the fund, and this is what helps it grow and gives you the compounding effect over time. However, I needed my funds to produce an income for me during retirement, and so I started to move my investments into income funds. With income funds, any money the fund produces through dividends or interest is paid out as income.
Increased the level of diversification
I also wanted to reduce any potential volatility within my investments as I approached retirement, and so I increased the level of diversification within my fund holding. This meant that in practice I moved from holding 2 or 3 funds to closer to 25 funds, split across asset types (shares and bonds) and across geographies. I made all these changes over a number of years; I don’t like to make large scale changes in one go, I make lots of small changes over a long period of time and check that everything is working as planned before taking the next step. Diversification reduces volatility of your investments because if one asset type or geographic area isn’t doing well, then another asset type or area may be doing better, which balances things out somewhat.
Always been tempted by property
Also, as a part of my diversification, I started to look at other types of investment. I had always been tempted by property, but had never really found the time to pursue buy-to-let properties whilst working. I was still quite hesitant about buy-to-let when I happened to come across a new company called Property Partner. With Property Partner, you can buy shares of a property along with other investors and then receive your portion of the rental income each month. After 5 years, there is a vote to decide on whether or not to sell the property or keep it for another 5 year term. There is also a secondary market if you need to sell your shares earlier than the 5-year term. From an investor's point of view, owning property through Property Partner is a much easier option compared to owning your own buy-to-let property, as it allows you to diversify across a wide range of properties without the worry of property management, as this is all taken care of by Property Partner. It hasn’t been all plain sailing, however, and over the last few years, returns have not been as great as expected. However, the company has now been bought by a U.S. mortgage company called Better, which has already resulted in some improvements such as lower fees. This along with the post covid recovery could see investor returns improving over the next few years. Currently, the rental yields I am receiving are around 3% - 4%, but with the few properties that have gone through the full five-year cycle I have made just under 14% return as the bulk of the profit has been through the increase in property value between purchase and sale, rather than through rental yield.
Continue to look for new opportunities
Recently I have also started to look at a newer company called Proptee. This works in a similar fashion to Property Partner, but uses the power of NFTs (Non-Fungible Tokens) that are associated with real rental properties. It’s an interesting concept that lets you benefit from rental yield and growth in property value, but again with none of the management issues you may have with traditional buy-to-let. As this is a newer start up company built on a newer technology, there is probably a greater risk associated with investing through Proptee than through Property Partner. However, it highlights that as newer technologies develop, so do the opportunities for investors. I continue to look for new opportunities to invest in, but always start cautiously and carry out my own due diligence.
Generating untaxed passive income
Soon after my 55th birthday, I handed in my notice at work and ‘retired’. In the U.K. you are allowed to withdraw 25% of your pension fund without paying any tax and so this is what I did. This enabled me to buy a car to replace the company car that had to be returned, and the rest went straight back into investments. It couldn’t go straight into my stocks and shares ISA as it exceeded my annual allowance (£20,000), but it was invested in general investment accounts, and over the next few years was gradually moved in to my stocks and shares ISA, invested in funds generating untaxed passive income.
Following a natural yield approach
My remaining pension went in to a drawdown account, as I believe that the value you get from an annuity is very poor. I’m following a natural yield approach both with my pension and my stocks and shares ISA, which means that I only draw off the income that is produced though dividends or interest and the capital is left untouched. Hopefully, in this way, my investments will last throughout my retirement, maybe growing slightly in value and continuing to produce enough passive income for me to have the lifestyle I want.
Personal finance is just that; personal
This is my story, which I am sure is very different from your story. Personal finance is just that; personal. There isn’t one way that is the right way, just a set of general guiding principles. I didn’t start to gain a real interest in finance until quite late in life. Up until that point, I stumbled along and followed my own gut feelings of what felt right to me. It didn’t work out too bad, and I achieved my goal of retiring by 55. But I am sure I could have done things better, invested more, invested smarter and retired with greater wealth than I now have. Please remember, what I have written is not investment advice. But if it makes you stop and think, or if it gives you a new way of looking at things, then I have done my job.
Author - Stephen Scrupps
Stephen Scrupps lives in the U.K. and since retiring at 55 years young, has spent some of his time developing the finance55.uk website and blog, a financial website that discusses investing and early retirement. He is currently writing a book which might be called ‘On The Road To Financial Freedom’ if he ever gets it finished.
Although Stephen’s background is as a business manager in a pharmaceutical sales environment, his interest in finance is born from an analytical enquiring mind, a fascination in technology, the paradox of making money through money and the love of investing in general.
