Our Overall Plan
The diagram below shows our overall plan (*note that technically, the state and work pension is not until infinity). As you can see, as we get older, our sources of income should hopefully increase. For many people, it is the reverse. We are aiming to reach FI by 2025.
Over the next 7 years, we will continue to try and grow our savings rate. The money we save is invested in the following things:
- Passive Index Tracker Funds
- Savings Plans
- Work Pension
Whilst Mrs. CC remains in the military, we get to have subsidised housing. This means that we don’t need to live in any of the properties we own. However, for one of the properties, rather than renting it out completely, we have opted to have lodgers. This way, it gives me another place to stay which is close to my workplace and cuts down my commute. We have a small property portfolio (3x three bedroom houses) which we are aggressively paying down the debt. Within 7 years, the mortgages on all the properties will be paid off and the rental income will go towards covering our expenses. We may grow our portfolio a bit more, but we haven’t decided on that yet. We are trying to get the balance right by not having so much of our wealth tied up in property. We are aiming for no more than 50% of our net worth to consist of property investments.
Now, one thing which may stand out to all you budding professional property investors out there is our commitment to paying off our mortgages. The majority of BTL (Buy to Let) owners out there have interest-only mortgages. I will talk about this more in another post, but we do not need or want a property empire. We know what type of life we want and for us, a small property portfolio will more than cover that. Yes, we could increase our portfolio LTV (Loan to Value) and easily double the number of properties we own within the next 12 months, but with that comes more risk.
We would also like to build our own passive home (ultra-low energy efficiency) one day, perhaps even generating excess energy to sale back to the grid. The idea of creating our own home appeals to us in the same way that FI does. FI allows us to design the life we want and the next logical step is to design the home we want. It need not be on the scale of Grand Designs, but something that suits us perfectly and also generates an income by having a separate self-contained unit to rent. I am monitoring developments in the self-build sector and keeping an eye on land prices. We hope to have our own self-built home within ten years.
Passive Index Tracker Funds
We are making monthly investments into a combination of passive index tracker funds and an actively managed fund. We have chosen funds provided by Vanguard as well as the Scottish Mortgage Investment Trust. They are invested in tax efficient wrappers: ISA, LISA and SIPP. Apart from an ISA which is instant access, the other two can only be accessed once we reach a certain age. You can read a little more about what these are in FI Building Block: Budget.
Since joining the Police over 10 years ago, I have taken out 10-year regular savings plans through Police Mutual. I take out at least one plan a year, but most of the time, I take out two which are spread six months apart. By doing so consistently, it means that after 10 years from the date I took out the first plan, I will have at least one plan maturing every year (sometimes two plans). These plans give a tax-free guaranteed lump sum with a bonus added on top based on the performance of their actively managed Life Fund and life insurance cover incorporated. I call these my Minor Savings Plans. I have also taken out a much larger 25-year plan which I call my Major Savings Plan.
I don’t know if it’s still the case, but as new Police recruits, a company called Police Mutual were given a slot to present all their financial products and services whilst we were in training school. Their posters and leaflets are still dotted around police stations. This has always made me feel uneasy because I wonder how they were selected and be given access to such a potentially valuable source of new income in these new recruits. Also, the products they offer do not provide the best rates. Given what I know now, I wouldn’t have taken out these plans, but instead invested the money in passive index tracker funds. This is because the Savings Plans are for-profit so incur expensive charges. However, given that many Police Officers tend to be bad with money, it is a good way to get into the habit of saving since the payments to Police Mutual are taken directly out of our salary so we don’t even see the money. I recently stopped taking out new plans and although I should have stopped sooner, I liked the idea of diversifying and having a guaranteed payout with some potential uplift. I have 16 of these plans altogether with the last Minor Savings Plan maturing in 2027 and the Major Savings Plan maturing in 2039. I will report on how my plans perform as my first one pays out this year.
Mrs. CC has a non-contributory Military Pension. It is a defined benefit scheme which gives a guaranteed level of pension that increases with inflation. The pension is calculated using Career Average Revalued Earnings. This is not as good as final salary schemes, but it is fairer as it avoids the last push in the final years to climb the career ladder to drastically boost a pension. For each year she is an active member, her earned pension is 1/47th of the value of her pensionable earning for that scheme year. The pension is uprated by Average Weekly Earnings (AWE) Index whilst a member and Consumer Price Index (CPI) once she leaves the service.
For my Police Pension, it is very similar to Mrs. CC except for each year I am an active member, my earned pension is 1/55.3th of the value of my pensionable earning for that scheme year. It is uprated by CPI + 1.25% whilst I am a member and CPI once I leave. Here is a big difference: my Police Pension is contributory. This means I have to contribute about 13% of salary to it. My Police Force also contributes an extra 21.3% of my annual salary towards my pension.
We were also members of final salary pension schemes before they were replaced with the current career average ones. Past contributions to our final salary pensions are secure and continue to increase with inflation. As result, we will both have a final salary pension as well as career average work pension when we reach the scheme retirement age. As it is possible that we will leave the Police and the Military before age 60, we would become deferred members. This means that our work pensions will be paid out at the state pension age. We have factored this into our FI Plan. We are also making additional contributions to our work pensions as I worked out that it provided a guaranteed return of about 9% plus inflation. That’s a great return in my opinion. I will write separately about this.
An Adequate Contingency Plan?
Am I being too risk averse? Should I just concentrate on passive index tracking funds or property as they provide the potential for better returns? Everyone’s risk tolerance is different. The worst financial decision above is by far my choice to continue to take out those expensive savings plans. To me, it would provide me with a safety net and although it is not the best financial decision, it is still the right decision for me.
As you can see, our plan has plenty of contingencies built in and multiple sources of income. Notice that we always include employment as an option in the overall plan. The worst case scenario is that we may have to continue working longer than we want to. That’s what most people do anyway, so it’s not the end of the world. Our plan still means we are less reliant on it as a source of income. In any case, we might both decide we want to keep working because we continue to enjoy it. If that’s the case, the extra income will be used to build an even bigger safety net and perhaps even indulge a little.
The 7-Year Plan
The diagram above shows how our expenses would be covered over the next 10 years. Although it is a 7-year plan to reach FI, I have extended it out to ten years in the event we want to invest in another property so that we don’t need to rely on our other investments. At the moment, about 20% of our expenses could be covered by our passive income from rental. However, all our excess income is currently distributed as described above since we are currently in the wealth accumulation phase. We aim to reach a point where our expenses could be covered using passive income by the end of 2024. We will also have backup sources of income as well as the option of working.
It could be argued that property investment is not really passive as it can be hard work managing all those properties. It’s a fair point. For us, we have factored in management fees and accountancy fees on top of the other associated costs involved in owning properties. Although we can and have self-managed properties in the past and have also learnt to complete our own tax returns, we have reached a point where outsourcing those tasks at a cost is worth it for us. This saves us time and stress. We still continue to read up on changes to tax legislation and property law. This is more out of interest, but also to check that my accountant or letting agent has not missed anything and that we are getting value for money. For example, we don’t allow our agent to let our properties to anyone until we have at least completed a video chat with the potential tenant. It is in the agent’s interest to get it rented as quickly as possible. Sometimes, this could mean getting a tenant in which might not look after your property. By meeting potential tenants beforehand, it helps to weed out those who we feel would not be suitable for us. We would rather take longer to let a property to the right tenants than rush and let a bad tenant in.
Plans are just that. They are not definitive. It simply gives us milestones to aim for and a sense of direction in terms of our finances. We are both flexible in our approach and if our circumstances change, we’d like to think we would be in a much better position to adapt and change our plan accordingly.
What do you think? Are we being too cautious, or perhaps too optimistic? What plans do you have to reach financial independence?