(no. 007)
General
2016 was a mixture of joy and sadness for us. Mrs. CC’s brother passed away out of the blue and at a very young age. It was also the year when we got married and finding out Mrs. CC was pregnant.
We spent quite a bit eating out and also on miscellaneous things which includes holidays. We had our wedding (done on a budget) and was preparing for our first child (many trips to the charity shop, but there were things we had to buy new, such as a baby car seat). This meant that our expenses were higher than normal. I will write about these topics in separate posts.
Property Portfolio
In terms of our property portfolio, Property 1 is the one with lodgers instead of being completely rented out. As a result, we bear the cost of utilities. Another thing that stands out is the refurbishment cost to Property 2. The property had some damp problems which needed to be resolved. Finally, Property 3 was purchased towards the end of the tax year so did not contribute as much towards the rental income. We had a tax refund of £480 from our property income. I will also write about my experience investing in property in due course.
Investments
In terms of our investments, we did not pay as much into our SIPP and ISA accounts because all our money was used to purchase the two properties. Our employers contribute quite a significant amount towards our pension. This is one of the benefits of many public sector pensions. Although they are not as generous as they used to be, they are still considered amongst the best available. This is why for the tax year 2017-2018 onwards, we are both making additional contributions to top it up even more. This is because the benefits are defined and inflation proof. The main downside is if we pull the trigger and leave once we reach FI, the pension would be deferred until the state pension age which is much older than the normal pension scheme retirement age. It will continue to increase in value in line with inflation, but it means we need to ensure that we have sufficient passive income to cover us until then. If we decide to go part-time and still be active members of the pension scheme, then we will still qualify to claim our pensions earlier. This is something we would consider, especially if we continue to enjoy what we do, but it’s nice to know that we won’t have to rely on the pension income.
Goals for 2017-2018
Our passive income after costs and taxes came to between 13.84-23.38% of our main living expenses (depending on the measurement adopted). The main aim for tax year 2017/2018 is to:
- Reduce our eating out expenses.
- Reduce our miscellaneous expenses.
- Ensure that Property 2 and Property 3 start cashflowing.
- Increase our FI Ratio:
(Passive Income / Expenses) x 100 – this ratio shows how much of our passive income covers our expenses. If it is 100% then we would be technically FI.
At the time of writing this post, we are approaching the end of another tax year. The numbers have not been finalised yet, but our return from our properties is looking much healthier this year.
Our Numbers
Further Reading:
Our Net Worth – To Share or Not To Share?
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Thanks for sharing the finance details CC. It all looks very positive. The stand out for me looking at the breakdown is the huge overpayment on mortgages this past year and I am just wondering why you have prioritised this aspect rather than paying into your pension which would get the additional 25% (min.) tax credit from HMRC?
Hi there DIY Investor. That’s a very valid point and thank you for raising it. It was something we discussed at length.
In the end, we decided that by paying off our mortgages, the rental income will go a long way toward covering most, if not all of our living expenses. If we were to plough all the capital repayments into our pension instead (although the tax credit would be great), that income cannot be realised until we are much older (25+ years). This would mean we would need to develop other sources of income if we would want to reach FI within our 7-year plan. It is possible to do and one option would be to grow our property portfolio. However, it means reaching FI with a larger property portfolio which would carry a relatively high LTV. This brings with it risks of interest rates going up to an unstainable level and also risk of not securing a remortgage deal: 1) if we no longer have formal salaried employment; 2) property market crash bringing our LTV to an unacceptable level to banks; 3) a larger proportion of our wealth tied up in property.
Having said that, we have paid much more into our pensions this year because the properties have been cash flowing much better. Once we pay off the mortgages, we will have so much more cash flow to pay into our pensions. I think 5-7 years is a short time to sacrifice for the security and the psychological reward of knowing we have no debt at all. The rental money we receive could be spent and invested however we want without sacrificing a large portion due to loan interests.
That’s our thinking anyway. I know it goes against the grain and when I go to property meetups, many have encouraged me to release equity and buy more property. I get it and it makes financial sense, but it just doesn’t fit well with our FI plans. Can you spot a flaw in our thinking? One of the reasons I started this blog was to get views from others because it is so easy for me to miss something obvious and end up going down a path which in hindsight would make no sense!
CC, good to see you have worked through the options and, as you say, there is a ‘feel good factor’ from paying down the mortgage and becoming debt free asap.
I looked at the pros and cons for a section of my book ‘DIY Pensions’ and came down in favour of the excess income going into a sipp but that analysis was based on the traditional 25 yr mortgage. The 7 yr FI obviously poses some different considerations. Good luck with the plans.
Thanks for deciding to share your numbers, CC.
Pay off mortgage vs investing? I don’t think there’s a right or a wrong as long as you’re doing one or the other (or both!), whatever works for you and you’re most comfortable with. As you mentioned, the psychological feeling of not having debt is a very powerful one.
Although for some, it’s a big money earner, I too have avoided using further leverage to buy properties – there’s just the potential for things to go wrong (eg increased interest rates, further changes to legislation etc), and I prefer a simple life!
Good luck with your goals for 2017/18!
I’m curious how your pensions factor into the FI math, if you don’t mind sharing the details. I imagine that as a police officer and a RAF member, you both are in line to receive government pensions. How much are those expected to be and what timeline do you expect to receive them? In the U.S. for example, if you spend 20 years serving in certain branches of the armed forces, you are eligible to retire with 60-100% of the average of your last three years of compensation. Thus, that’s a pretty attractive incentive for our young folks to join something like the FBI.
Hi Tran and QL. I’m not sure who I’m addressing, but thanks for stopping by. Yes, you’re correct. With me being an officer and my wife a military nurse, we are members of government pension schemes.
For me, the government changed the Police pension scheme in 2015. You can guess any change made by the government usually means we are worse off! It’s less generous than it used to be. It is basically a career average defined benefit pension. The maths was a lot simpler when I was on a final salary pension. For this new pension, my final pension benefit is dependant on my average salary throughout my career (or for as long as I remain a member). I can provide some examples of how the maths would work in another comment if you need, else this comment will get too long. As we do not intend to remain active members until the official scheme pension age, we will not be able to access them until the normal state pension age, which at the moment is once I’m 68. I suspect the state pension age will increase. If we to remain in the police and military for the full term, then we could start to collect our pension at 55. For us, that’s over 20 more years of full-time work. I briefly spoke about our pensions in Our FI Plan post.
My wife’s military pension is similar in the sense that the government changed it from a final salary to a career average pension a couple of years ago. However, her’s is much more generous. She does not need to contribute anything and also accumulates quicker.
It’s difficult to say how much our government pensions will end up being because it will change as we move up the ranks and the longer we stay. However, to give you an idea, as of last year when I would have been an officer for 10 years, my police pension pot was worth the equivalent of about £138,000 in the private sector. For my wife, as of last year, she would have been in the military for 7 years and her pension was worth the equivalent of about £86,000. The numbers are very approximate and on the conservative side.
In terms of how it factors into our FI math? We are treating our work pension and the state pension (I think you call this Social Security Pension where you are?) as a nice to have added bonus once we reach a certain age. Our expenses prior to being able to access those pension pots will rely on our rental income and a separate pot of money invested in index funds which we are building.
By the way, the government pensions you describe above seems much more generous than what we have over here. However, I imagine that’s probably because your country seems to value your military personnel more so than over here. I could be wrong, but at least that’s the impression I get.
Anyways, I hope that helps you understand our situation better.
How does your pension situation work? Does the government contribute towards QL’s medical pension?
Interesting data points, thanks for sharing.
It’s pretty rare for someone in their early 30s to have an employer pension in the US. Instead in the US we’ve shifted to defined contribution plans, and the “pool” as you call it for someone working 10 years in the US is nowhere near $200k from employer contributions alone.
Neither of us of have an employer pension. We both have the aforementioned defined contribution programs, however QL’s employer doesn’t offer any sort of employer matching for a few years (very conservative and unusual). Doctors in the US are all private sector and few (aside from those who work for the Veterans Association) are affiliated with the government. Thus, they have no special benefits.
We have a public “pension” you’re right, known as Social Security. It’s pretty limited – the maximum amount you can receive monthly is currently ~$2,600. It’s also pretty underfunded currently, so we expect the payouts when we reach retirement age (68-69) to be less than today’s values.
Always interesting to compare numbers on social services with someone from across the pond!
We have a post on 401k matching if you’re curious how our employer sponsored system works over here.
https://www.smartmoneyandtravel.com/max-out-your-401k-early/