How to Invest Money for Financial independence In 10 Years
Welcome to the 8th Reader Case Studies on The Humble Penny.
The goal of these case studies is to solve real problems.
If you’re new to this, the case studies are a way for me to better interact with the subscribers of this blog.
I refer to the subscribers as a generation of Fearless Dreamers because they’ve got to a stage in life where they’re seeking another path.
This generation wants to be debt-free, create multiple incomes ethically, become financially independent, live fulfilling lives and ultimately Create Financial Joy.
These case studies are a way in which I can help to solve their problems via free coaching.
Solving such problems is what The Humble Penny was created and exists to achieve.
In addition, they get crowdsourced responses from other readers in the comments below.
Together, we can help ourselves and each other.
As these case studies are real-life situations, I commit a fair amount of my time to consider them and respond.
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Now let’s dive into this month’s case study:
Note that this case study on how to invest money was a real face to face coaching session. I have changed her name for privacy.
Letter from Jai:
Re: How to invest money for Financial Independence in 10 Years!
It was great seeing you at the meetup on St. James’s Park!
I'm currently living in the UK as an expat with my husband.
We work in the IT industry and doing fairly well pay-wise.
As things stand, we are likely to remain in the UK and see how the political situation plays out.
I come from a family where people typically retire early in their 40s and live a long life supported by their assets.
So Financial Independence is a natural attraction for someone like me.
I chose to go personally, because of the experience and I thoroughly enjoyed the personal experience and connections made.
To be financially independent within 10 years.
“Financial independence” here means having an investment portfolio of approximately £500,000.
This figure is based on a hypothetical 4% Return on Investment (500,000 x 0.04 = 20,000).
Currently, my husband and I have access to approximately £120K.
On top of what we currently have, our plan is to save as much as we can and inject cash into our portfolio each year.
Our forecast for the next 5 years is that we can probably save £23K~25K and put it into our portfolio each year.
This “FI project” is mostly for me, not for two (me & hubby), so we don't have to go big (e.g a portfolio worth £1m).
If I understood correctly, an ISA is absolutely tax-free.
I.e. no matter how much, when, or how frequently you withdraw cash from ISA & what it is (capital gains or dividends).
So, my plan is to open two ISA accounts via Vanguard or any other platforms that offer ETFs: one for my hubby, one for me.
However, the annual ISA allowance for each person is £20K, so we can only put £40K in total this tax year.
The question is – what do we do with the remaining 80K? do we put that into a non-ISA account?
On top of what we currently have, our plan is to save as much as we can.
Then inject cash into our portfolio (savings from each month + a chunk a few times a year).
Also, this “FI project” is mostly for me (one person) to be able to achieve some kind of FI, not us together.
So we don't have to go big (e.g a portfolio worth 1 million).
How To Invest Money
I had a sit-down with friends who achieved Financial Independence and their advice was to buy these two ETFs:
Other FI people recommended these:
Some of these are offered at multiple platforms/providers.
Fees should not be major deciding factors, as the most important thing is to invest in ETFs you have faith in.
But I’d be interested in hearing what you have to say about each provider’s fee structure.
Now, this is where I'm stuck: I need to figure tax implications on non-ISA ETFs.
Without it, I can't decide if I want to invest all cash in one go now (open up a non-ISA account for the remaining 80K now)
OR do it gradually (stick to ISA only & use up the ISA allowance each tax).
Since rules around ISA changes all the time, I don't think it makes sense to wait.
Also, my initial investment for non-ISA is little (80K), so maybe I don't need to worry about it too much after all.
ETFs and Tax Implications
– the country of issue
– hold the status of reporting or distributor
– Investment structure = Irish UCITS
– Asset class = Equity
– Dividend schedule = Quarterly
– Tax status = UK Reporting
UK Reporting Fund Status provides further info:
– Income/Accumulation = Income
– Income distributed per share in respect of the reporting period = quarterly
In this scenario, my understanding is that any income paid out quarterly is considered a dividend.
If you sell the ETF's and gain anything, it is then considered a capital gain.
Is this correct?
This is just to give you a rough idea – our pension pots are in multiple countries:
- Country A: there is a chunk of money, but we can’t move this money to the UK. We decided to manage this by choosing funds ourselves (leave it as is and grow it).
- UK: workplace pension scheme with employer contributions. It’s possible to start receiving pension money at 55.
- Country A and Country B: so little money and can’t move (leave it as is).
- UK: state pension only for now, but it’s possible to enroll in a workplace pension scheme although employer contributions will be little.
We did our homework on how to invest money with a pension and understood that it is possible to manage as SIPP.
However, our conclusion is that it’s not worth it, at least not now, because we’ll lose employer contributions.
Some friends also mentioned that I should try the BUY/SELL SWAPS method.
I.e. if I want to “move” money in our pension pots & make it part of our non-pension investment portfolio.
Does this method work in the UK as long as there's an ETF held in both your pension pot and non-pension pot?
I'm wondering because I can't find anybody who's done this in the UK.
Here are my main questions:
- Let’s get started on how to invest money! Which ETFs should I start with & via which platforms?
- For non-ISA account, do you think I should just go ahead and get started with it? If yes, what are the tax implications?
- Do you think it's a good strategy to put all the money in the two ETF's recommended by my friends? Can you think of better options?
- Somebody at the FI meet-up said that it's worth considering Accumulation ETFs. If I don't need to withdraw cash any time soon. I was under the impression that Accumulation ETFs complicates tax filing, but maybe I'm wrong. Any thought on this?
- Do you think we should consider pension options?
- Is there any way to access pension pots in the UK? Is it possible to do something similar to BUY/SELL SWAPS? Or SIPP is the only way?
- Looking at my overall situation, do you have recommendations or advice on investment (peer-to-peer, property, any other form)?
I know I just need to get started at one point, but I feel I need the last push.
Maybe I wasn't looking at the right place, but I wasn't getting the type of help I needed for a very long time.
Being an expat and fairly new in the UK, I had to start from scratch too.
I thought about talking to financial advisers, but you know how it goes (they don't get it).
So, any advice would surely be appreciated!
Thank you so much!
Ken’s Response to Jai:
I hope you’re well.
Thanks for allowing aspects of your private coaching session to be made public.
As with the face to face coaching session we had, it’s important that I state:
Nothing written in this case study should be considered Financial Advice.
I particularly liked reading your situation because of how you thoroughly analysed your situation.
It’s also helpful that you’re well aware of Financial Independence and have even been to FI events too.
So I’ll get straight to the point and answer the questions you’ve asked and will also make other observations:
Questions you asked:
1. We have £120K saved. £40K can go into 2 x Stocks and Shares ISA.
Our immediate question is – What do we do with the remaining 80K, do we put that into a non-ISA account?
The key point here is about liquidity. You want to become FI in 10 years and will want access to your money.
Immediate options are that you should open up a dealing account with a broker and use your Capital Gains tax allowances.
This gives you both flexibility and tax benefits. The current allowance for 2019/20 is £12K per person.
So you and your husband can make gains of up to £24K a year without paying any Capital Gains Tax on your investments.
Alternatively, fill up your current ISA now and immediately wait for the new tax year and fill that up too using some of the remaining 80k.
Then put the remainder in a dealing account as above.
They are also more for retirement savings, although the LISA is useful if you’re trying to buy a house.
You can withdraw before 60 for this specific reason – buying your first home.
2. I’d be interested in hearing what you have to say about each provider’s fee structure.
Fees vary depending on which provider you go with.
Each provider charges an admin fee and then a recurring fund-level fee.
Platforms such as Hargreaves Lansdown, the Share Centre, etc, are supermarkets offering everything from funds (active & passive) to stocks, etc.
Others such as Vanguard only offer their own funds and fund of funds directly.
Vanguard is pretty cheap as they’re innovators when it comes to passive investing.
You can learn more about the costs here.
This important PDF shows you ALL their funds and their related total charges line by line.
Hargreaves Lansdown also offers Vanguard funds but with a small mark-up.
However, I like that they have an easy to use and reliable app. Plus you can buy a wider variety of products from them.
Vanguard is more expensive than Hargreaves Lansdown on the admin fee but cheaper on the ongoing fund fee.
£375 per year cap vs £45 per year cap (for up to £250k pot) respectively on admin fees.
Your focus should be on the Total Expense Ratio (TER), which is the sum of admin + ongoing fees + one-off fees.
Keep an eye on those ongoing fees especially. The link above tells you what they are by fund.
3. Our forecast for the next 5 years is that we can probably save 23K~25K and put it into our portfolio each year.
The focus here should be on maxing out your Stocks and Shares ISA and automating your investing into the relevant ETFs and/or Index funds.
See “Other Observations” below for my analysis on whether you are saving and investing enough.
4. We did our homework and understood that it is possible to manage as SIPP. However, our conclusion is that it’s not worth it, at least not now, because we’ll lose employer contributions.
You can have a SIPP alongside your employer pensions.
I’ve done this before by speaking to someone in HR and asking them to point my employer contributions into my SIPP.
The advantage of doing this that you:
- Can monitor the fees on your pensions. Very important for portfolio growth.
- Have complete control over what your money is invested in.
5. Let’s get started on how to invest money! Which ETFs should I start with & via which platforms?
Unfortunately, I cannot tell you what to invest in as that would be investment advice.
However, if I was investing for myself with the options you gave, I’d focus on a combination of VWRL and VUSA.
Both of these are exceptionally cheap and have delivered good performance historically.
However, this should not be a guide of what the future holds. The asset allocation of those two funds is key to the performance.
Ongoing fees of 0.25% and tracks the “FTSE ALL-World Index”.
It also focuses on developed and emerging markets.
Top 3 allocations are USA (54.9%), Japan (7.7%) and UK (5.2%). The rest are in places like China, Germany, etc.
Note that this fund is the “Distributing” kind. I.e. dividends are paid out as income.
VWRP appears to be an “Accumulation” version that allows reinvestment of dividends.
But this doesn’t appear to be on the Vanguard platform yet. Google it if of interest.
Again, this is not financial advice.
Ongoing fees of 0.07% and tracks the “S&P500 Index”.
Focused exclusively on the USA.
Top sectors – IT, Healthcare, Financials, Communication Services etc.
This particular fund is extremely cheap but has delivered outstanding performance over the last decade.
In addition to VWRL and VUSA, there is VEUR for European exposure as you noted.
Although note that this has a 27% exposure to the UK.
More on this below in “Other Observations”.
6. Do you think it's a good strategy to put all the money in the two ETF's recommended by my friends? Can you think of better options?
With 2 or 3 ETFs, you can create a simple global portfolio. This is a smart thing to do.
However, you have to consider if you’re happy for ALL your money to be invested in the stock market. Especially as new investors.
From a risk perspective, the right choice of ETFs or Index funds will give you as much global diversification as you need.
7. Somebody at the FI meet-up said that it's worth considering Accumulation ETFs. If I don't need to withdraw cash any time soon. I was under the impression that Accumulation ETFs complicates tax filing, but maybe I'm wrong. Any thoughts on this?
“Accumulation” simply means that you’re reinvesting dividends. You should have no issues as you’re not selling anything.
I also don’t see why this would complicate tax filings.
The key thing is to make sure you choose the right type of account with tax-free benefits.
A Stocks and Shares ISA offers that.
Any dividends received in such an account will be tax-free and won’t affect your annual allowance.
If you sell your investments in the ISA and make a profit, those are also free of Capital Gains Tax.
8. For non-ISA account, do you think I should just go ahead and get started with it? If yes, what are the tax implications?
If you’ll be using up your annual ISA limit of £20k each, then yes. Tax implications covered above.
9. Do you think we should consider pension options?
Yes, a SIPP with any provider that you’re happy with.
These have the advantage of Tax benefits i.e. tax rebates.
For example, you can get a rebate of £40 for every £80 you put in up to £40k per year.
Personally, I use Hargreaves Lansdown.
There is also the option of a Lifetime ISA. I covered this earlier.
Only SIPP as far as I'm aware. We don’t have the same mechanisms that the Americans have here in the UK.
11. Looking at my overall situation, do you have recommendations or advice on investment (peer-to-peer, property, any other form)?
I would personally avoid UK property for now unless you’re a first-time buyer and don’t have to pay the extra stamp duty.
Given the local bias attached to UK property and link to BREXIT, it is an area to be cautious about.
Do further research on how to invest money from a p2p perspective. Do read our guide before you get started.
Other Observations on How to Invest Money:
Below are a few other things I observed whilst reading your case:
1. How Much Money To Invest Each Year
The one thing that you should consider further is how much to invest each year.
Although you stated that:
“Our forecast for the next 5 years is that we can probably save £23K~25K and put it into our portfolio each year.”
Moving from £120k to your goal of £500k will require:
- A certain amount of money,
- Invested consistently every month,
- Assuming a certain sensible rate of return (taking into account inflation and investment fees),
- Invested over your 10 year period of time.
Doing the above and some scenario analysis will help you figure out if you’re investing the right amount.
I have done these for you assuming 4%, 5% and 6% real returns respectively.
To keep things as sensible as possible, I have also gone with the lower end of your savings goal of £23k per annum i.e. £1,917 per month.
Below are the results:
Assuming 4% real rate of returns:
Assuming 5% real rate of returns:
Assuming 6% real rate of returns:
You can see that at:
4% average real returns, you’ll have a shortfall of £46,810.
5% average real returns, you’ll have a shortfall of £16,034.
6% average real returns, you’ll have a surplus of £17,019.
I expect that the next 10 years might not be quite as generous as the last 10 years.
So my suggestion would be that you should assume the worst and save more for the best.
If you assumed an average 4% real rate of return but saved the top end of your forecast of £25k (approx £2,100 p/m) –
Your shortfall would fall yo around £20,396. You can see this in the middle scenario of the 4% chart above.
That chart also tells you that you’d really need £2,300 per month (£27,600 p/a) invested at 4% to hit and exceed your £500k.
£2,300 per month would leave you with a surplus of £8,418 above your required £500k Financial Independence target.
2. UK Exposure in Global Portfolio
The various ETFs that you’re considering can give you global exposure with the right combination.
I wanted to point out that VEUR (FTSE Developed UCITS ETF) has significant exposure to the UK.
Although it invests across 16 EU countries, 27.2% is allocated to the UK.
Whilst this might not be a bad thing, I personally think it is quite a high allocation.
Just something to consider and keep an eye on given our political situation.
The next 6 – 12 months will offer more clarity on how to invest money re the UK.
3. Financial Independence As A Couple
You stated that the goal of Financial Independence is just for you.
Whilst there is nothing wrong with this, my experience is that this journey is easier when both people are onboard. Especially being married.
Then again, I’m well aware that cultures differ, so provided your current set up works for you, then all good.
If, however, you’re trying to get your husband to become FI too one day, read
The above points to you being in a very fortunate place financially and Financial Independence not far away.
Keep saving and investing consistently even with all the current expectations of a crash.
Remember that the return numbers we’ve used above are assumed averages. So dips along the way are expected.
Stay healthy and keep enjoying your life as you plan your next decade.
All the best and feel free to give me a shout whenever.
Related posts on how to invest money:
- READER CASE STUDIES: When Can I Retire?
- How To Invest In Stocks With Confidence: Step-by-Step For Beginners
- 10 Tips For Smarter Investing
- How To Become Financially Independent In Your 30s
Are you currently working toward Financial Independence? How do you invest your money? Do share some helpful tips from your journey on how to invest money.
Do please share this post if you found it useful, and remember, in all things be thankful and Seek Joy.