Yesterday marked my return to blogging after a 2 month hiatus and I posed the question about what would you do with a tax free £1m if you received it right now. Read it here
I woke up this morning at 5 thinking about many things, checking my emails and all the things you really shouldn’t do if you want any chance of going back to sleep.
My mind wandered back to this and I realised my gut feel didn’t take into account a few important factors. Namely these:
- We might have a 2nd child – quite an important oversight but this is on the horizon hopefully within the next few years. Whilst i don’t believe they cost as much as everyone says (assuming you don’t private school them and they don’t go to university), they will need to be factored in. This leads me onto…
- I had forgotten my son’s Junior ISA. Currently we pay in £100 a month to give him a good start once he’s 18. I would strongly encourage him to not touch that when he’s 18 and strive for financial independence with my guidance and let compound interest work its magic. Anyway, i digress, I would boost this to the maximum £4,260 per annum. Some quick calculations (assuming 9% YoY growth) – I’m using Vanguard LifeStrategy 100% for those interested would mean (inflation adjusted) £120k at the age of 18. If he didn’t touch that (or add to it) AT ALL, when 50, he would, in theory, by financially independent. Assuming he’s employable and able to save something from 18 onwards, this should only improve drastically. Enter child number 2 hopefully, and this annual outlay is doubled to £8.5k.
- My wife would never, ever, let me get away without spending money on the house. We’ve bought something structurally pretty good but it could use £70-80k to get it configured better for us and updated. We think the work would add value but not a huge amount, but justifiable.
- The other adjustment i would make to my original plan is to pay off the mortgage entirely. Getting the outgoings down takes far more pressure off and whilst probably not the best way to maximise the money, it represents a spread of risk away from solely investment strategies and any potential headwinds in the near future (ie. Brexit etc)
- Now, i need some help, the big outstanding question i have is not what to invest in with the remainder, but when to invest it. Do I do as i said yesterday and add my max ISA allowance each year and drip feed and in theory sacrifice growth over time, but have no tax considerations, or do you invest it all in one go, maxing out the ISA allowances but then investing in general fund and share accounts for the rest. This means clearly if i drawdown and make profits above my allowances i will have to pay tax.
My question this: What is the best strategy? If i took option 2 (invest all at once, not all in a tax wrapper), can i transfer 40k each year into the ISA account? Would this be possible, even?
Then there is my SIPP – should i drip some into that every year (max £40k) instead to get around the tax? Obviously i then cannot touch it for 17 years until im 57 (at the moment anyway) and then cannot get access to all of it without a tax penalty…
I haven’t written here for a while. I think I slipped into depression after my portfolio plummeted in October, all the while reading many reports that the markets are dying, and we should all get out – its overvalued in the US and thats where i have 40% of my investments blahblahblah
That, and we moved house and have to spend a small fortune on furniture etc, so i’ve not been investing anything so have had no updates!!
I’ve had to reach into the depths of resolve to stick with it all and not change my approach. I’ve bought books on crypto, p2p property investing and even revisited investing in Gold.
My reading has also taken me back to blogs and specifically the UK FIRE scene to get some perspective. One post I enjoyed was the theoretical question of what would you do if you won a tax-free 1 million pounds right now. The idea being you don’t think too much about it, its the gut feel response in that moment. So here goes…
- Quit work. Surely I can, actually, its not just me, its my wife too. Or can I? My target number for our financial freedom is 900k, worked out with drawdown of 3-4%. OK, so that was worked out from the age of 55, not 39, so maybe i need to be a little more towards the 3%. We currently have c.33k in stocks and shares ISAs, and 90k in SIPPs/Pensions. We have 360k equity on our house and a 335k mortgage. What next? Hmmm… tempting to pay off the mortgage, but we would get 5% early repayment charge as we’re in the first year of a 5 year fixed term, so 16.75k. Is that better than overpaying mortgage by the maximum amount (10%) every year and in theory getting % growth from passive investing?
- Let’s go with overpaying mortgage by maximum each year (10%) and so keeping investable pot as high as possible. So we’re down to 966k, with essential monthly outgoings remaining the same at about 4k (including mortgage and my son’s nursery cost and fun money). Thats 48k per year required.
- Investing: Investing it all at once means tax and lots of it outside of the 20k personal ISA allowance. Lets assume we invest 40k per year (allowance x 2) . Add that to the savings we have already, if i assume 9% growth (optimistic right now), its not that much (10-15k), and certainly with 48k coming out that will make a serious dent in the overall number until we have enough invested to cover it.
What to invest in? It would have to be less risky than by 100% equity ratio as I am now in my aggressive wealth building mode. Maybe i would go for a Vanguard LifeStrategy 60% or 40%. Maybe i wouldnt want to be so passive, but i probably should be. Do i trust myself?
- Outgoings in 5 years time – 966k minus 5 x 25k (mortgage overpayments) – 125k, minus 5 x 48k outgoings = 240k, minus pay off mortgage in full, say 160k at this point = 440k of original 1m leftover.
OK, mortgage paid off and child not in nursery anymore, and no plans for private education currently, where does that leave us in terms of monthly outgoings. Probably about 1.8k x 12 = 21.6k per year required. By then, we’ll have 200k plus 120k in investments/pensions plus 440k = 720k total assets, assuming zero growth in 5 years. We would of course have at least 540k in equity in the house too (assuming no change in house value), so net worth is 1.26m. Thats enough, surely?
- What next, keep investing 40k per year in ISAs whilst dipping into savings for living costs? It would take 11 years to invest it all that way, and assumes the ISA allowance remains the same. Maybe it would actually be best to have invested it all in one go at the start to benefit from the growth, and not worried too much about it being out of the ISA wrapper? Arrrgh, i dont know enough about it!!
Hmmm…. I’m now wondering if i should’ve quit work. This is depressing….it shouldn’t be, but it is.
What would you do?