Category: Investing

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Coast FI as a Late Starter to FIRE

Image by pasja1000 from Pixabay

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When I first came across the term “Coast FI”, I assumed that it meant living a FIRE lifestyle somewhere along the coast, perhaps near a beach. What a dream!

It is one of the many terms in the FIRE community, signifying the different levels of FIRE you can aim for – Lean FI, Fat FI, Slow FI, Barista FI, Flamingo FI and so on.

Me? I was just aiming for ordinary FIRE, or as close to FIRE as someone starting late could hope for!

What is Coast FI?

Four Pillar Freedom explains it as “having enough money invested at an early enough age that you no longer need to invest any more to achieve financial independence by age 65 (or whatever age you define as a retirement age)”

That is, you coast to financial independence once you’ve saved up enough money for it to grow by compound interest to the sum you need at traditional retirement. In the meantime, you just need enough income to support your current lifestyle without worrying about saving for your retirement.

Pretty neat, huh?

Except the bit about invested at an early enough age …

Well, that rules me out.

I am a late starter at all this investing and pursuing FIRE as I didn’t discover FIRE until my late forties.

So I dismissed the idea as interesting but unachievable.

Then Professor FIRE shared his story on the Late Starter to FI series, explaining that he is essentially at Coast FI despite starting late. Again, I dismissed it as a possibility for myself because I wasn’t earning a big enough salary.

Now, a couple of years after reading Four Pillar Freedom’s post on Coast FI, I think I’ve achieved this very milestone!

I’ve arrived at Coast FI as a late starter, woohoo!!!

How, you ask?

Super, baby, super! Or superannuation, Australia’s retirement account.

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Superannuation in a nutshell

The government mandates the minimum percentage of your gross salary that your employer must pay into your superannuation account. This is known as the Superannuation Guarantee and is set at 9.5% currently. There is considerable debate at the moment about whether it should be raised to 12% or whether employees would be better off with an increase in wages.

This contribution is taxed at 15% instead of your marginal income tax rate. Any investment returns is also taxed at 15%.

The current income tax rates in Australia are:

Up to $18200              Nil

$18201 – $45000        19%

$45001 – $120000      32%

$120001 – $180000    37%

$180001 upwards       45%

Therefore, the government has made it attractive for you to contribute to superannuation and save for retirement.

But wait, there’s more!

Once you are able to access your money in retirement, it can be withdrawn tax free and any investment returns in this pension mode is also tax free. There is a limit of $1.7 million ($1.6 million before 1 July 2021) that can be converted to this pension mode.

Of course there is a catch! And the catch is that … you can’t access your super until you are 60 (if you are born after 1 July 1964).

And because of this inaccessibility plus the automatic employer contribution, many forget that the money sitting in superannuation is YOUR money (ahem, I fell into this category!) And that investing it well is an important retirement strategy, whether you retire earlyish or not.

Back to my story

When I first started working nearly thirty years ago, superannuation was a new concept in Australia. Compulsory employer contribution had just been legislated. I knew nothing about it.

A family friend nagged me to open a second account (with AMP) ie an account that is not connected to my employer. I remember asking only one question – can I stop contributing if I don’t have the spare cash? Yes, he said, it’s up to you. So I agreed to open an account, knowing I have an escape hatch.

Every year I would contribute about $2000 after tax to this account. I never read the annual statements or cared abut how the money was invested. I just remember that I always resented forking over $2000 or so (it increased by inflation) every year.

All I cared about in my early twenties was saving enough money to go on overseas holidays and eventually buy a house. Retirement was an eternity away.

And yes, I eventually bought a house and had a mortgage. My intention was to pay off my mortgage as quickly as I can. So I stopped contributing to this extra superannuation account. After all, I needed every cent.

But I kind of got used to having debt. Everyone (except my parents) told me that having debt was normal, that some people never paid off their debt until they retire. So it is perfectly ok to travel and live a fine life while paying off your mortgage.

This is exactly what I did. I bought nice things for my house. And travelled overseas. I enjoyed my life. And stopped investing. Duh! This is one of my biggest money mistakes.

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Fast forward to my 40s ...

The year I turned 47, to be exact.

I still remember vividly that morning in January 2018 when I woke up in a cold sweat … I was terrified that retirement was suddenly on the horizon and that I probably hadn’t saved enough to retire at the traditional retirement age. My job was so stressful at the time that the thought of working another 20 years was truly out of the question.

I scrambled out of bed and searched through folders of annual statements to find my account numbers. And set up online log ins. My combined balance from the two accounts was … disappointing. I did not have anywhere near enough to what the retirement experts say you need in retirement.

Fortunately I had just paid off my mortgage. That was the only plus in my favour. Because it meant I have cash to invest in something.

A friend gave me The Barefoor Investor by Scott Pape. In one of the steps, he advised contributing extra to superannuation, up to 15% – ie a top up of 5.5% if your employer contributes 9.5%.

So I decided to ‘do something’ with my super.

Optimising my superannuation

Having two super accounts meant paying two lots of administration fees. So I closed the AMP account and rolled over the balance (minus a hefty penalty) to my main account, REST.

After more reading about industry funds, I chose to roll over to yet another fund (Hostplus) with lower administration fees and the ability to choose index funds to invest in, which lowers management fees even more.

The lower the fees, the more of the investment returns I get to keep.

My next step was to salary sacrifice. That is, I contribute pre taxed dollars to the maximum of $25000 (which also includes my employer’s contribution).

I didn’t have enough time in the 2017-18 financial year to fully achieve this but I did it for the following two years. Because the pandemic affected my returns dramatically, I continued salary sacrificing for the first six months of the 2020-21 financial year.

However this meant that I didn’t have as much as I’d like to invest outside of super.

If I want to retire at 55 (and I really, really, really want to, believe me!), I need to build my ‘bridge the gap’ fund that will support me from age 55 to 60, until I can access my superannuation.

It is a delicate balance between having enough in super to cater for my sunset years (60 years old onwards) and having enough to survive in the five years before I can access super while retired.

Image by kordula vahle from Pixabay

Rule of 72

The Rule of 72 is a quick, useful formula that is popularly used to estimate the number of years required to double the invested money at a given annual rate of return – Investopaedia

I utililised the rule of 72 initially to estimate when I can stop salary sacrificing so much into super.

My reasoning is as follows.

I have 10 years before I can access super. I have an end figure in mind that will support me for the rest of my life from 60 onwards, based on the 4% rule and my expenses.

In order for my balance to double in 10 years, my annual rate of return need to be 7.2% (after fees and taxes).

Is that feasible? I think so.

Despite the tumultuous year of 2020, when my balance plummeted by 30% in March, it has since climbed back up and exceeded all expectations.

The three funds that my super is invested in all returned more than 7% per annum since inception (including 2020). And while past performance doesn’t guarantee future performance, it is a good indication.
 
Therefore I need my super balance to reach the half way mark, with 10 years to reach preservation age. That is, even if I didn’t invest another cent, as long as the average annual growth is 7.2% for the next 10 years, it will grow to my desired final balance.
 
And isn’t that the definition of Coast FI?

 

What ifs?

I’ve done the calculations a million times.

But just in case I got it wrong or the stock market does not cooperate, there are contingencies.

Since I plan to work for the next five years, my employer will be contributing at least 9.5% of my gross salary into my super.

And I am also still salary sacrificing but only less than a third of what I did when trying to contribute the maximum.

I will continue to monitor and review its progress. If the balance is not growing according to plan, I will increase my salary sacrificing again.

The worst case scenario is that I work a couple of shifts a week and not fully retire at 55, contributing all earnings to shore up my super balance.

Or I delay withdrawing from super for a couple of years, if I can survive on funds outside super. The next three years will be crucial in building this ‘bridge the gap’ fund.

So what contributed to my arrival at Coast FI, even as a late starter to FIRE?

(a) That second superannuation account

While I was initially disappointed by the combined value of my super balance, I should be happy with my younger self, on further review.

I calculated at best, I would have contributed around $20k – $25k to this AMP account before I bought my house. I then stopped contributing for at least 15 years. When I checked the balance in 2018, it was a whopping $80k! This was not an industry fund so fees would have been high. And the Global Financial Crisis was smack bang in the middle of it all.

While $80k is nowhere near what I need in retirement, it is good ‘seed’ money and I am grateful to my younger self.

(b) Boosting contributions

Salary sacrificing was tough at times but I am so glad I did it. Those two and a half years boosted my balance so it was totally worth it. There really is no other choice as a late starter. With a shortened time frame, all I can do is throw in as much as I can.

 (c) Investing in low cost funds within super

Looking at my most recent super statement, I paid 0.04% in fees (indirect costs, other fees and administration fees). This means I get to keep more of the investment returns instead of paying others.

(d) The stock market cooperated

While this was totally out of my control, I am grateful that the share market has cooperated! Investing in shares in the long term will pay off one day.

Final thoughts

I wasn’t aiming for Coast FI specifically. And I certainly never believed that Coast FI was possible as a late starter.

But I can tell you that despite all that, arriving at Coast FI is liberating!

I can relax a little, knowing that one phase of my retirement plan has been taken care of.

Now, I’m off to build that ‘bridge the gap’ fund.

And oh, trust in the math!

Have you arrived at Coast FI yet? Did you or will you do anything differently when you achieve(d) the milestone?

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Goodbye 2020 – letting go of 2020

Goodbye 2020

2020 was a year unlike any other. Full stop.

I am just so relieved I survived it.

There are many, many more people in the world who had a much tougher year. After all, I didn’t have to deal with sick family members or home schooling children or working from home or all the above at once. I also didn’t lose any loved ones, job or business. I know I am one of the lucky ones. Therefore I feel guilty that I feel what I feel, as if I haven’t the right to feel them.

Reflecting on the year brought up much of the distress and anxiety of dealing with Coronavirus in my workplace, managing anxious and fearful staff, dealing with the public, panic buying, stock shortages, curfews, lockdowns and so on. (I wrote 2 posts about this at the time – How has the Covid-19 virus affected my retirement plan?  and Emerging from the storm of Covid-19)

There was so much mixed emotion – on the one hand I was happy I had a job throughout 2020 but on the other, that job had a real chance of coming into contact with the virus. And I was terrified of passing that inadvertently to my elderly parents.

I went to work every day so did not experience the isolation that others lived with during lockdowns and curfews. In fact, my colleagues and I longed for the peace and quiet of home and to some degree, envied those who could work from home, and therefore lessen the danger of contracting the virus.

I now realise that I’d largely suppressed a lot of feelings about 2020 and just got on with it. Honestly, I wasn’t aware of how much underlying anxiety and stress I buried under the surface or how much I carried with me all the time.

Until I came to a standstill on Boxing Day and could not be motivated to do anything. My tiredness has finally caught up with me. So I basically just slept, read and ate. And poured all my concentration into finishing a 1000 piece jigsaw puzzle.

I didn’t have a break between Christmas and New Year except the public holidays as we were short staffed. And as my extended family did not return to Australia for Christmas, I didn’t have a reason to take time off. Note to self – TAKE THE TIME OFF regardless next year (or really, it is this year now)

Shedding tears and letting go of 2020 – that is how I farewelled 2020.

But … there were GOOD things that happened in 2020 too and I learned many lessons.

 

jigsaw puzzle ice cream cones fallen on marble counter | goodbye 2020

The context for July to December 2020

My Mid Year 2020 Goals Review post was about the first six months where I discussed the disruption to my routines. Well, the second six months was more of the same. Every time I thought I succeeded at sticking to a routine, something else would happen and I’d be back at square one.

The last six months of 2020 was dominated by a ‘hard’ lockdown with curfews from 8pm to 5am initially, then 9pm to 5am for months, from mid July. We had the toughest lockdown conditions in the country to deal with a deadly second surge of cases. Then we had 60 days of zero active cases only to be back to a dozen or so cases before the end of the year. And we are now back to border closures as Sydney battles a new surge of cases.

Our collective mood seem to be at one with active cases. When the active cases were high, we were cautious and anxious and when the numbers were low, we were visibly more relaxed and happy.

Recap of decade goals

2020 was the first time I’d set decade goals – goals I want to achieve within 10 years.

My decade goals are to retire at 55, visit Antarctica and run a marathon. Amazingly, with one year done and dusted, I think I am on target to do the first two but need a LOT more work to tick off running a marathon.

Just articulating the goals somehow made them real and when opportunity struck, I leapt at it. For example, looking for a travel buddy to Antarctica. None of my friends has ever expressed the desire to visit Antarctica so I always thought I’d do it by myself. But lo and behold, when Frogdancer Jones, a fellow late starter to FI and blogger wrote about her new goal of visiting Antarctica, I put up my hand to go with her. This may very well be the first goal I achieve within the decade, yay! 

But how did I fare for my 2020 goals?

 

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1. Exercise and stretch daily

I am happy to report that stretching is now part of my morning routine. It has been a struggle for years. My personal trainer sent me a video on how to stretch ham strings against the wall while lying on your back in our first lockdown. I watched the video and was put off by how hard one of the exercise was.

Then one day, much much later in the year, I realised that I could do this first thing in the morning. I can continue my snoozing on the floor while stretching my ham strings against the wall. Why didn’t anyone tell me that earlier?

And now while I’m stretching, I manifest money flowing into my life and articulate why I need money. (Refer to my earlier post on How I Transformed my Limiting Beliefs about Money)

The exercise part is still a failure as I just can’t seem to settle into a routine to walk or run. There were many stops and starts. While a lot had to do with lockdown restrictions, I also know that exercise is the first thing I give up whenever life gets a bit complicated.

I will need to do better in 2021 somehow.

woman stretching ham strings against the wall
My stretch does not look like that AT ALL!

2. Journal daily

This was a partial fail, in that I did not journal daily but did keep up the practice at least thrice a week. Writing brings me clarity so I will persist.

3. Read more

I wanted to resume this habit in 2020 as I used to enjoy reading books but somehow stopped when I discovered FIRE and read blogs and listened to podcasts instead. I didn’t have time to read any books except finance related ones.

I smashed this goal and rediscovered my love of reading especially during the lockdowns. It is so good to lose oneself in someone else’s world (even if it is a fictional world) rather than having to face what is going on in my own life 🙂 It was pure escapism.

My goal was to read 20 books. I’d read 33 by the end of June and  ended up reading another 20 books by the end of December, only a handful of which are non fiction.

Once again my Libby app which allowed me to borrow ebooks from my library was a saviour!

 

4. Be more sustainable

At the beginning of 2020, I commissioned an Energy and Sustainability Assessment on my house. One of the key recommendations was to increase the insulation in my ceiling.

Unfortunately, this is still not completed as the second lockdown imposed strict restrictions on the building industry. They couldn’t work inside any residential building that was occupied, unless it were an emergency and a permit granted. Hopefully it will be done in 2021.

Installing extra insulation would have meant less reliance on heating and cooling and therefore using less electricity and gas.

I was home every day in 2020 compared to travelling 6 weeks overseas in 2019. With that in mind, I am very pleased that my gas bill in 2020 was only $20.66 more than what I spent in 2019.

And electricity was $163.75 less in 2020 compared to 2019. I am very happy with my solar panels!

I wrote about How to reduce your water bill – by reducing your water usage earlier in the year – the aim is to use 155L per person per day as per Victorian guidelines. In 2019 my average was 276L per day; in 2020, my average was 177L per day! Since I only started water saving strategies in February, I’m very happy with the result. Plus my water bill was less by $123.48

I’ve been using vinegar and sodium bicarbonate to clean the bathroom and kitchen, in an effort to reduce buying cleaning products in plastic bottles. So far so good.

 

5. Declutter

I did not manage to declutter at all! I must be the only person in the world who did not declutter in 2020 🙁

There was a new excuse … all the charity shops were closed due to Covid – who would take my donations? I tried half heartedly in July when I was on annual leave but gave up pretty quickly.

But I did manage to keep my kitchen counter clutter free 🙂 Gotta aim small these days!

 

young woman staring at orange piggy bank | goodbye 2020
Image by luxstorm from Pixabay

6. Financial goals

a. Invest $25000 in shares portfolio

I always knew this was a stretch goal for 2020.

My wages were lower due to transitioning to a role with lesser responsibilities – 2020 was the first full year on these lower wages.

I invested a total of $23200 – in AFI, WHF and VAS to be specific.

VAS is new to my portfolio. I already had AFI, MLT, BKI and WHF (all LICs ie Listed Investment Companies) in my portfolio and had in the past, decided not to hold VAS as well.

VAS, an ETF (Exchange Traded Fund) tracks the ASX300 while the LICs I own mainly focus on ASX200 companies. So, it’s kind of a duplication.

I like LICs in that they can smooth out their dividends so even in bear markets, they can offer a dividend. As in the case of AFI – which offered dividends throughout the global financial crisis. It is comforting for me, knowing that I will receive an income even during the bad times.

ETFs on the other hand must distribute all its earnings. So in lean years, when the underlying companies stop or reduce their dividends, it follows that there will be less distributions.

But LICs still depend on fund managers to make sound investment decisions, which now makes me a bit uncomfortable. Whereas VAS is a true index tracker and doesn’t rely on good judgement. Therefore I now aim to hold VAS in equal value to my LICs.

 

b. Maintain salary sacrificing into superannuation until end of June then review

I was hoping to stop salary sacrificing into superannuation this second half of 2020. I had calculated, based on the balance at the end of 2019 that it should double to my target in another 10 years, when I am able to withdraw the money.

However, at the end of June, my super was only just starting to improve after plummeting in March. So I decided to continue salary sacrificing. 

This meant that I did not have enough to invest in my share portfolio outside of super and hence did not make the $25000 goal.

But my super balance has recovered and increased by 9.4% compared to 2019. Should I stop salary sacrificing now? I’ll tell you in my next post!

c. Aim for a savings rate of 50%

At the end of June, my savings rate was 55% so I was on track if I kept to my spending pattern for the next six months.

Unfortunately, that was not to be. I always have larger expenses from July to December – local council rates, home and contents insurance, professional association fees and Christmas to name a few. This year, there were unexpected expenses too.

I paid a home insurance excess of $500 on 2 occasions. I made a claim in July to repair a hole on my porch ceiling from water leakage during heavy rainfalls. Insurance did not cover the wear and tear but covered the repairs to the ceiling.

The second occasion was more recent. I’d returned home to my kitchen and parts of the living room inundated with water pouring out of a burst pipe under the kitchen sink. Insurance did not cover the replacement of pipe and tap or plumber fees (which cost just under $1500) but will cover the cost of repairing my hardwood floor. Some boards have buckled from the moisture.

In October, my front door lock died. So that was another $400 for a new lock and locksmith fees.

I’d recently started a sinking fund for home maintenance. Needless to say, but that fund is more than depleted 🙁

I spent about $1500 on Pinterest, email marketing courses and Online Impact membership. This is an investment in my blogging side hustle – I have so much to learn! I decided as I wasn’t travelling this year, I had the money to invest in myself. To date, I haven’t considered blogging to be a side hustle but will do so from now on. More on that in 2021.

Growing my own vegetables gives me immense pleasure. I would love to be self sufficient one day. Fruits and vegetable prices are increasing all the time – if not from droughts then from lack of labour at the moment to pick them. There just wasn’t enough room in my 1.2mx1.2m and 0.6mx1.2m beds to plant what I needed. So I ‘invested’ in 3 1mx1m wicking garden boxes for the back garden in early December. I’m upping my game considerably!

With all these unexpected or unplanned-for expenses, my overall savings rate for 2020 was 47% (oh, so close!), with total expenses $7182 less than 2019. 2020 was my lowest spending year since I started tracking expenses in 2018. That has to be a win!

 

3 wooden wicking bed boxes
My new wicking bed vegie boxes

2020 Lessons

The biggest lesson for me in 2020 was that I needed to be resilient, both financially and mentally. I need to be able to bounce back from setbacks.

Although I am thankful that I did not lose my job, I also watched worriedly as my workplace adapted to less customers (and therefore less revenue). Plus we didn’t replace any staff who left.

I will never forget the TV images of long queues of people outside Centrelink offices, waiting to apply for welfare. It is not a scene I associate with being in the ‘lucky country’, Australia.

I am reminded again and again that I must set money aside to look after myself, for those rainy days. My grandmother and mother were correct.

I truly appreciated the value of an emergency fund for the first time and was grateful mine was fully funded. For the first time too, I considered work in other areas of my profession, just in case.

But it was also in 2020, that my blog had enough readership (for a few months at least) to qualify for ads revenue. And even though it is miniscule compared to what I spend on the blog, it gives me hope that maybe, just maybe I can derive a side income and therefore some insurance against a job loss.

Working with anxious and fearful staff and the public in 2020 showed me that how we respond to uncertainty and the unknown matters greatly. The ones who were positive and willing to adapt, performed much better than those who were negative and fearful. It showed me that having a positive mindset was a very powerful asset in life.

It was stressful having split shifts – where our day and evening shifts could not intermingle; one shift left promptly at 5pm by the back door while the evening shift enters via the front door. But we soon adapted and NOT one day shift person longed for extra hours when we ceased split shifts in November.

So that is a huge legacy of 2020 – I now finish work at 5pm! I can be home by 6pm even after a walk after work with my colleague. Unfortunately I need to work on my night routine – surely I can be more productive than falling asleep on the couch.

I learned how to bake sourdough bread and keep a sourdough starter alive; I learned how to bake bagels and pretzels, babka and challah from a bakery in London via Zoom. And once again, via Zoom, I learned how to make bang bang noodles from New York! Really, if I so desired, I could be very addicted to these classes … who knew I could learn anything from a small screen …

Final Thoughts

I shouldn’t feel bad that I didn’t accomplish many of my goals.

2020 was a year of constant change and disruption. Adapting to all these changes and disruption takes a lot of energy. And as one of my blogging friends said to me “You should give yourself some grace for 2020 – it took an emotional toll on you, dealing with all that you did at work”

I want to thank all of you who have read, commented, followed me on social media, interacted with me in any way this year especially Late Starter to FI series contributors. Thank you for your support and encouragement and your willingness to share your stories. I appreciate every single one of you ❤️

So it’s time … 2020, thank you for your lessons.

I am ready to let you go now.

Goodbye, 2020!

How was your 2020? Did you accomplish your goals? What did you learn?

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