Getting Onto the Platform

I first took out a S&S ISA around 8 years ago with CIS (now managed by Royal London). I paid into it monthly and took very little notice of how it was doing, basically because I truly believed that it was little more than a glorified savings account which would just increase somewhere in line with the amount I put in. I had heard the term "volatility" but I had never really bothered to find out what it meant.

When I started thinking about retirement planning I took another look at my ISA as this is the biggest "chunk" of money that I have available to help me. Whilst doing my research on what a S&S ISA actually is (which naturally led onto a crash course in portfolio building and asset allocation courtesy of Tim Hale amongst others), I came to realise that there was a whole new world out there. This world was one where people could manage their own investments online, where they could see how those investments were doing on a day-to-day basis if they wanted to, where they could research what was available, create imaginary portfolios and "watch" interesting funds. In other words I discovered the online broker platform.

From believing that I had to leave my money where it was and passively watch what happened to it via an annual statement that came through the post, I went to realising that I could move it onto a platform and be actively involved in managing it. It was a liberating discovery as it fed my desire for control and need to plan, but it was also a little scary. How should I go about moving all that money, and where should I put it?

As I'd been reading Monevator for some time this article was my main information point in my planning, (although I did read the boards at moneysavingexpert.com and anything else I came across about the subject). Given my profile Interactive Investor turned out to be the fairly obvious choice and as they were offering an attractive transfer deal at the time (and still are, I believe) I decided to bite the bullet and start the ball rolling.

I filled in the transfer form, set up an ISA account and began to familiarise myself with how things worked. I must admit that the first time I bought a fund I felt quite nervous and, in fact, my 5 first buys were fairly small ones as I wanted to see the whole process run through but without committing much cash. For that reason I know I paid more dealing costs than I should have (iii charge £10 per deal) because I hadn't yet (and still haven't) been credited with any of the free dealing that was promised as part of the transfer deal. Thus I committed one of the cardinal sins of investing - paying over the odds to deal. But I'm happy to take this hit as I think it's worth it to get myself up and running with confidence. Plus I now know that I've been paying more charges than I have needed to for years, so, in the long run I will be saving quite a bit of money.

I'm now at the point where I feel that things are going pretty well. I have 5 funds with small amounts sitting in them, I've organised a monthly payment into my account from my current account and the first set of regular transactions I set up went through (almost) without a hitch. I feel pretty pleased with myself and all ready for the next financial year.

If only whoever is sorting out my transfer would get a move on and shift things across ..

Enter Plan B - an Interlude

Slap bang in the middle of my attempt to work out a plan to pump up my S&S ISA enough to let me stop work at 60 the Chancellor throws a spanner in the works by reworking defined contribution pensions.

Pensions are the one part of financial planning that I've never really had to plan. I'm a public sector worker with a final salary (soon to be career average) defined benefit scheme that (along with my state pension, rent from our small flat and what's left of the savings) will be enough to let me live comfortably at age 66 (it should be around £12,000 if I manage to keep it intact.) Salary sacrifice, annuties, SIPP's, PPs and stakeholders  - all things that I haven't needed to concern myself with. I've only needed to know how LGPS works and what I can expect it to do for me.

However these last few days have been full of "all things pension" as I've had to start reading up and researching due to the changes introduced in the budget last week. Where once personal pension planning was just something that only applied to other people, it now promises to be an opportunity to help me with my early retirement plan.

Actually, I haven't always been totally faithful to my DB pension. Eighteen years ago when I had just started back at work on a part-time basis after spending 10 years at home looking after the kids, the Co-Op men came on their yearly visit. (We are northerners with the kind of backgrounds that mean that, if we were going to do financial business with anyone, it would be the CO-OP). They sold us a Platinum Bond (we had just come into a small inheritance) and, for the lady, a FSAVC. Whether they should have done this is up for debate (and in fact I'm not sure that they would be allowed to do so now considering that I was a Local Authority worker with a final salary scheme which I could have been paying extra into instead), but I'm jolly glad they did.

I've never stopped paying my small monthly sub and it is now worth about £16,000 (predicted £22,000 by 2019 when I can draw it) and it can be taken when I'm 60. The tax-free lump sum already figured in my calculations to buy me free time between 60 and 66 but now it looks as if I will be able to up my payments and use the whole lot during those years. An incredible opportunity, especially given that anything I put in will have a further 20% added to it by the taxman.

In the course of just one week the value of that small monthly payment has increased dramatically. From being worth about £5,000 when I needed it and then £450 pa when I didn't, it has now gone up to £22,000 that can be used exactly when I want it with the added benefit that putting more in gives me even more gain. It just goes to show that the "value" of money and the time that it is needed are woven closely together, they form a whole and are virtually meaningless in isolation. How can you possibly know how much money you need if you haven't plotted your income against your timeline?

Plan B Arrives

After some careful calculations as to what is the optimum amount to put in (around £250 per month I think) I have decided to beef up my payments into the FSAVC to the level that I will have enough at 60 be able to draw just the right amount each year to keep my taxable income below the threshold, and take the rest of what I need to live on from the ISA.

Just to be sure that this is the right thing to do I've spent the weekend researching whether I would be better transferring it into a personal pension as it is one of those rather difficult to understand "with profits" creatures. However from my reading it seems to be invested in a CIS fund that isn't performing too badly at the moment, it's low volatility and not charged too steeply. I've decided to wait for my annual statement which is due any day and maybe ask a few questions but then hopefully be able to avoid the fees associated with moving it anywhere else, up my monthly payments and forget about it (just like I have for the last 18 years).

Sometimes inertia does seem to pay.

Beating the Banker (Or At Least Putting Up a Fight)

Spending wisely is just as important as investing well or saving hard.

This is something that has only just started to dawn on me and I would love to be able to provide myself with some hard facts and figures to back up this newly discovered and enlightening realisation. So I've been working on a few calculations based on our previously rather chaotic monthly budget and tried to assess how the changes I have started to put in place are making a difference.

Firstly - How we pay for things:

We have no mortgage but pay most other regular bills via Direct Debit or Standing Order from our two joint current accounts (Halifax and Santander 123). I set up the Santander account a few months ago to hold some of my husband's pension lump sum (3% interest) and to take advantage of the cashback it offers.

We tend to put most of our shopping (food, household stuff, clothes, cosmetics, travelling expenses etc) onto credit cards. I currently have a M&S 0% interest card as I spend a fair amount there on a regular basis. This is a recent acquisition (part of my drive to get "value" out of my spending) and I also took up a M&S current account which came with a 6% regular saving account at the same time. I'm making a real effort to get back at least some of the profit I've leaked into M&S over the years.

Additionally we have a Halifax Platinum card with a high credit limit (£14,000) for larger purchases and my husband has just started using a Santander CashBack card for everyday groceries (1% cashback) and petrol (3% cashback).

We pay back all cards in full each month (in effect, although I am using the M&S deposit account to hold some of the money eventually destined to pay off the card when the 0% interest period comes to an end, so I am running a balance on that one -  my small stab at "stoozing" as I like the idea of turning things in our favour a little, rather than the banks', once in a while, but I don't have the nerve for the heavy stuff).

What this all means

It is difficult to put an accurate figure on the changes I have made to maximise the "value" of the current accounts and credit cards and what they can give us in terms of points, credit and 0% interest but I've done a very quick and dirty on the figures and I reckon we're about £785 a year better off:

Extra Interest from Santander 123 as compared to Halifax Online Saver: £500
Interest from M&S Regular Saver: £85
CashBack from Santander cards/account: £100 (after charges)
Points/vouchers/discounts from M&S: £100 (after charges)

That may not sound much but it would actually go a long way towards paying for an extra week's holiday or, if I add it to my investments at the rate of £65 per month it gives me:

After 6 years, you would have £96,553

How much will you invest each month? * 

For how many years? 

Is there an initial lump sum? * 

What is your expected rate of return? 

So, it actually pushed me up past my target :-)

Already I'm looking at being able to reduce the time that I have to stay at work to 5 years, I just need to find a little more to save. I really don't think that this should be too difficult.

After 5 years, you would have £86,180

How much will you invest each month? * 

For how many years? 

Is there an initial lump sum? * 

What is your expected rate of return? 

(Thanks again to motleyfool.co.uk for providing the calculations).

Plugging the Leaks

When I reduced my working hours this year I was determined that, as a household, we would not be any "worse-off" for my having done so. This objective was given a large boost by the fact that my husband had just taken his pension (in part, he is currently in flexible retirement working 20 hours per week) and so we were able to pay off the remaining mortgage we had from his lump sum. Although I know that paying off a mortgage is not always the best plan in our case I think it was the right thing to do as we were tied into a fixed-rate of 5.99%.

Two hundred pounds a month of the £600 that used to go into the mortgage now goes into AVCs. The rest was meant to just take up the slack from the decrease in my salary. However, by going through our accounts carefully and making a conscious effort to stop spending money without being sure of the value of what it is buying, I am finding that, despite the fact my income has dropped by about £600 per month (including the AVCs), we still seem to be several hundred pounds a month in the clear. It's early days yet and I'm pretty sure there won't be extra around every month but the effect of simply introducing "mindful" spending is quite incredible and very empowering.

Waste is a big block to the process of growing savings because it means that, over time, you only grow a proportion of what you could have done and so only end up with a fraction of what was possible. That £6 a month which I spend on a nail varnish that I then use just once and leave to languish in the drawer with dozens of others, could instead have been earning me interest.

Saving £506 per month instead of £500 (along with my £40,000 pre-existing savings) for the planned 6 years gives me £91,756 instead of the £91,268 in my original calculation. £488 extra (£56 of it in interest). The possibilities for increasing my chances of success seem immense, for very little pain, just by adding small ammounts that won't really be missed. This deserves careful thought. Every penny I save from our monthly budget I intend to add to our existing regular S&S ISA contributions. My account at iii allows me to transfer funds from our current account and change regular payments as and when I choose, so adding what's left in at the end of my accounting period should be simple.

Not spending without thinking is an important part of my strategy which is supported by my determination to keep a very close eye on what we actually do spend. I feel quite ashamed that I haven't done this before. Up until now there has always been "enough" so I didn't take any notice of where the money was going. Now I need to be sure because I want to steer our future, not just drift into it.

Keeping a tight ship, not dozing on-board a leaky vessel is very much part of the plan.

(Thanks to http://catinthepumpkinmoon.blogspot.co.uk/ for the picture)

The Art of Soothsaying...

or the Science of Financial Lifestyle Planning.

Is there a difference? Can I predict the future by running it through a few spreadsheets? Can I make plans based on the results of my formulae. Should I even try?

Well, yes, actually I do think that working through this type of exercise is worth the investment of some time so let me tell you how it went for me.

When I first started thinking about retirement planning (about 4 months ago) I realised that one of the main requirements for successful planning was being able to determine "The Number" (thanks to the MSE Retirement Forum for crystallising this idea for me). That is, I realised that it was essential that I should be able to put my thumb on the amount of monthly income I needed in order to be able to live, as I wanted to live, in retirement.

Without having this number the temptation is to sail on saving what you can, where you can but without having any idea as to whether your results will fit your requirements - in other words whether you're working towards a goal, or just "working" without really knowing what for.

So, my first move was to look at what I was spending , and then to try to assess which bits of this "spending" picture would stay the same, and which bits would change if I wasn't tied to the world of work any more. So, for example, the expenses of smart clothes, the daily commute and lunches out might go, to be replaced by the costs associated with afternoon teas in country houses and a few extra hours of heating here and there. Swings and roundabouts. Very difficult to assess what it all meant in solid, financial terms. However I made a stab at it and I eventually came up with an annual figure which roughly represents what I think I will need to live in comfort, and enjoyment, throughout my retirement. (In actuality, around £36,000 for my husband and myself).

Then I designed a spreadsheet based around a timeline, detaining income and expected expenditure in the years running up to and following the time at which I hoped to stop work and I assessed the results against "The Number" so giving me an idea of when I would need to start drawing on my savings, and telling me how much I would need "in the bank" to fund each year when I didn't have a wage. At this point I started to feel a small twinge of satisfaction, I began to feel in control.

To help things even further I then came across "MoneyVista.com" and spent an engrossing couple of days feeding in my figures and playing with different permutations of retirement age, investments, bathrooms refits and other major expenditure and, best of all, I started to pull together a Monthly Budget.

I had never put any of my spending under scrutiny before. If I could afford it, and I wanted it, I bought it. But looking at my budget pye charts in MoneyVista and thinking about where I wanted to be in 5 years time really concentrated my mind on where all those £'s and pennies were actually going .

For the first time in my life, I started thinking about the value of thrift.

The Target

What exactly am I working towards?

After the basics have been taken care of (food, shelter, comfort and so on) money has tremendous potential to buy free time. This, more than luxury goods and expensive holidays, is what is becoming increasingly important to me, especially as I get older and the responsibilities of children and the challenges of building a career have declined (they're still there, of course, but not so all-encompassing).

Until recently normal retirement age for women was 60 and, in the public sector, where I work, it was sometimes as young as 55. However, times have changed and my normal retirement age is now 66. Those years between 60 and 66 years are very precious to me and I don't want to spend them doing a job that my heart really isn't in any more. I have other things I want to do, and places I want to go.

I have already made a small start this year by reducing my working week to 4 days, but my ultimate aim is to leave work at 60 and have enough savings to be able to defer taking my pension. Taking it at 60 would be possible but it would be very expensive in the long run because it would be reduced by around 27% (costing me around £3,000 per year for possibly as long as 25-30 years - maybe up to £90,000).

In order to get round this I need to somehow accumulate enough to fund those years from savings.

I have worked out that I will need around £15,000 extra per year on top of the other income that I will have at the time (rental income, small pension from previous job) to replace my salary and allow me to live to around the same standard as I do now. So the total target is £90,000 - coincidentally exactly the same as I will be saving by deferring my pension. So, every pound I manage to save now, I will eventually give back to my future self in addition to buying that future self the freedom to spend time doing what I want.

I currently have around £40,000 in my S&S ISA that I will be growing as much as I can with monthly saving (min £300 per month - hopefully nearer £700). Using a compound interest calculator I got the result shown below. I need to reach an average annual interest of around 4% to hit target.

How will my investments grow over time?

Use this calculator to see how much your money may be worth in the future given an expected rate of return.

After 6 years, you would have £91,268

How much will you invest each month? * 

For how many years? 

Is there an initial lump sum? * 

What is your expected rate of return? 

* you may leave either the lump sum or monthly payment empty but not both.

Calculations are indicative only. The calculation is based on compound interest, capitalised on an annual basis and does not take into account taxation.

Apparently the stock market historically returns somewhere between 4 and 8% above inflation over a 30 year period. My timescale is much shorter (5-8 years) but I have to remind myself that I won't be needing the whole £90,000 sitting in a bank account as cash on the day I stop work. Some of it will continue to grow throughout the period until it is needed. So it may shrink in real terms, but not by as much as a simple calculation suggests and it will not all be subject to the same "time in the market" averages as that I take out on day one. Some of my money will be in for 12 -15 years.

I think it's doable.

The biggest challenge lies in making this happen without reducing the value of now. I don't want to be saving so hard I can't enjoy the present. A fine balance. Enter spreadsheets and budgeting software...

From the Storecupboard ...

The first step in putting together my recipe for success has to be to take stock of what I have to start with.

This will help me decide what I need to add, or take away. How much of this, and of that, is needed to give the whole mix the most "fizz" and the best chance of growth.

A rough inventory gives me:

• Cash in a high interest current account (or what passes for such these days) equivalent to 6 months salary.

• A public sector, final salary pension fund that, along with my state pension, will give me enough to live on, in contentment, at age 66
• A very small (but growing) AVC pot paid into at source from my salary (£200 per month). This pot can be taken, in whole, as a tax-free lump sum at 66. 

• Two small pensions from previous jobs payable at age 60.

• No debt whatsoever (mortgage paid off last year).
• A S&S ISA that I've been paying into for several years on a monthly basis and taking no more notice of than to quickly glance (and sometimes deeply sigh) at the 6 monthly statement. It is invested in a single UK Equities fund which has not performed particularly well and is nowhere near the top of the leader board (although it has done better over the last couple of years) and is currently worth the equivalent of 18 months' salary. Up until recently it was held directly with the fund manager and I had made no effort to "manage" it in any way. I have recently started the process to have it transferred to an trading platform that offers online access (Interactive Investor) and I plan to sell some the fund and buy a few more "ingredients". It feels far too dangerous to rely on a single holding which is invested in the UK market only.
• Monthly rental income from a small flat (mortgage paid off).
• Enough disposable income to be able to continue to invest around £500 per month.
• Time and energy to spare (I've recently recently reduced my working week to 4 days)

So, I do have all the things I need - tools, equipment and wherewithal, but, at the moment these things are not working together.

That's because up till now there hasn't been a plan and there hasn't been a goal. Both these things are now very much on the agenda.

The Beginning

Until very recently I believed that investing in the money markets was an obscure science, its secrets only accessible if you were prepared to become a numbers “bore”, obsessed with charts and percentages. Left brain stuff, even geekier than the world of IT in which I spend my days. Dull, cold and devoid of creativity.

But I've had to reconsider. I've realised that I need to take a serious look at how this investing business works because I dearly want to retire before I'm 66 and I won't be able to do that unless I get my savings into some sort of order. The only way I'll fund early retirement is to grow them as much as possible inside a S&S ISA for the next 5 - 8 years. I need to take what I already have and nourish it, so that I have enough to be able to stop work at 60 (give or take a couple of years) and defer taking my pension until state retirement age.

So I've made a start. Three months ago I started reading, researching and gathering together the basic ingredients - knowledge and cash. Now I'm ready to start putting together my own particular recipe for success. Some would call this mixture a "portfolio". I like to think of it as being more like a magic potion, carefully blended from a little bit of this and a little bit of that (wing of bat and eye of toad) with all the ingredients coming together to form a powerful whole. 

My ultimate aim is to concoct a potion capable of turning the base metal of pounds and pennies into the gold of "time to call my own". I'm pretty sure I won't get it right first time but, fingers crossed, I'll learn from my mistakes, adjust the balance when needed, keep my stirring hand steady and come out the other side with something that works.