I have been FIRE (Financial Independence Retire Early) for over a year now and it’s fair to say the novelty has worn off.

No longer do I awake with a start thinking: “Oh God. I must be late for work.” Or wonder why my calendar isn’t packed with back-to-back Zoom calls. Or imagine my phone must be broken because it’s not ringing every ten minutes. 

Life has settled into a new and settled pattern. So how does the reality of FIRE compare with the dream? What did the brochure neglect to mention?

Is FIRE how I imagined it to be?

Well, no. I had a fantasy in my head. That I could somehow do whatever I wanted. That I’d learn tons of new skills and become a ripped FIRE-Warrior-Monk.

A master in love, art, philosophy, combat, comedy, and dance. 

I exaggerate, of course. But for all I dreamt of soaring once the chains fell off, I’m still flapping with the same stumpy duckling wings I’ve always had. 

That’s okay. It’s not a disappointment because fantasies aren’t real. The reality is plenty good enough. 

My relationship with time has changed in weird ways

Time is still the great enemy. Even though I’ve got bathtubs full of the stuff relative to my old life. 

But the reality is you can still only fit so much into a day. And a mysteriously large amount of it vanishes while you deal with life’s mundanities like fixing the toilet, acquiring food, and navigating customer service lines seemingly designed by psychological warfare experts. 

You know how the pensioners in your life claim they’re too busy despite having nothing scheduled bar a doctor’s appointment Tuesday week? 

Now I know why! Once you’re no longer spinning plates on your fingers, arms, ears, and toes, you drop the laser-focus on getting stuff done. 

Instead, you potter about for Britain. Must-dos get ticked off… e…vent…ually. In between breaks for a natter, a walk, a read, a leisurely lunch. 

Left to my own devices I proceed at the pace of a canal boat holiday. 

And it’s glorious! The height of luxury. 

No longer do you feel squeezed like a tube of toothpaste. 

You’re sovereign over your time. You can change the plan whenever. Say “yes” to helping someone out at short notice. Be more emotionally available for those closest to you. Finally catch up with old friends you haven’t seen in years. 

Tons of stuff still doesn’t get done. I feel guilty about it because I haven’t shaken off the modern demand to be productive like a 24/7 computer-controlled factory. 

But god, this is better. 

Real world problems don’t go away

Nobody thinks all their problems will be solved, right? But still, FIRE is presented as some kind of personal End Of History.

Some of the marketing encourages you to believe that FIRE-ees step out of a monochrome world and into a primary-coloured Oz of rainbows, sparkles, and boundless joy. 

But this has been The Accumulators’ worst year for a long time in terms of health. Death and life-threatening and life-limiting illness have struck close to home.

Mrs Accumulator and I are okay but others we love have not fared so well. 

I’ve never had so many reminders that our healthy years run out and it’s always too soon. 

I’m only dwelling on it here because the Monevator community has often debated the time versus money trade-off in the comment threads. 

When should you pull the plug on your peak earning years and focus on living more? 

It’s a very personal question but for me the answer has swung decisively in favour of time.

I haven’t completely renounced ‘work’

That said – and the thing that’s surprised me most – is that I’ve picked up a reasonable amount of paid work without trying.

Does this mean I’m not really FIRE? 

For me, I’m 100% FIRE because I’m in control. 

• These projects are a hobby not a hustle. 
• I do them on my terms. I’m completely free to say no and nobody’s making me do anything I don’t want to.
• I’ve never had to drag my exhausted carcass through a bad day to meet ridiculous deadlines while fighting political trench warfare. 
• If it all dried up tomorrow, I could still pay the bills. I don’t need the money. But I can’t deny it’s nice.

This is a healthy relationship with work which I enjoy. And it’s helped settle me into FIRE for two reasons.

Firstly, knuckling down for two or three days a week to nut out a problem has kept my brain ticking over. It also allows me to feel like I’ve occasionally done something useful. Such as with the social care series. 

Secondly, I need some discipline in my life. Committing to delivering something tangible makes goofing off with Mrs Accumulator all the more pleasurable.

Scoffing up coffee and cake after a weekday amble feels like a wonderful treat. But only because we’ve tricked ourselves into believing we’ve earned it by doing some ‘work’. 

It’s basic carrot-and-stick psychology. Admittedly we’re beating ourselves with a tickling stick but it still works. 

I think there’s something pretty universal about this. There’s a reason why so many FIRE-ees keep starting blogs and YouTube channels.  

Note: hat tip to The Investor who saw this coming and would be livid if I didn’t acknowledge his wisdom on this point.

What about money worries?

Inflation is enemy number one for retirees. So it’s not ideal that UK inflation is scaling heights not seen for over 30 years. 

Our portfolio is roughly where it was a year ago. That means it’s down after inflation. 

Am I worried?

No. 

I haven’t spent a penny from my FIRE warchest. The money trickling in from paid projects has covered my outgoings.

The cash I’d earmarked to spend has been rerouted into the emergency fund, which was looking lightweight. 

Knowing I can pay the bills by doing a little work makes me think we’ll almost certainly be okay in the future. 

Sure, we can Red Team this and scare ourselves with disaster scenarios but I don’t see the point. 

I set my sustainable withdrawal rate (SWR) at 4%. We’d only need to earn a third of our outgoings to reduce it to the so-called perpetual withdrawal rate of 3%. 

Earning half of your expenses drops your SWR to a near-bulletproof 2%. (Global catastrophes aside.)

I’m less concerned now about decumulation than I was when I listed my backup plans to rescue retirement should things go wrong. 

Some Monevator readers have said they’ll be terrified to spend down their resources. But I’ve noticed that people who actually are decumulating typically seem sanguine about it. 

My guess is you soon get used to the idea. 

I actually feel more relaxed about splashing the cash than I did when in full-on accumulator mode. 

Before FIRE, I often regretted inessential spending because it delayed financial independence. 

Now we’re here, I think we might as well enjoy ourselves. 

For the record, our first-year FIRE spend was £25,000 for two. Versus a budget of £26,000. 

Now I didn’t account for 10% inflation or doubling energy bills. We’re heavily exposed to food and heating costs so things will tighten up. 

But it still feels like we’re spending quite freely and we can rein things in if needs be. 

Ultimately, I’m not worried because I believe that if you can FIRE then you’ve probably got what it takes to handle any bumpy years along the way. 

FIRE: my one-year verdict

I don’t do happy-clappy but don’t get me wrong: I’m loving FIRE. It was the right move for me. 

I thought my problem was the low-level, chronic stress of working in a corporate environment. And the heartache of letting down my nearest and dearest who needed me there, more than they needed the money. 

Luckily for me, that diagnosis was correct. FIRE is just the tonic. 

The autonomy alone is worth the entry price. 

They say ‘it’s the journey not the destination’. Well, with FIRE it’s definitely the destination.

The journey is agony. 

But keep going. I think you’ll be glad that you did. 

Take it steady,

The Accumulator

What caught my eye this week.

Long-suffering readers may recall how I failed to follow-up my musings about market regime change with a post on possible investing responses.

It wasn’t through a lack of trying. I have a 3,000-word draft in the Monevator vaults. That version was itself revised several times, too.

The trouble was addressing whether you should shift allocations to equities, bonds, and other asset classes in the face of then very rapidly-shifting expectations for rates, inflation, and economic growth proved impossible in a single blog post – at least for me.

To be honest I felt myself bumping up against my pay grade.

Then a war broke out!

So I put the article on ice.

Despite this outbreak of humbleness, my pondering did prove personally fruitful. It helped me rejig my own portfolio (albeit to mixed result so far).

But I wasn’t ready to give a take to you guys. Especially as the Monevator audience bifurcates dramatically between the majority of passive investors who would (rightly) demand pretty solid reasoning to change anything, and a lovably picky minority of mavens for whom no amount of caveats and other-hands wrapped around necessarily uncertain musings would be enough.

Bridgewater over troubled waters

Happily I felt myself getting off several hooks this week, as I listened to a brilliant Oddlots interview with Bridgewater’s Greg Jensen.

In this podcast the famed hedge fund’s co-chief investment officer surveys the shifting landscape.

At the same time, he also underlines how uncertain current conditions are.

And if Bridgewater isn’t ready to make confident pronouncements, no wonder I was struggling.

That said, an articulate “we don’t know” can be just as valuable at a time like this.

Spiller material

While Jensen frames his take around Bridgewater’s notorious ‘money machine’ view of the global economy, there’s still lots to digest for those of us without a company stuffed with brilliant quants to test and execute our hunches.

But as a companion podcast, you could do worse than follow up with Citywire’s interview with Capital Gearing Trust’s Peter Spiller. (Or to the almost identical one he gave to the Investor’s Chronicle.)

Spiller sees the likely future similarly to Jensen – essentially higher for longer inflation, whatever central banks say, mostly to deal with outsized global debt.

But the legendary UK manager is more old school in his portfolio responses.

Smart plugs

I concede it might have been more helpful to hear these views in February. Taking action on the back of what’s already happened – or been priced in – is rarely a stellar idea.

Moreover these views of the how things will unfold could well be wrong. Spiller in particular doesn’t prevaricate much.

Still, you could do much worse than get your AirPods on this weekend if you’ve been wondering why this year’s volatility has provoked more soul-searching than usual. (Besides the fact that US markets have been on their longest losing streak since 2001 – the Dow since 1923 – before rallying this week.)

Also do take a ride on Crossrail if you live in London.1 It’s well worth the wait.

Have a great weekend wherever you are!

[continue reading…]

1. More than a third of you do! [↩]

Investment funds are often made available in two classes: income and accumulation.1 Unlike train carriages, one class isn’t better than the other. In a contest, income vs accumulation funds always ends in a draw. That’s because they’re functionally identical, except for how they pay dividends or interest to their investors. 

For brevity, I’ll only refer to dividends below. But the accumulation vs income funds rules apply equally to interest payments, too. 

And everything we’ll discuss today also applies to Exchange Traded Funds (ETFs) as well as Unit Trusts and OEICs.

Note that ETFs sometimes replace the terms income and accumulation with distributing and capitalising. 

The difference between income and accumulation funds

• The income class of a fund pays dividends out as ever-popular cash. This goes directly to your brokerage account shortly after the fund’s payment date. From there, you can spend them, reinvest them, or just watch the cash pile up. 

• The accumulation class of a fund reinvests your dividends back into itself. This buys you more of the fund, increases the value of your holding, and compounds your return. 

The graphic below shows you the income vs accumulation fund effect of reinvesting a dividend, as opposed to taking the money.

The 5p dividend raises the value of a single unit of your accumulation fund to £1.05. 

Note, you don’t receive additional units or shares. The reinvested dividend simply increases the value of every accumulation unit (or share) that you own. 

Meanwhile, the income version of the fund hands out its dividends. In fact the value of inc units of a fund actually drops slightly when dividends are stripped from its net asset value, ready to be distributed to the lucky fund owners. 

Over time, the accumulation share class price of a fund gradually climbs higher than the income class. The retained dividends increase the capital value of these acc units. 

But income owners do benefit instead from regular cash paydays. These can be spent on life’s little pleasures, bills – or on other investments.

Income vs accumulation fund returns

Happily, you get exactly the same investing bang for your buck with either class of fund. 

The chart below illustrates the point. It shows the 10-year returns for a FTSE All-Share index fund in both accumulation (or acc) and income (inc) varieties:

Source: Trustnet 

The line on the graph shows identical returns for both funds when dividends are reinvested in the income version.  

In this scenario, the income fund’s performance matches its accumulation sibling over comparable timeframes. (Bar the occasional rounding error.)

However if the income fund’s dividends are spent, then its value falls behind. You can see this in the next chart:

Now we can see how badly the income fund trails (red line) when we don’t reinvest its dividends. 

The blue line of the accumulation version slowly diverges from the identical starting point as those re-invested dividends boost its growth like little rockets. 

And so a yawning acc vs inc fund gap opens up over time. 

The acc fund demonstrates the power of compounding dividends as and when they’re earned, retained, and reinvested.

Whereas income units leave all that up to you.

Still, there’s no right or wrong choice when it comes to selecting income vs accumulation funds. 

How you use your dividends depends on your financial objectives and investing preferences. 

But your choice does have knock-on effects. Let’s quickly run through the key reasons why you might pick income or accumulation funds.

Accumulation vs income funds: pros and cons

Why choose acc or inc funds? Here’s why:

Spending now vs spending later

Pick income funds if you want to use dividends as spending money. That’s particularly useful for retirees who want to live off their income. 

Your inc fund payouts effectively provide a rule-of-thumb spending guideline. And you limit the hassle factor of periodically selling off funds to meet your expenses. 

Accumulation funds are ideal if you’re building your pot – particularly in tax shelters. Your income is automatically rolled up into a snowball of future wealth. You needn’t lift a finger. 

That’s appealing given the passive investing benefits of investing on auto-pilot.

Convenience has a value all of its own in investing. Viewed through this lens, your accumulation vs income fund choice is the one that best fits your lifestyle. 

Controlling investment costs

If you need to sell units or shares to meet everyday expenses, then regular income fund cash distributions can reduce costs. 

When you withdraw dividends from your account, you avoid paying dealing fees compared to selling down your investments. 

Some people also like to use their spare dividends to pay platform fees. 

Contrarily, if you plan to reinvest your dividends then acc funds enable you to avoid:

• Reinvestment costs
• FX fees
• The bid-offer spread 

Your money is also put to work in the market at the earliest possible moment. That’s liable to be positive for your returns in the long-term.

Obviously you can reinvest dividends manually, too. But inevitably there’s a lag.

Fund managers must pay your broker the dividend. Your brokers must process the payment.

And then real-life sometimes gets in the way before you can do anything with the cash lying dormant in your account.

Psychology

Many inc fund investors like the feeling of watching dividends roll in as live cash-money in their account.

There’s no doubt the ‘Ch-ching!’ morale boost is real. It can help you stay motivated during a long investing journey towards a faraway objective like FIRE. 

The countervailing advantage of accumulation funds is that automatically invested dividends juice your returns without any danger of you self-sabotaging. 

You can’t, for example, divert the cash into a wildly overvalued investment because you’ve been swept along by the madness of crowds. 

And you won’t fail to reinvest into an asset on sale just because it’s taken a pounding lately.

The best habits are the ones that don’t cost willpower.

Acc vs inc fund taxation

When it comes to paying tax the critical point is that there’s essentially no difference between income and accumulation funds. 

Your dividend tax, income tax, and capital gains tax liabilities are the same. 

The main issue is you need to keep good records if you hold accumulation funds outside of tax shelters. 

Our post covering tax on reinvested dividends in accumulation funds explains the extra step you need to take to protect yourself from being overtaxed.

If you don’t take that step, you could be unfairly taxed twice on the interaction between capital gains and reinvested dividends. 

Your tax certificates and/or dividend statements from your broker should provide you with the paperwork you need to fill out your self-assessment form. 

The tax certificate tots up the dividends you receive from your accumulation funds in a given tax year.

Hassle your broker if you’re not receiving this certificate after the first tax year you held your funds.

Note: you won’t get, nor need, a tax certificate if your funds are held within an ISA or SIPP. Hurrah!

Some people investing outside of tax shelters find it easier just to hold income funds. 

Others – incorrectly – believe that receiving inc fund dividends will save them capital gains tax that could be triggered if they sell acc fund units to meet expenses. 

But this is not the case. Accumulation fund dividends do not count towards capital gains. 

Therefore you can sell acc units or shares equal to the dividends you receive without incurring a capital gain.

Does switching from accumulation to income funds trigger capital gains tax?

Switching between accumulation and income share classes within the same fund may not trigger capital gains tax – but it depends on how the tax rules are interpreted. 

Snippets from HMRC tax manuals in circulation appear to suggest that such a switch doesn’t trigger a capital gains tax event. 

But much depends on gnomic HMRC guidance that’s laced with technical terms and depends on opaque interactions between different pieces of tax legislation. 

The tax manuals are also silent on what happens if you trade between an accumulating and distributing ETF. 

The bottom line: get expert tax advice beforehand if you’re concerned about the capital gains tax consequences of a switch.

Again, capital gains are not an issue if your accumulation or income funds (or ETFs) are snugly secured in your tax shelters.    

The difference between income and accumulation fund names

How can you spot an accumulating fund or ETF? The clue is usually in the name. Look out for these abbreviations:

• Acc
• A
• C
• Cap

C is for capitalising which is another term for accumulating. 

Income funds or ETFs may also be termed distributing and tip you the wink like this:

• Inc
• D
• Dis
• Dist

Read more on Monevator about decoding fund names. You can also learn more about accumulation funds – including how to uncover their dividend history!

Take it steady,

The Accumulator

1. Funds with ‘inc’ in the title indicate income units. Meanwhile ‘acc’ indicates accumulation. [↩]