2020 – The year in review!
In this post, I will take a look back at 2020, starting with at all of the usual financial metrics, and moving on to a general commentary on the year that was, and my thoughts for the future as we enter what is hopefully the end stage of the war against this pandemic and begin to look forward to what life might look like in the future.
Market Value of Investments + 29%
Here, I refer to my investments in various pension plans. Each of these plans came about as a result of a job which I have held at some stage. I have a pension plan with my current employer, to which I have been contributing the maximum allowable tax-free amount based on my age and job-based income since 2017. I also have 3 other “pension pots” which I accumulated through previous jobs. The balance in each of these pots is a combination of 1) my contributions 2) my employers’ contributions and 3) growth in market value through performance. These are known as defined contribution pension plans. The investments which I have made through these plans are a combination of equity funds and bond funds.
I began recording the balance on each of these at the end of each month during 2017. At the end of each year, I then compared the values with those of the prior year. Overall, the total value of all of my pension pots increased by 29% in 2020. All 4 pots increased in value in 2020, as follows:
2020 growth rate in market value of pension pots
|2020 market value increase in %|
|Pension Pot 1 -previous job||13%|
|Pension Pot 2 – previous job||9%|
|Pension Pot 3 – previous job||7%|
|Pension Pot 4 – current job||68%|
|Total Pensions growth||29%|
Pots 1 through 3 are from previous jobs as I mentioned, and therefore no contributions were made to these in 2020. As such, the increase in market value of these is purely due to performance. The increase in pot 4’s market value is a combination of performance and contributions. The majority of the increase in market value came from contributions. The performance was about 14%. This was a pretty good performance. I made the bulk of my investment during the February/March time period while the markets were down 20%, so buying in low certainly helped with the overall 14% on pot 4! Pot 1 increased by 13%, all of which was due to performance. This seems impressive, given the year that we have had!
The pension pots have grown steadily since I began tracking them in 2017, as you can see below. Pension pot 4 is accessible from age 50. The others are not accessible until 60/ 65 years of age. I am not yet of an age where I can begin drawing any of these down. However, to contextualise this, hypothetically, if, for some reason, I could access all 4 pots currently at a withdrawal rate of 3.5%, I would be able to cover about 15% of my typical annual living expenses indefinitely with the income from these pension plans. In 2017 I would have been able to cover about 6%. So, at some stage in the future, this will be a nest egg available to me. I also have the ability to transfer pots 1 through 3 to pot 4, to ensure that all is available to me from age 50. I am looking at the performance of each, and will consider whether to make any transfers.
Year-on year growth in market value of pension pots
|Pension Pot 1 –growth||No comparator – 1st year of tracking!||0.53%||19.15%||13.34%|
|Pension Pot 2 –growth||No comparator – 1st year of tracking!||-2.43%||13.24%||9.42%|
|Pension Pot 2 –growth||n/a||No comparator – 1st year!||13.31%||7.42%|
|Pension Pot 4 –growth||n/a||No comparator – 1st year!||167.59%||67.94%|
|Total Pensions growth||42.73%||42.28%||29.33%|
|% of annual living expenses covered at 3.5% withdrawal rate||6%||8%||11%||15%|
It is nice to see the values of these pots steadily growing. As you can see here, that hypothetical amount of my expenses which could be covered indefinitely based on withdrawing at a rate of 3.5% was 6% in 2017, and is now 15% at the end of 2020, (if I were able to draw it down).
Thoughts, and 2021 Plans
When I saw the values of all of my pension funds plummeting in February/ March 2020, I took the view that the stock market would rise again in the longer term, and so I decided to invest as much as I could at that point in time. I knew that I had a certain amount that I can invest in my pension per year on a tax-free basis, and I decided to put most of my contribution in at this point in time.
I am aware that many in the Irish FIRE community have chosen to ignore the pensions route due to the fact that this money is unavailable until a later age, so will not bridge the gap for someone wanting to retire in their 30s or 40s. This is true for me too of course. However, I find the tax advantage of contributing to a pension too big to ignore, so am committed to making this one part of my strategy, for as long as I remain an employee, and I intend to maximise my allowable contributions again this year.
Cash in Banks – 56%
As planned, a large chunk of the cash I had been accumulating was used to invest in a construction project which, all going well should have the ability to now generate an income stream for me for as long as I own it!
Again, to contextualise this, I now have 9 months’ expenses available in cash, down from 19 months’ at the end of 2019. I am happy enough with this. I have 3 income streams presently, and I soon will add a 4th, so I am becoming more diversified and less reliant on any one income stream. As such, I am happy enough now having a smaller cash reserve.
Thoughts, and 2021 Plans
I considered whether to postpone the building work since my job was looking a little unstable in 2020. However, I decided that precisely BECAUSE my job might be unstable was all the more reason to push ahead with construction to build this additional income stream. To give myself extra comfort I did some calculations and put a contingency plan in place – 1) if I lost my job, I would start teaching English online to bridge the gap in covering my expenses. 2) If I really needed to earn some further income, I also had the option of renting my third bedroom in my home to cover it. 3) I still had cash reserves and 2 other income streams.
This approach paid off. I didn’t lose my job, and now the construction project is fully paid up, and the apartment unit almost ready to be put on the market, at which point it should start earning income and increasing the cash reserves again. As I write this at the end of January, I am now giving it a final clean up, and getting ready to stage, photograph and advertise it, and have this exciting new income stream up and running by the end of Q1 2021!
Income + 5%
I currently have 3 income streams, which break down as follows:
- Rent-a-room – 13% of total income
I earned rent-a-room income throughout the year. My lodger’s work contract was due to end in June 2020. However, she and her employer decided to extend it for another year, so currently she is expected to be here until June 2021. She’s a great lodger, and I’m happy to have her here for as long as she wishes! Based on what I am seeing in the market, I feel that I am earning a very decent rate for renting this en-suite room in my home, so I have no plans to raise the rent on this.
- Rental property – 22% of total income
As above, the tenants remained in the property and continued to pay rent throughout the year, as they have for number of years now. I will be doing a rent review in Q1 2021 with a view to possibly increasing the rent by 4%.
- Job-based income – 65% of total income
The company took the opportunity of the pandemic to reduce staff wages for 6 months of 2020. I say “took the opportunity” because I couldn’t help but notice that dividends continued to be paid to shareholders during the period. Coupled with the fact that I see no opportunities to grow salary through career progression within this company, I am taking a look at the jobs market to see what opportunities there may be in the market for me! My goal here would be to explore the job market with a view to making a move to increase job-based income by 20 -30%. I plan to write a separate post on this at some stage!
Overall, my income managed to increase by 5%. While job-based income dropped by 3%, rental income remained flat. The overall increase in income is driven by my rent-a-room income, which was 50% up on 2019, simply because I had a vacancy for a number of in 2019, after 1 lodger moved out and the before the next moved in. As I mentioned though, the same lodger has been with me now since July 2019, and throughout 2020 to date.
Expenses – 5%
Total annual expenses decreased by 5% since last year. Average monthly expenses also decreased by 5%. (Note, I have excluded one off property development expenses from my calculations from both years). This due to a combination of not having been able to travel or take holidays, and not incurring the expenses of travel to work, nor the occasional bit of socialising that I used to do pre-pandemic.
Savings rate –> 50%
Income increased by 5%, while expenses decreased by 5%, pushing me into a 50% savings rate! This compares with a 42% savings rate last year. (Again, I have excluded property development expenses here).
Plans for 2021:
One of my first steps after I first became interested in financial independence was to begin tracking my expenses. This of course led to a heightened awareness of my spending, and to me becoming more frugal. Having an awareness of expenses is essential, and great in many ways, and I intend to continue tracking expenses, questioning spending and seeking out value. Now that I have a system in place, this takes relatively little time to keep up to date at this stage. However, in 2021 I will be focusing a lot on the income side of the equation.
Investigate increasing rent on rental property
My rental property is in a “rent pressure zone”, which means that I may only raise the rent by 4% every 2 years, if I can prove that the amount I am increasing it to is within the market rents for the area. I will be looking into this, and increasing the rent, if appropriate.
Explore growing job-based income!
As you can see above, job-based income represents 64% of all of my income. As such, I am conscious of the need not to overlook this income stream when assessing my progress year-on-year!
In 2021, I have set myself the goal of investigating whether I can grow my job-based income: If I discover that I can earn an additional 20% by moving to a similar job elsewhere, I will likely do so. If I have an opportunity to take up a progressive opportunity paying 30% more, all the better. Perhaps the outcome of the research will be that I am not successful in getting a job offer with a higher salary elsewhere, in which case I will stay where I am for now, and I will be comfortable in the knowledge that I am doing the best I can right now! In the meantime, despite the fact that I don’t see any formal path for progression opening up for me within the company where I am currently working, I continue to take opportunities to take on interesting tasks which will broaden my horizons and allow me to (hopefully) demonstrate to potential future employers that I am operating at a high level and have gained a lot of useful experience. I feel that this is worthy of a whole blog post in itself, so will leave it at that for now, and possibly dedicate a blog post to it later on!
New – Set up Income Stream 4
I intend to launch my new build apartment on to the rental market and create a fourth income stream! We are down to snagging at this point, and I am doing some final cleaning up out there in the coming days, with a view to presenting it all nicely, photographing it and put up a few ads, with a view to getting it rented out by the end of February. This has been an interesting project from which I have learnt a lot, and it probably also warrants its’ own blog post!
All in all
Based on the financial metrics which I have outlined above, it has been a good year. I continued to maximise my allowable tax free pension contributions, and built an apartment which will generate an additional income stream for me. Income managed to increase slightly, while expenses decreased slightly. I hit an impressive 50% savings rate, mainly due to the inability to take holidays or spend money socialising or travelling to work! So good a solid year in financial terms.
On a personal level, I have been working from home since March 2020, almost a year now! Saving 10 hours per week through not commuting, and possibly another 3-4 through not having to dress up for work has been great in some ways. I didn’t know myself in terms of the time I had available in the evenings! I actually started getting enough sleep, and had to cut down on the amount of coffee I was drinking as a result! Going to the gym was no longer safe, so I started walking in the evenings with a neighbour. To fill some of the extra time I started an online course which was being offered for free for the duration of the pandemic.
Everyone’s situation is different in this pandemic. I am a single person, which meant that when the shutters came down in the lockdown, I was isolating alone. Meet ups and other social activities became no-go activities as restrictions increased. Although I have a lodger living in my home, she has always tended to keep herself to herself and tends to spend most of her time in her room. I have 2 little cats who been my main company throughout this period, and they have had to deal with constant cuddles and attention from me throughout the day!
I found Christmas very tough. My close family members decided that spending time in each other’s houses over the Christmas period was too risky (and of course they were right). I had built up a lot of annual leave over the holidays and ended up spending it deep inside my own world! My lodger had returned to her family for Christmas. My construction project was almost finished, but in any case the builders clocked off a number of weeks over the Christmas period, as is customary here, leaving me to my own devices, and devoid of human company for the most part during this period.
All this time alone in my head has provided for much deep thinking and introspection. I returned to Ireland a number of years ago with a kind of a misty-eyed nostalgia for my childhood roots. The reality was that family members have built their own lives in the company of their chosen partners. I didn’t have many friends here to begin with, having spent significant periods of my life living in different countries, and I never seemed to manage to build that network around me here, in the way that I had been able to while living abroad.
I explored the possibility of taking advantage of the fact that I am already working remotely from home, and raised with my employer the possibility of working overseas for a number of months during the pandemic in a warm climate where I have a number of friends, and where some friends were willing to let me a studio apartment on a little resort for about € 400 per month. My employer did not wish to entertain this, and my request was promptly declined. I now find myself listening to digital nomad podcasts (check out travel like a boss), and am wondering whether there is some way that I can do some kind of online work to make enough money to be location independent, and live somewhere which has a thriving ex-pat community and where I could have the opportunity to build a decent social network around me, while simultaneously being able to take advantage of a lower cost of living.
It definitely feels like the world is changing. In 2020, I got a taste of what it is like to work extremely independently (sometimes not hearing from anyone in work for days on end), and balancing work deliverables with a construction project that was taking place in my back garden for more than half of the year. I was able to schedule meetings with my builder to discuss the project within my workday, as opposed to rushing out of the office door at 5:30pm and hoping that I would be able to get home in time for a 7pm meeting! This gave me a taste of what it might be like to be my own boss! I have also seen what it is to not be exhausted on a Friday night from the effort of dragging myself in and out to the city for 5 days. I have experienced in a sense how disconnected I seem to be from life here in many ways. Perhaps this is partially just the long-term effects of the isolation due to the pandemic. I find myself very open to some kind of a more location-independent lifestyle. In any case, I decided to explore a job-move in 2021.
Most importantly of all, thanks to the stance taken by the Irish government since March 2020, I have been able to work from the safety of my home, which has allowed me to remain healthy. I have been lucky enough to have been working in the type of job that can be done remotely, and I was also lucky enough to be able to maintain my job and to progress with my goals during the year of the great pandemic.
As those isolated Christmas weeks of 2020 drew to a close, I went back to work, and was glad to be busy again. My builders came back to work too, and finished their job leaving me with a nice apartment ready to be rented out, and I busied myself with buying the final fixtures and furnishings.
A number of vaccines have now been approved and are being deployed, and we will soon be able to heave a big sigh of relief once our more vulnerable members of society have been vaccinated. In time, this will come to the rest of us too, and we will gradually be able to return to some version of what we once considered to be normality. Stay safe all, and take heart that we are in the end stage now!