Getting Organized Part 2 - Five Year Plans Part 1

Five year plans for Level 0 and Level 1

For people in net debt or with net assets less than £50,000


What does a five year plan look like and where do you start?



The idea of a five year plan is to set longer term goals, and to break down those goals into manageable chunks of one year or less – chunks that make sense.


The end of our third plan was 2004, when we changed our goals from a single fixed goal of net asset wealth to a “stochastic” model of the future, both for net asset wealth, and for net income achievable from those net assets. The latter is more important than the former.



“What’s a stochastic?”, I hear you say.

A stochastic process is one whose behaviour is non-deterministic, in that a system's subsequent state is determined both by the process's predictable actions and by a random element.


In 2004, we had over-achieved our long term goals in some part because of a random element. That random element had been the UK property price growth from 1999 to 2004. So we set a baseline (or worst case scenario) where property price growth would be 3% per year over the next ten years, and a maximum stochastic where property price growth would be 7% per year over the next ten years. We reset our goals to double our end-game net income from our original plans if achieving median plan results, or triple it if the maximum stochastic were to be achieved. That would either mean earlier retirement or a much bigger safety net where our 2015 expenditure would be less than one third of our 2015 net income.

So back to the five year plan, and this is targeted at the Level 0 investor (net debt) and the Level 1 investor (net wealth of between £0 and £50,000 excluding the equity in their private residence, or home).


I will also make the assumption that the Level 0 or 1 investor is going to make residential property one of the key investment areas in the portfolio. For anyone who is not interested in property as a wealth generator, skip this article and read about gold, stocks, options, fine art or any other investment vehicle. These are all investments, but this is about property.

From the 50,000 foot high level view, you have to make some assumptions about the long term, and my assumptions are listed below:


1 Real UK inflation baseline is 5% per year. Minimum stochastic is 3% and maximum stochastic is 7%.


2 UK property prices will keep abreast with real UK inflation, as will your personal expenditure, provided that your lifestyle does not change.


3 The cost of borrowed money will average out at 7% over the long term.


4 In 20 years’ time you plan to have net wealth of £5M with a net income stream of £150,000 per year.

Before you go thinking that this is pie in the sky, let’s look at NPV.

Net present value (NPV) or net present worth (NPW)[1] is defined as the total present value (PV) of a time series of cash flows. It is a standard method for using the time value of money to appraise long-term projects. Used for capital budgeting, and widely throughout economics, it measures the excess or shortfall of cash flows, in present value terms, once financing charges are met.

I don’t want to get technical in this article, but suffice it to say that with an inflation rate of 5% per year for 20 years, the NPV of a £5M portfolio in 20 years time is only £1.9M and the NPV of a £150,000 income stream is £56,000 per year in today’s money.


Since five years is a short space of NPV time compared with 20 years, think in today’s values when you make your plans, but be mindful to adjust your plans in each five year period.


Here’s the unscientific bit. In five years out of twenty years, plan to control assets worth only 10% of the entire projected asset value in 20 years’ time. In this example, choose £0.5M worth of property. Plan to achieve cash flow of only 5% of the entire projected cash flow in 20 years’ time. I will explain this in the next article.


So now your first five year plan involves controlling only £500,000 worth of property, with only £7,500 of cash flow. Do you think this will result in comfortable retirement in 20 years’ time? I’ll explain in the next article why this is so.