13 Aug 2013, 8:35pm
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  • Why your spending may not be lower in retirement in future

    My experience of spending post work was of a massive fall, but two commenters (Jane, Monkeynut) on the post describing that make me wonder if that may not hold so much for future retirees. So in the interest of balance I thought I might as well take the other side, though I’d not speaking from personal experience.

    For what it’s worth my biggest spending was on mortgage payments which then switched to pension contributions and simultaneous ISA investing in the last three years. I am not able to think up anything I’d want to spend that much on – Stuff, Experiences, whatever. I’m in agreement with Jane that spending on myself has gone up as a proportion, though not absolutely, because working made me spend quite a bit just to dull the pain. But as a proportion, sure it’s increased.

    Taking my ex-colleagues as a benchmark, two things clearly stick out as different about my lifestyle choices. One is that I am child-free, and the other is that housing is a much lower part of my net-worth than for most of them 1. The reason for the lower percentage of net worth is I had a very bad experience of the housing market early on in my career, and never saw it as a financial investment that could only go up as everybody else seems to do. I have only as much house as I need, which is a three-bed semi for the two of us. The reason most of my colleagues had the dominant stake of their net worth in housing was because they have a lot more house than I do in general. It isn’t because not having children has made me particularly rich compared to them, though there’s an argument to be made that if you have kids you probably do need more house 😉

    Having more house than you need is a hit on your net worth if you live in it, because you take on more massive debt on something that provides you with a consumer good – living space, as well as accumulating an asset. Over the course of a 25-year mortgage you pay about  twice nominal for the house, maybe 1.5 times  real terms 2. You have to heat, furnish, maintain and service that space, and the more there is of it the higher your running costs will be. You do, of course, build up equity is a larger asset – when they have paid off their mortgages my ex-colleagues will have houses that are worth a lot more than mine. After which, by the looks of some who have got there, they will rattle around in them and keep spare rooms for the kids to visit, though those kids will not visit as often as they’d like. So they keep a lot of their net worth tied up in bricks and mortar, which doesn’t pay any financial return. Note this is totally different in the case of the buy to let owner – they may also have a lot of their net worth tied up in housing, but the return arrives in the form of the rent cheque every month.

    Because I have the excess net-worth in financial investments I have less room to swing my cat in. Compensating me for this is the income from shares. The general return from the relative asset classes seems to be similar over the long run, accepting that the capital value of shares is hellaciously more volatile than that of houses. This is the evil twin brother of the higher liquidity, I guess.

    I’m not telling people how to live their lives, each to their own. However, I do observe that there’s often a lot of emotional capital invested in a family home. In my own case, it was probably not a rational decision to pay down the mortgage in a time of low interest rates when I was planning to retire early. I mainly wanted rid of other people being able to tell me what to do by controlling money – I’d had enough of that at work and wanted shot of the threat at home from the mortgage company. It would have been much more sensible to keep the mortgage and use the cash to invest and bridge the gap rather than save the cash upfront and pay off them mortgage. But in the end, if you don’t want other people to be able to control you through money, then don’t borrow money from them and don’t depend upon them for an income. Paying the mortgage off was a dumb thing to do, financially, but sometimes claiming financial freedom isn’t financially clever. But it sure does feel good.

    It’s usually a very bad thing to have a lot of emotional capital invested in something where you have a lot of financial capital too. You tend to end up with sub-optimal results, it’s hard enough getting a handle on personal finance as it is without adding a great layer of confounding emotional values.

    The increasing opportunity cost of having children

    Having children is something that the vast majority of people want to do, and while it leads to all kind of of rewards I don’t think that anybody claims improved personal finances is one of them. It’s frowned upon to send them out to work in the fields or down t’pit to do their bit for the family finances these days 😉 Something that strikes me comparing people having children now compared to the impact it had on my parents’ generation is that the opportunity cost of having children has dramatically increased. This is probably as a result of modern households being predicated on having both partners working. The baseline cost of living has shifted upwards, particularly in the area of housing, which has increased relative to individual incomes over the last 30 years.

    That means the opportunity cost of one partner stopping work while the children are young has a lot more effect on the household finances, because housing costs remain at a level assuming two people earning. That’s a hit early on in one’s working life, because biology means that having children in the second half of your working life isn’t that easy. Inadvertently we have designed an economic system that disadvantages one of the most common things people want to do in life more than for the previous generation.

    In return our households have twice as much coming in, so we have a more Stuff and experiences, as well as a larger proportion of our net-worth tied up in houses. An awful lot of people lay the increasing cost of housing at the door of immigration, but it started a long time ago, well before New Labour. I was twit enough to buy a house at over four times (single) income multiple, though I didn’t have to borrow that much from the mortgage company because I had a deposit. And an interest-free loan from a credit card 😉 I was already suffering competition from those dual-income households in the late 1980s, a decade before Things Could Only Get Better.

    the 50% university target delaying financial independence

    go on. Take a guess when the switch to criterion referencing happened

    Something else that has changed is that children don’t become financially independent of their parents when they come of age these days,  and this is often to do with the cost of university, though the dearth of jobs for young people right now doesn’t help either. When I went to university the deal was simple. You had a very high chance of failing the exams that were necessary for university admission 3, because your marks were allocated as a percentage of the performance of everyone who took the exams at A level. This is called norm referencing and strikes me as the obvious way to do exams, it tells you how good you are relative to others of your age. This is what universities and employers wanted exams to do for them.

    Failing exams upsets people, and to avoid that we introduced criterion referencing – marking the exams against some supposedly absolute reference, and also raised the target for the number of children going to university. This all sounded very progressive and egalitarian, and of course an advanced knowledge economy needed more knowledge workers and fewer carpenters, machine operators and brickies.

    Everybody believed Tony Blair’s story that more university – “education, education, education” was A Good Thing in itself, and yelled down the cynical who asked the obvious questions about grade inflation and cheapening the brand. I was therefore surprised to read in Ha-Joon Chang’s ’23 things they don’t tell you about Capitalism’ that the correlation between education and economic performance is very weak. One of his examples struck me as particularly remarkable.

    That well-known backward and developing country otherwise known as Switzerland had a university enrolment rate of 16% in 1996 – only a shade over the 11% enrolment that Britain had when I started university nearly two decades before. And yet Switzerland is highly industrialised, though they do their best to make out that all they do is make cuckoo clocks, fabulous skiing, and, ahem, occasionally allow dodgy geezers to deposit money in their banks without asking too many questions about the provenance of the filthy lucre…

    I must admit I thought “you’re having me on, Ha-Joon” when he said Switzerland is industrialised. I was thinking as a tourist, all cuckoo clocks, cheese, cowbells and mountains. And yet, to be honest, when you go there and you see all the stupendous rock-boring to straighten out the motorways you have to acknowledge these are not people who are afraid of big engineering works, and looking around I saw that indeed Swiss engineering had penetrated Ermine Towers; I didn’t need to step outside my door to find several examples of fine Swiss engineering, even though I have no desire to own a Rolex. The Swiss aren’t generally known for industrial output because they concentrate on business-to-business according to Ha-Joon Chang.

    Switzerland - clever marketing makes you think it's more about this

    Switzerland – clever marketing makes you think it’s more about this

    than about this - Swiss quality: over twenty years old and still going strong

    than about this – Swiss quality: over twenty years old and still going strong


    You don't have to be a connoisseur of jigsaw baldes to see the Swiss quality even in the basic range compared to Wilko no-name

    You don’t have to be a connoisseur of jigsaw blades to see the Swiss quality even in the basic range compared to Wilko no-name

    Now there are others who declare the modern UK university experience an increasingly unaffordable luxury, but Ha-Joon Chang, bless his South Korean and Cambridge lack of egalitarian political correctness, delivers himself of the true purpose of university:

    the main explanation for the Swiss Paradox should be found, once again, in the low productivity content of education. However, in the case of higher education, the non-productivity component is not so much about [… (Ed: I paraphrase: all the self-actualisation and citizen-building benefits of education …] as is the case of primary and secondary education. It is about what economists call the ‘sorting’ function.

    Higher education, of course, imparts certain productivity-related knowledge to its recipients, but another important function of it is to establish each individual’s ranking in the hierarchy of employability. 4

    In other words, university is there to help employers tell the bright bulbs from the dim ones. You can do that cheaply, using norm-referenced examination results to screen. Or you can do that expensively and poorly, by telling everyone they are special and should go to ‘uni’ and let the employers sort it out some other way. Because university adds little value to productivity 5, you unfortunately can’t sponsor it as a widespread experience as a government because the taxpayers will revolt, so if people want so much of the university experience they end up paying shedloads of money and incurring debt at the beginning of their working lives.

    Parents, why on earth did you not have the guts to accept that some of your kids won’t be brilliant, and damned your children to this world of hurt by demanding politicians facilitate a 50% university enrolment? Why have we collectively as a society done this to our young people because we didn’t have the courage to tell them that people are of differing abilities? And use our extra wealth to create a vocational system that tried to address these differences?

    I went on a satellite master antenna  TV(SMATV) training course once, and wiped the floor with everyone on the written part of the training course, enough to win a prize of a installer’s meter worth about £1000 (Thank you Sky – I still occasionally use it!). It was unjust, because you don’t need theoretical and design understanding to install a SMATV system, but the marks were measurable and what the prize was determined on. Everybody else in the room, who was either working for an installation company or apprenticed to one, could rig a satellite dish better and faster than me. Faster as in less than half the time. There were people on the course who couldn’t add 3, 5 or nine to a channel number – I helped a couple of guys by showing them how to use squared paper to do that, but they’d have your dish up and running and be onto the next job in half the time at less than half the cost. I would have been the slowest installer on the block. Even in many technical jobs competent workmanship often trumps theoretical smarts. 6

    Now if university didn’t come with a mahoosive price tag these days then it wouldn’t be such a bad thing. Our society has no coming-of-age rite of passage and it’s poorer for it. ‘uni’ provides some sort of safe environment for people to indulge in some of the boundary testing inherent in becoming a young adult. Not sure the rite of passage is worth the £40-50,000 price ticket, though. Even a Gap Yah seems like better value, and takes you out of the workforce for only one year rather than three 7

    Going to university is bad for your wealth – parents and children alike

    As well as setting up a society which makes one of the most basic and common lifestyle goals  – having kids – more difficult, we’ve produced a university system that places a big financial millstone round the neck of the children just as they leave home, where earlier generations would have become financially independent. That gives a double whammy – many parents look at the situation and understandably don’t want their kids to start off with the equivalent of a small mortgage before they’re earned any money. If you look at the lifecycle of humans, if you have children in your mid-to-late-twenties you will eat this hit twenty years later, in your mid to late fifties. In previous generations this is where the children would have left home and become financially independent, meaning the parents could now accumulate wealth a lot quicker, clearing their mortgage and getting set for retirement. The children now have two calls on their finances – the costs of university and the cost of getting a deposit together for the house they can’t afford to buy unless they have two incomes. Parents who do want ot help their children out at this stage may want to familiarise themselves with Martin Lewis’ guide to student loans. If you have £x to help your child, it’s probably worth a lot more to them as a deposit for a house than as an upfront student fees payment. It’s at least worth convincing yourself that’s not the case before ignoring it 😉

     Previous generations needed less income after retirement

    Let’s take a look at a bit of history. A final salary pension scheme targeted  between 50% and 2/3 of the worker’s final salary; these were considered the gold-plated heyday of British pension provision. Blue collar ones seemed to accrue at 1/80th of final salary per year worked, a typical working life was 16-65 but sometimes the years up to 21 weren’t pensionable. Later white-collar ones accrued at 1/60th of final salary, graduates started at 21 and would work until 60. Both of these rough out about 60% of final salary. However, the experience of a professional career had more similarities then than the variety or career experiences now, and some of the assumptions were:

    1. mortgage was paid off
    2. the worker was 65 or older – people had children earlier in life so it was more likely that
    3. kids had left home and were financially independent

    I fit the assumption that the mortgage is paid off and there are no child-related costs, so maybe this is why I share these earlier generations’ spending models.

    These assumptions are less likely to hold with people coming up to retirement in future. In particular the interest-only mortgage nixes assumption 1, so perhaps people will have to shift their retirement dates to keep a constant spending rate.

    When I analysed my own spending for why it fell, one of the biggest reductions in spending was the drop in pension contributions after retiring, it was larger than I had been spending on the mortgage before it. I gained a double win with the fact I stopped spending  more money than I should have done trying to compensate for a worsening experience of work. In particular holidays were too fast and furious, and expensive. The first time I had an inkling I was not living my values with respect to work came in 2005 on a whistle-stop trip of Western Scotland – I had been searching for ptarmigan at the Applecross pass, which is a remarkable drive in it’s own right and not one you’ll ever forget.

    In the evening I watched a fabulous sunset over the bay and heard a cuckoo in the distance. Somewhere over dinner in the bar I realised that I was running away from something, snatching glimpses of this natural beauty in what seemed a never ending greyness of work. This sort of thing shouldn’t happen – you shouldn’t find yourself in such a beautiful, quiet and isolated part of the world with clean air filling your lungs and experience a down. I did not listen up to the signal, but drowned it in whatever fine ale they had.

    Your spending patterns may be more sensible than mine were, and less susceptible to reducing. If you carry a mortgage into retirement then your spending may not fall that much, unless you are investing the money you release by not paying it off. If you’re the Bank of Mum and Dad, then clearly your spending may in fact increase… If you have more house than you need then some of your costs won’t fall, and indeed if you need to heat it in the winter they may increase. There are all sorts of reasons why your spending may not fall.

    If you want to retire early, however, reducing your spending punches way above its weight. Earning more doesn’t help nearly as much; reducing discretionary spending lets you save more while working and makes it last longer when you aren’t working. I’ve also banged the drum at length about the value of time – we don’t have an endless string of days on earth.

    However, I’ll leave the last word to Jane – and Monkeynut

    I suppose I’m just wanting to suggest that whilst frugality has it’s place and usefulness, it’s important to have an idea of what gives your life meaning (and that’s different for all of us) and that doesn’t always mean we’ll potentially spend less in retirement.


    Overall, my strong advice would be to work all this out to your own preference before you ‘go’. You CAN go and then live within what your spreadsheet tells you, or (as I prefer) get your spreadsheet to inform you how much you NEED, and fix your retirement date to match.

    I couldn’t agree more – it is more important to live intentionally and in accordance with your values than to live frugally 😉


    1. at work people with children tended to discharge their mortgages in their late fifties, unless they’d upsized in the 2000s, in which case it was interest-only all the way, with an expectation of house price appreciation and probably downsizing to solve the missing equity problem
    2. I used MSE’s mortgage calculator assuming repayment, 7%, which was probably an average over my mortgage-paying time, in real terms probably about 4% over inflation
    3. I flunked the general knowledge entrance exams for Oxbridge most comprehensively – some of the questions on Classical philosophy I didn’t even understand, never mind have any intelligent answer to. I scored a Gamma, which is Oxbridge speak for ‘thanks for signing your name, but we had expected better’ on general knowledge, though I survived the subject-related papers with an alpha and beta. The competition clearly had a much better general knowledge than I did
    4. 23 things they don’t tell you about capitalism, Ha-Joon Chang, Penguin, 2010, “Thing 17, pp 186/7
    5. I studied Physics at university, and in working as an electronics engineer some of the maths, in particular Laplace and Fourier transforms were used at work. I’ve used more of my Physics knowledge since retiring, in developing and using environmental sensors. I’m with HJC on the low productivity value of education. It still amazes me, talking to people in their undergrad studies, how they both take it so seriously and often assume they will use it at work
    6. I went on this course to learn the issues and practice of SMATV installation because I was designing systems to work with these systems, so I was never going to be an installer. Had I worked as such I’d hope I would have got a bit faster. I did well in the theory part because I knew it from designing some of these bits of gear and some large systems
    7. doing a Gap Yah and going to university seems a rum do. It was extremely rare when I started at university, because people couldn’t afford it. That it’s common enough to satirize now despite those high fees shows just how much richer Britain has become in the intervening three and some decades.

    I went off to uni in 2005, right at the height of the 50% madness and time almost perfectly to go head-first into the recession upon graduating.

    Looking back now, I feel my entire age group were lied to by everyone in government and schooling who constantly repeated the same line: “go to uni, you’ll all get good jobs after” and like sheep to the slaughter the huge majority of my 6th form class headed off.

    5 years after graduating and most of my friends are still in jobs which required no university education and no sight of obtaining that fabled ‘graduate scheme’ we were promised.

    My younger brother moved with my parents to France about the same time I went off the uni. There the focus in school was on getting a skill and a trade. He studied carpentry and walked into a job immediately upon leaving school.

    Well I remain strongly pro-university, even for degrees that are often cited as useless.

    Gaining explicit qualifications is only part of the experience. Most of it is meeting with a whole diverse mix of people you won’t easily come across any other way. It makes people far more balanced and pleasant, and means they can actually have informed debate about diverse topics rather than just take their views from whatever tabloid they read.

    Of course there are people who don’t come out like that, as well as people who take the alternative routes and turn out well.

    I hate the fashionable thinking of trying to work out an economic value for everything, that’s not what the quest for knowledge is about.

    Life expectancy is increasing at a rate of 6 hours per day; why should all the gains be spent earning money or being retired? What’s the rush?

    Education is one of the things we do well here – we punch hugely above our weight in research, despite the best efforts of people who did PPE and can’t work out the chance of getting 2 heads in a row.

    It doesn’t have to be massively expensive – that’s only because the selfish generation want it all and won’t help out. If houses were 75% cheaper then there would be more money washing around to actually do stuff.

    We need people skilled at making things – this takes investment too. I think the lack of decent apprenticeships for people who don’t want to go the academic route is ridiculous. That’s due to greed from companies as well as incompetence from politicians. Another example of no-one caring about the current crop of fresh faces.

    It would be nice to normalise wages to actual social use, meaning teachers, nurses,and carers get more, engineers get about the same and management consultants get a negative amount… Obviously that won’t happen but one can dream!

    As for cash flow for my generation, I suspect we will have it worse than any one before. (However, that doesn’t make the lives we’ll lead worse! Money’s only a small part of this!)

    I actually agreed with Reue in some respect. I went to Uni because it was expected of me to do so. If I have second opportunity, it is quite likely I would not go to brick university, instead, I would opt for Open Uni. Which is much cheaper and more importantly, you can work full time. Indeed, I am just two or three years away from getting an Open Uni degree and holding a full time job.

    Which is why I was so furious when the Open University increased their fees to make it even more unaffordable. The good part about the Open University was the fact it is cheaper. Not so true anymore sadly. 🙁

    I am also in the job which does not require a university degree but the sad truth is more and more jobs now requires a degree because more people now got them.

    As for a holiday, well, I think that holidays on the whole are much more affordable nowadays compared to decades ago. Which may mean taking a gap year affordable?

    Either way, the cost of university is increasingly unaffordable especially that student loans will be in the order of six figures.

    @Reue – I feel for you! Although the financial crash was probably not foreseeable then, the strategy was still bizarre. It’s the chance to have decent vocational alternatives, and perhaps the possibility of fewer students better supported that was robbed IMO.

    I watched Make me a German and was struck by the greater sense of the whole tertiray educations options. And the associated lower costs!

    @Greg if it came across as general university bashing I didn’t mean it that way. The extremely high cost of going to university now which came about because of the 500% increase in the enrolment targets means it throws a much harsher light on the finance aspects for students now. Put it like this – when I went to university what was the worst that could happen – I risk being told I wasn’t up to the grade, as with Oxbridge, or you lost three years when you could be working, but you did get the rite-of-passage experience at least.

    Now you risk taking a six-figure hit, though I do take Martin Lewis’s point that it’s more like an extra tax now. That debt seems a rum deal in exchange for some people not having their feelings hurt by flunking the entry exams. University is elitist, by definition. The OED defines it as

    a high-level educational institution in hich students study for degrees and academic research is done

    and pretending it isn’t has made it a lot dearer, as well as adversely affecting the brand 🙁

    @Joe It does seem that alternatives are getting more attractive, one thing I hope English students in particular consider is studying in the EU, which seems a lot cheaper in some cases.

    Holidays are much cheaper now, so you are dead right the cost of a gap year is lower in real terms. However, the opportunity cost of not working is quite harsh now for gap year university students because the alternative is they could have been working to reduce the higher level of borrowing going to university incurs now. Though with the state of the jobs market at the moment perhaps that’s not so clear cut right now 🙁

    Hi Ermine:

    Yes it does “feel good” to have the mortgage paid off because no bank can say “we want your house now” you haven’t paid on time. It’s also nice to pay it off because now ” the equity” in your house is potentially all yours which means you are living in a saving account that delivers on average 3% a year and compounding. And yes it feels good to get the cheque every month from a rental property especially in a low mortgage environment because you are slowly building equity and maybe a bit more and increasing your overall wealth year by year in that paid down principle plus your 3%. It all feels good even though, as you say, it may not be the wisest investment at all times. Great blog !

    […] The past really is a different country, eh? However, this had much in common with the experience of Reue and Joe – it was just kind of expected of those with a more academic leaning. The nascent Ermine […]

    […] ermine strikes again, with two gripping posts on why university education is akin to “golden handcuffs” of debt for a […]

    Dp people really still pay rents by cheque? How exotic.

    10 Sep 2013, 9:07am
    by living cheap in London


    In a way I consider myself ‘debt free’ when as have a fully offset mortgage?

    I am now trying to do the thing you didn’t, & not be tempted to pay the mortgage down. I’ve spent a good few years over-paying whilst also building up the offset cash. Now I am changing my approach/mindset & using the free cash to invest elsewhere as we are now paying no interest on our debt as it is fully offset.

    Whatever happens the mortgage will be clear before my 50th birthday… that’s paying it off the slowest way the product allows.

    Obviously the downside is the offset cash is degrading at the rate of inflation.

    @living cheap in London – I would say you are getting a much better deal even than you think. It’s the mortgage company that is eating the loss IMO.

    The reason is the reverse of my situation. What that offset is doing for you is being your emergency fund, but it is also stopping the mortgage company getting a return on their capital. Which is a great deal for you as you can invest your other money, secure in the knowledge that you can handle the emergencies by drawing down the offset.

    Where I, having paid the mortgage company off, now let them get a return on their capital, presumably lending it to someone else. I then have to hold large amounts of cash as cash (the money you can invest) against the emergency scenarios; a retiree has to hold a lot more cash as emergency fund because they have a lower income than a working person and thus less capacity to recover from the emergency saving from future income.

    So you have it exactly right, I suggest the money in the offset isn’t actually yours (it’s to pay off the house) and therefore the mortgage company is the party that is suffering the degradation due to inflation 😉

    10 Sep 2013, 11:14am
    by living cheap in London


    @ermine. That’s a great way of looking at it. I’d certainly already clocked that the previous funds that have been overpaid are a bank of emergency cash that can be drawn on in case of seismic changes in circumstances.

    My wife & I are lucky to have very stable jobs & earn well above the average too, so our ability to save a good chunk of our earnings after our regular outgoings remain excellent in both the near & long term.

    Key to the above is of course living a cheap & simple life (where possible) in London with our young kids.

    thanks for you input!


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