27 Jan 2015, 5:34pm
living intentionally personal finance:
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  • George Osborne may help me to live intentionally and spend more

    By his pension changes, that is. Sadly the exact mechanics wont be of much use to young’uns but for for some modestly old gits (45 plus) who have accrued a defined-benefit (DB) pension where you can buy  additional voluntary contributions (AVCs). Since there are a number of readers who work(ed) for The Firm that employed me for many years I’m throwing it out there.

    The philosophy of how difficult it is to qualify living off savings may be of more general interest. It’s heavy on pensions, which seem to be the Cinderella of the PF world, because most PF bloggers are younger than me and Monevator’s Greybeard seems to be off on a cruise. However, hopefully you’ll all get old enough to be interested in pensions one day, and if you can learn from my mortgage screw-up then so be it 😉

    Some pension and early retirement orientation

    One of the big challenges facing early retirees is how to fund the pre 55 early part of their early retirement. The part before 55 has to be something other than pensions because you can’t get hold of pensions before getting to 55. The goto place for this is ISA income and cash savings, though not paying your mortgage off early is a great way to have more cash savings in the pre-55 period, because you can use the pension commencement lump sum to save to pay off your mortgage from pre-tax income.

    don't automatically pay off your mortgage early if you are retiring before 55

    don’t automatically pay off your mortgage early if you are retiring before 55

    I didn’t get the mortgage wheeze right. In threading your way through the myriad paths to early retirement you are always going to get something or other wrong, that was my big mistake. I don’t have housing costs other than council tax and the 1% or so house purchase price depreciation fund, but having the borrowed capital to run down now would be useful. I could then use my AVC fund to pay off the mortgage tax-free at 60. Pretty much any time I go anywhere near anything to do with housing I screw it up royally. Why break the habit, eh?

    Because I drove my spending down to be able to quit early I have been able to string out my savings for twice the amount of time I anticipated. But it’s probably fair to say I haven’t lived large like like mistersquirrel and theFIREstarter 😉 I don’t have any complaints – freedom from The Man and being able to pursue my own interests is more than adequate compensation. For much of the first couple of years it was a process of recovery from the experience – and it’s respite that matters, not consumer goods and services. But I am also mindful that time is also ticking away, so if I could smooth my income I could do more in the near future rather than back-loading it. I’ve noticed the birds are starting to sing and maybe they call to me, get out there, travel more.

    I have no income – one of the primary navigational aids of personal finance spins and knows no North

    Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness.

    Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

    Wilkins Micawber

    I never understood how to manage finances without having a number I could allocate on the Annual Income side. Without a figure for income, I could never qualify the Micawber question. It has made me fearful and over-conservative in spending. This has worked out okay for me till now – it is how I got to this point and having the choice to take Osborne up on his alternative offer of getting my AVC out tax-free but earlier. If I had favoured spending I would have drawn my pension short by now.

    or, as da yoof sez, YOLO

    or, as da yoof sez, YOLO

    Some readers will wonder WTF? The income computation is easy. Take current age of Ermine, subtract from 60 which is how long it needs to last till a good alternative, then divide total amount of cash savings by years and you have the income level. Maybe knock off about a year’s savings to cover emergencies then run the calculation.

    Not so fast. If you have no income, you will find it the devil’s own job to borrow money which is a perfectly reasonable way of leveraging your emergency fund. A year’s worth of low-ish running costs as  savings is not enough to hedge some kinds of risks. Lucy Mangan charges us that If you don’t understand how people fall into poverty, you’re probably a sociopath  – probably correctly. I didn’t want that to happen to me, so I have used a much smaller percentage of my non-pension cash savings than that cash÷(60+1-current age) calculation would give. At least half of them are with those NS&I people so they aren’t being killed by inflation, unlike my cash ISA and cash balances. I really, really hate cash as an asset class, and never expect a return on it. At least inflation is surprisingly low given all the QE money that has been  pumped out – it seems to have gone in inflating the stock market and the housing market.

    The logical thing to to with a cash ISA these days is to switch the damn thing into S&S ISA but I can’t bring myself to do that, because of the fears of some of Lucy Mangan’s demons catching up with me, or needing to pay for an operation 1, or something like that. And as a result, the fearful me jams my spending. I err in the opposite way to mistersquirrel and theFIREstarter but error it still is.

    TEA calls this out well in The Pyramid and the Oxygen Mask – to wit

    If you are one of those people and you carry on working in your all consuming City or Corporate job, then you are wasting your life.

    This is more frequent than you might think. The most common motivation for this behaviour is fear  – fear of change, (irrational) fear of poverty, fear of loss of status, fear of their spouse’s reaction etc.  Its not enough just to make a life-changing amount of money, you still have to change your life.  Don’t just load the gun, pull the trigger.

    Apply own mask first…
    We owe it to ourselves and our families and friends to start by getting our own shit together.  Think about the airline safety briefing : always apply your own oxygen mask before helping others.  This initially sounds a bit counter-intuitive and even selfish to some people. 

    I have overcome most of that. I changed my life, and I qualified what Enough looked like to me. But I am still on his Level 2.

    These people understand the power of money and have mastered some of their emotional weaknesses re money. Paradoxically, they are seeking to get to a point (see level 1 below) where they think much less about money.

    I am not sure I can do that until Mr Micawber’s compass begins to respond and the questing needle shows which way is North. After a certain level personal finance is much more about the personal than it is about the finance. My fears of Lucy Mangan’s demons are part of the emotional weaknesses re money. Possibly I have some of the elements of her sociopath. I just didn’t want to depend on other people’s grace for dealing with the demons and so I spent less so I could buy my way out of certain kinds of misfortune. But I take TEA’s point. This is a question of balance and I haven’t got that right. A clawed hand remains frozen on the controls set to dead slow because the broken compass shows no signal I feel I can trust. There is still work to do on that intentional living thing.

    It has been five, getting on for six years since that fateful day in February 2009 when a jumped up punk of a manager squeezed an Ermine, intimated TINA and I realised I was all out of options and didn’t want to kiss The Man’s ass, and I locked down spending and took a three-year holiday from the middle class in the name of Freedom. I would do the same again. I have become even more ornery, awkward and unemployable since then. Work is not the point of Life 2. This much I know.

    I would soon have access to a DC pension

    Now if I had a DC pension I would soon be able to draw it. As a brutal simplification that everyone should qualify for their own circumstances, it makes sense to draw a DC pension as soon as possible, all other things being equal. By drawing it early, you stretch out the time over which the money is extracted, and you get a personal allowance for each of the years over which you take it. If you don’t need all the money that year , reinvest it in an ISA in the same sort of thing the pension was invested, and you shift the pension capital from being taxable to being sheltered from tax. If you still have more than 15k left over each year I suggest you need to spend more, unless you are looking to mollycoddle your kids in which case leave it in the pension since they can inherit that at their marginal tax rate it seems. The converse is that if you are so bloody stupid as to take your DC pension out in one lump then you deserve to pay a shitload of tax because such arrant stupidity should be taxed out of existence.

    But I don’t have a DC pension. So I can’t do that. Don’t get me wrong – I am deeply grateful that I started work at a time when there was a better balance between labour and capital and The Firm actually wanted people to work for them so they offered good benefits, the original DB pension being one of them. However, a DB pension is less flexible than a DC about the retirement date – draw it earlier than normal retirement age (60 in my case) and it is reduced by roughly 5% per year drawn short. If you are in decent health you really don’t want to do that. The actuarial reductions usually favour those who follow the norm rather than the early retirees. In itself that’s not a big deal, because I saved a quarter of my DB pension capital 3 in AVCs.

    the original plan – invest the 25% tax-free PCLS in the market in a couple of years time

    The original plan was to run off the SIPP I took out earlier this year when Osborne changed things, after another two years worth of contributions which I can get in by May 2015 (this year and next tax year), and then to draw my main pension a bit early and eat the actuarial reduction. I would then get the AVC tax free, which I would then shovel into ISAs over a few years, getting more ISA income to top up the actuarially reduced pension.

    Note the correct way to have done this job would have been to keep my mortgage at the level of the PCLS and live off the money I paid my mortgage off with until at 60 I take the PCLS tax-free and pay off the mortgage. The general cocked up the tactics there, even before the battle plan made contact with the enemy.

    the new plan – invest the AVC in deferring my main pension

    It appears I can shift the AVC into a SIPP without taking the main pension, as it is considered a DC independent saving. All of a sudden I lose the whole point of the AVC, which is to get 25% of my DB pension capital free of tax. I now only get 25% of 25% or a sixteenth of the capital tax free. However, I have discharged my mortgage and don’t have a particular need for a shedload of cash, other than as investment capital to make up for the actuarial reduction.

    From some time after this April, I can draw down the SIPP tax-free, as long as I stay below the income tax threshold. There is also some hazard of work income over the coming years 4. Indeed, it seems I can contribute to a SIPP up to £10k p.a. while drawing from it, so I can lose any earned income into the SIPP, which is a good way of spreading out earnings to minimise tax – I don’t aim to give up much time to the filthy W word, so 10k will probably do 🙂

    Each year I live off the AVC fuelled SIPP and the dividend income of my ISA, my deferred DB pension increases by roughly 5%. Effectively I get a return on my AVC funds in terms of that permanently increased DB pension, and at current stock market valuations that looks a higher return and lower risk than I could win from adding to my ISA. Of course that is a return on capital, the return of capital is consumed as income. Normally if you want a return on capital you need to retain the capital and not spend it, this is one of the few exceptions 5. When I get to 60 I will probably stop drawing down the divi from my ISA unless I think of something to spend it on. Running down the AVC + ISA income is roughly equal to the value of the DB pension at NRA, so I smooth my income. I will get two smaller bump-ups, one at 60 when the ISA dividend income becomes superfluous to requirements, and one in the distant time at 67 when and if I get the State pension.

    I get the same general effect as if I hadn’t made a cod’s of the mortgage/PCLS thing, subject to the limitation of being limited to the tax threshold + the income from my ISA each year. I’m easy with that, big spenders may not be.

    An annual income, and an answer to the Micawber question

    Obviously there’s the benefit of getting this AVC cash into use rather than depreciating for another six years. More importantly, however, I get an income for the first time in about three years. So I could return to that middle-class sort of spending if I wanted to. They say that it takes a month to break a habit, so six years should be plenty. I can’t unsee the wanton waste I discovered in some of the empty dreams of the middle class cubicle slave I was. I am no longer a cubicle slave, but some of the dreams still seem empty. I found freedom in the open spaces, in the sound of birdsong, in places like this

    1501_wolves_P1000135rather than places like this

    Westfield, London

    Westfield, London

    I am in no hurry to spend more, but I do need to release the dead hand of the fearful non-spender who felt adrift in a pathless land without the compass of Wilkins Micawber to guide the way. Unusually among consumers, possibly I am consuming at too low a rate. I can easily live well on the personal allowance plus £5000 tax-free from my ISA, maybe I will have to consult with good people like mistersquirrel and theFIREstarter as to how to inflate my outgoings on fine living. On the other hand I don’t have to spend all of it every year. My ISA will thank me for continued reinvestment. I now have a high-water-mark for annual spending, which I can exchange for the dead-hand’s ‘as little as possible’. The tide is a long, long, way out.

    the tide is out there somewhere

    the Wash – the tide is out there somewhere

    There’s no rush – one of the arts of pension planning seems to be keep as many options open, and then opportunistically close them off at the eleventh hour in whatever way is most advantageous at the time.

    Ed Miliband could destroy this plan

    …in May. In which case it’s back to plan A. There’s nothing I can do about that, it’s the usual mantra – coffee for the things I can do something about, red wine for what I can’t change. It’s the problem with pension savings all round – government meddling can screw up the best laid plans. In fairness to governments, it is only government meddling that has made this alternative a possibility. It wasn’t a possibility when I left work in 2012.

    of market crashes, and excitement, and foolishness

    All this will take a few years, should there be a market crash I can rethink, draw my DB pension a little earlier, eat some actuarial reduction and seize the opportunity to invest the SIPP. Assuming, that is, I have the cojones to do that – such a market crash could be the trumpet at dawn of the great unwinding. Or maybe I lack the taste for the ride. Finding myself unable to to determine a reasonable spending rate without having an annual income shows that perhaps I am not the Wolf of Wall Street. I should heed the words of Warren Buffett…

    To make the money they didn’t have and they didn’t need, they risked what they did have and did need–that’s foolish, that’s just plain foolish.

    …and at most half-split this if the denouement comes this year. At the moment an increase in DB pension looks lower risk than the known risk of the market 6. It’s taken me a long time to realise that I had this opportunity, because my original plan was built when Osborne’s changes hadn’t happened. However, the job of any chief executive is to adapt to changing circumstances

    no plan survives contact with the enemy

    von Moltke

    Pension planning is a bastard for complexity and counterintuitive wrinkles and changing rules. I’m generally of Monevator’s opinion when it comes to financial advisers, but I wonder if pension planning might not be an exception. Certainly for those working at The Firm, take up the offer of the Wealth at Work seminars, since you don’t pay for the advice and they have knowledge of your specific environment. Just don’t hire W@W to run your investment portfolio, which is what they’d like you to do afterwards 😉

    My pension will eventually be a combination of the DB pension with about 2/3 of the target time accrued, and my ISA to make up the difference, tax-free. But as an early retiree I could have 30 years ahead – possibly more. It would be unwise to ignore the tail risks that affect both types of pension, though differently. The world will change over that sort of timescale. Just to remind ourselves of the scale of those sorts of changes, we were listening to this on the radio 30 years ago

    Only one guy in Britain had a mobile phone, though the first had been demonstrated in 1973 in the US. Those 1970s analogue devices were not cellular like TACS was, so the number of channels was very low and prices were astronomical.

    Motorola's Martin Cooper, April 1973

    Motorola’s Martin Cooper, handset first used in April 1973

    Nobody much had the Internet. I was using a VAX with green-screen text terminal and 9600 baud serial connectors to do circuit simulation. 30 years is one hell of a long time for things to change. It’s plenty of time for tail risks to show up. But it’s also plenty of time for nimbler, younger minds to invent good stuff that people want to pay for. Assuming, of course, that the work of humans is not done here – in which case the spoils will accrue to patrimonial capital as Piketty told us it would.

    Notes:

    1. the NHS does fine with big stuff and with chronic stuff, but elective quality of life interventions it does poorly now the Tories have been at it.
    2. with the obvious rider ‘for me’. If Work is the point of Life for you then knock yourself out
    3. computed by taking the gross paid at NRA and multiplying by 20
    4. there is some research work I want to do. In the end even an ermine can’t outrun the W word forever…
    5. it isn’t a true exception, it is the interaction with life-expectancy figures that gives an appearance of a return on capital.
    6. I am casually interchanging risk and volatility of the short-term price levels which I really shouldn’t do
    15 Jan 2015, 10:56pm
    personal finance
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  • City or country – where you live matters in the budget for early retirement

    Most of the personal finance community I’ve come across in the UK seems to live or work in London. Monevator lives in London. mistersquirrel does too. I don’t – although I was born in London, grew up, went to university and started work there I moved out in my 20s because I couldn’t see any way to being able to buy a house. Stupid house prices relative to earnings are not a new thing in the UK; this was a shade over a quarter of a century ago.

    Where you live is a large part of your running costs. It’s there in terms of the capital tied up in your house or the rent you pay, but it is also in the price of the goods and services you buy. More subtly, it’s there in the goods and services presented to tempt you to buy. It’s one of those strange facts of capitalism – normally increased scale lowers prices of goods and services. 13% of the population of Britain lives in London. Obviously that is going to jack up house prices, but I’d have guessed the cost of supplies and food would be lower, because there’s so much of it shifted. But it doesn’t work that way. London is a damned expensive place to live. The one thing that is notably cheaper as well as better in London is public transport – it’s far better than anywhere else I’ve seen in the UK 1

    But there’s a great buzz to the place, it’s full of things to do, though most of these things involve spending money, as the natural world is not well represented in the city. Even the sparrows got pissed off and left the city in the late 1980s 2.

    gotta get out of this crazy place

    gotta get out of this crazy place

    If you want to move town and particularly country, that’s usually easier when you are young. As you get older you pick up connections, often have kids, and then you just get used to a place. You also gain a lot of ‘domain knowledge’. You know who to ask for how to do various things. You know where to get things from and where is usually cheapest/best. You know how to get places, and which are the rough parts of town. A lot of this you lose if you move, and have to acquire again. It’s possible that I was lucky in that I left London in my twenties, because leaving the city later on seems to be a big wrench.

    Not living in London appears to reduce a lot of my costs, but I didn’t realise by how much until I visited the fair city of Oxford for a conference recently. The place smelled of money, like London does. I live in Ipswich, and the town has money shops, betting shops. closed down shops (nowhere near as many as a couple of years ago) and all the other accoutrements of the ‘cost of living crisis’. In short, compared to Oxford, and many parts of London, it’s a dump. The citizens of Ipswich are clearly not as rich as those in London or Oxford. You can see that on this income heatmap. Oxford average wages are 26k, for Ipswich this is 18k, whereas London has high values all round, nothing is as low as 18k. Even in places like Lewisham and Deptford, which were rough as guts when I left London people are on an average of 25k.

    Services have to be priced to reflect that, from the cost of housing to the council tax. There’s one service that always seems to sum this up as a quick guide for me, and it is this one

    OLYMPUS DIGITAL CAMERAIn Oxford it’s a little bit dearer than I am used to,

    OLYMPUS DIGITAL CAMERA

    but it’s nowhere near the outlandish sorts of prices mistersquirrel is happy to pay in The Smoke. I’m not a cocktail guy, so it may be that I don’t know the prices but I just couldn’t pay £10 for one drink. I just couldn’t do that. I could afford it okay, but paying that much out would bother me so much I wouldn’t be able to enjoy the experience 😉

    Let’s all move somewhere cheaper once we’re financially independent

    Seems obvious, really. Not so damn fast. In addition to the domain knowledge bit, within any one country places with a higher cost of living are often more interesting places to live. Intelligent people go there and start creating wealth, which drives up the cost of living because they can afford to demand higher standards.

    Oxford

    Oxford

    It’s why Oxford is a much nicer town than Ipswich. So is Cambridge. Those places are known for attracting clever people and the blighters apply themselves, creating value and then go around drive up the cost of everything, though they do make it all fancy as well. Hence the beer is a bit more expensive that in Ipswich, though I’d argue that The Fat Cat in Ipswich is a better pub than the Oxford one I was in. But Oxford’s probably got better pubs than the Fat Cat. We settled for a place on the bus route that looked okay.

    More Oxford

    More Oxford

    Your requirements as a retiree also vary if you are in a relationship and if you have children. Philip Greenspun has a fascinating article on choosing a place to live as an early retiree with few attachments, written from a US perspective. You’re not necessarily limited to the country you worked in, of course, and some places can be a hell of a lot cheaper, particularly in Asia 3

    Most of Europe is simply too crowded and expensive to be attractive to the average North American.

    Most of Asia is too strange and far away to appeal to the average North American. Nonetheless, there are a lot of expatriates who’ve found their Buddhist bliss in Thailand, a country with an excellent infrastructure and stable government 4.

    Greenspun on early retirement destinations 🙂

    In the States people seem to move all over the place all the time, so retirees are happy to move where things are cheaper – this seems to be towards the south, presumably where it’s warmer and the are lower property taxes. Anybody who is retired is usually very sensitive to wealth taxation for several reasons. Their income is normally lower than a typical working person, their wealth is usually higher (because they are skimming their lower income from capital saved from many years of working). 5. In the UK retirees have historically moved towards the seaside. which strikes me as a bizarre thing for the elderly to do, because the cold and wet in the winter will bother their aching joints and make it dearer to heat their homes, but what do I know? Nowadays they seem to gravitate to Dorset, Devon and Cornwall. In the Telegraph’s best places to retire series all the places seem to be in the south of the country 6

    I didn’t apply any intelligence to this choice. I was ejected from London because I was too poor to live there, and I got to like Suffolk which has a fair number of things going for it – it has far lower rainfall than most of the UK, it has a fair amount of natural beauty, it is an easy if expensive train ride to London. On the downside it’s very badly connected by road to the rest of the UK. Every time I want to go to any part of the UK that lies south of Cambridge and west of London I have to drive halfway round the M25.

    At the moment Mrs Ermine has more ties with the area. The decision to move or not isn’t purely a matter of economics or geography however, it is also about your social web of life. Early retirees by definition retire earlier than the norm, so many of the people they know will still have the constraints of work, in free time and in geographic mobility.

    Let’s all move to a cheaper country

    It’s not a bad idea – RIT is on the case with that one.It probably works better if you have some connection with the country or culture, and like everything about retirement it works better if you have more money. Where it really doesn’t work is if you haven’t saved enough money and you are simply looking to reduce costs or try and make a lack of savings work. There are a bunch of subtle tail risks that can get you, associated with the divergence in fortunes of your destination and the place the money that gives you an income is in. And of course you are starting again socially, but you have to pick up the language and the cultural references, or live in some expat enclave.

    And even if it hadn’t lost its Buddhist bliss, while somewhere like Thailand sounds like a great place to visit or even spend months or a year or so, I’m not sure I’d like to grow old and die in a greatly different culture from the one I’d spent most of my life in. Maybe I am particularly unadventurous in that way.

    International Living has a guide to various countries and costs, and the HuffPo likes Portugal, Thailand and Malaysia. Changing country also involves currency risk – if you’re looking at spending 40 years in a different country from the UK you have to take a view on the relative wealth of the two countries and how they would diverge. You’re okay if the UK stays the same or gets richer relative to your destination, but you’re in deep shit if it’s the other way round unless the funds upon which your income is based track the fortunes of your destination. This is a case where a DC pension beats a DB pension hands down because you can target your investment base accordingly. You see some of this thinking in RIT’s portfolio although he is unwinding the Australian bias because that isn’t his preferred destination any more. And just as Jim Slater said elephants don’t gallop, the potential of the UK to get richer more rapidly than a low-cost Asian country is questionable. It’s a tough bet, and as a UK expat you’re on the wrong side of it…

    if you depend on the UK State Pension then be very careful retiring abroad

    I’d go as far as to say if you depend on the UK state pension you can’t afford to retire abroad. You definitely need to know it doesn’t necessarily increase with inflation particularly relevant for Canadian and Antipodean retirees. Canada, Australia and NZ attract UK retirees because they speak English, but it appears this policy comes as a surprise to some of these retirees. Although there’s a lot of bitching about this, this isn’t something that was sprung on people retrospectively. Indeed, I’m amazed people who rely on the UK State pension retire outside of the UK at all because of the currency risk. Fair enough for people rich enough to have their own pension provision, but the UK State pension is not particularly generous compared to other First World countries so depending on it and retiring to another country particularly where you may have to pay for healthcare looks like sticking your neck out to me.

    The power play is obvious. A UK government is influenced by UK voters. If you’re a UK resident pensioner, you are a UK voter. If you’re resident abroad, you aren’t. In a squeeze on pension resources, a UK government will focus resources on people who vote in the UK. If you don’t like that, either don’t retire abroad, or accept the tradeoffs, or make adequate private provision to become FI, and maybe hedge currency effects. The UK Government is quite explicit on the policy

    Essentially, the reason for not uprating retirement pension in these countries is cost and the desire to focus constrained resources on pensioners living in the UK.

    town and country – the city is a spendy place

    it’s easy to spend money in a big city. There are so many expensive places to choose from, the temptations are all around.

    mistersquirrel

    I can get out of Ipswich and do something interesting without spending any money at all – I can bike to somewhere I can poke a telescope at birds, or listen to some. I can reach open fields on foot, though the council is looking at filling some of these with houses. The natural world abounds in things that don’t cost much. Whereas a city abounds in things that are interesting, and often cost something. Not always – f’rinstance in Oxford I went and poked an inquisitive Ermine snout at these oddities for free at the Museum of the History of Science

    copy of John Dee's Enochian tablets

    copy of John Dee’s Enochian tablets. Science wasn’t as nailed down in the past…

    various historical lab glassware

    fabulous historical lab glassware

    cabinet

    cabinet of preparations

    but we paid to see the William Blake exhibition  – as mistersquirrel said, it’s easy to spend money in a city.

    It’s possible that one of the things that made financial independence easier for me was being out of the city. When I look at city boys like theFIREstarter’s £24k hit and mistersquirrel who won’t let on as to the absolute level of spending because the drinking and dining stands head and shoulders above the rest then I think to myself we’ve got some high-rollers here 😉 And these are people who have their spending under control from a Micawber point of view, so God knows what this looks like for the rest of the country – no wonder that Britons slapped another £1.25 billion on their credit cards. In TFS and mistersquirrel’s favour, it was an Ermine rather than they who contributed to this statistic, though I used it to avoid crystallising a capital gain as opposed to spending money I didn’t have 😉 For what it’s worth my take on spending is back here. I’d probably add another 6k on that of elective spend between us because that was drafted in lockdown to get out mode. However, even now, I don’t spend more on running costs and elective spend than goes into my ISA each year.

    Notes:

    1. Where I do get to try provincial bus services I usually concur with Mrs Thatcher on the subject
    2. they are meant to like being around lots of people, the clue is in the name, house sparrow, and the Latin name Passer domesticus. There were plenty in the garden when I was a child, but they have nearly all gone from London now. Sadly it appears they just lost heart and died out in London, rather than flying somewhere more agreeable. If you think about the use of the canary in mines, this might give Londoners pause for reflection…
    3. an exercise for the reader is, of course, to look in their crystal ball and decide whether that will still hold after 30,40, or in some cases 50 years. 50 years is a very long time and you are asking a hell of a lot of your crystal ball – 50 years ago London was a grimy city of many bomb-sites, few cars, outside bogs and often the water stopped running when there was snow on the ground. Nobody would have guessed it would have loads of people making loads of money all around the world while its residential property becomes the reserve currency of last resort for Russian oligarchs, Greek tax dodgers and the like.
    4. No longer it seems
    5. Britain has very few wealth taxes, the council tax is the only one I can think of. We have capital transfer taxes when wealth is transferred  – from one form to another in capital gains tax. There is a theoretical tax on intergenerational/dynastic wealth in terms of inheritance tax, unless you are a member of the aristocracy/Establishment in which case you hold your dynastic wealth as agricultural land on which there is no inheritance tax because your forebears struck deals with the postwar governments to hide this egregious aberration in the principles of equality of opportunity from the wage-slaves and serfs.
    6. this may be the result of sample bias, if they ranked the places by number, since most people in the UK live in the south of the country
    4 Jan 2015, 1:12pm
    economy personal finance
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  • Here’s to interesting times in 2015

    Ah, New Year, a time for revolutionary change? Sophie Heawood has some point that January is a bad time to start anything new in, we really should have gone for September. It’s brass monkeys out there and the cruel coldest month of February still awaits. The fire festivals of the shortest day have passed. Heck, after the excesses of Christmas we could at least have advanced the 28 day shortest month to January to give wage-slaves a mini-boost. Mind you, when we look at the results in places with “Doros”, a double salary at Christmas maybe that’s not such a good idea. The WaPo is uncharitable about these things, and Fortune magazine is particularly cutting about giving wage-slaves festive breaks

    The 14th salary works like this: Greek workers get their annual salary in roughly 14 instalments. On top of 12 monthly payments, employees receive double their paychecks in December, right in time for Christmas consumerism. They also receive half of their monthly spending in the spring to shell out on goods for Easter. Then they get another half-salary boost in July, before their traditional summer vacation.

    In the interests of balance, Slobber takes this kind of thing to task, but hey, never let the truth get in the way of good journalism I say 😉

    Glastonbury Tor in the mist

    Glastonbury Tor in the mist

    The Ermine spent a while mulling things over the Winter Solstice in Glastonbury, and read a lot. Reflections and ruminations are not the things for a New Year. It’s about carpe diem, the opportunities on offer, and what with the return of the Eurozone crisis, an election here in the UK and the Russian brouhaha there is the scent of hazard and opportunity in the air. We haven’t had a good rumble in the markets since 2011, and it’s getting harder and harder to turn a decent yield with high valuations.

    It’s a funny old world – the price of oil, for instance, is lower than the marginal cost of new production. UTMT has a nice piece on this. There’s a link to the old boy Tim Morgan, he of ex Tullett Prebon fame and the report “Britain – Armageddon – there’s no way out of here’. Tim’s in a new guise and brings us the pithy summary

    what we are witnessing is not the dawn of an age of cheap energy.

    Low oil costs look like good news but when it’s lower than the cost of new production then it isn’t. Unless we’ve all decided to use a lot less energy, and lest we forget just how hard that is, the humble refrigerator in your kitchen is consuming the rough equivalent of the daily output of two horses.

    after a long glide, it’s time to see if the engine of finance starts again for me…

    This could be the year that I return to having an income. I will have have coasted on savings and investment income for three years since leaving work – that’s 10% of my working life before I draw a DC pension, which is indeed made up of more of those cash savings. One of the bizarre things about financial independence is how everything is set up to qualify someone’s financial probity in terms of their income. With no income I am a financial deadbeat in the eyes of banks. At least I didn’t have trouble switching energy provider, but I struggled to borrow money and probably wouldn’t get a credit card, a mobile phone contract or a loan. Most of what I borrowed has come back to me now and the rest is coming it over time. but as usual you can’t do anything with cash these days…

    The Lorax. He's a fellow who can tell you a thing or two about buying thneeds on your credit card

    The Lorax. He’s a fellow who can tell you a thing or two about buying thneeds on your credit card

    It’s perfectly understandable to banks, apparently, for you to want to spend money before you’ve earned it, particularly for your consumer thneeds – but have assets in the wrong place or tied up in pensions or an ISA and lenders aren’t interested. So I am finally returning to the salaried – or rather the pensioned, maybe, and cease being a financial unperson, when I get my cash savings back from those nice fellows at Hargreaves Lansdown with the Chancellor’s 20% bung on top.

    I was/am a salaryman at heart

    The Ermine is a maverick, but I have to say I was entirely conventional and non-entrepreneurial in that I hate not having an income, even though I had enough savings to cover the intercession. Spreading out previous savings, indeed making one ad a half years savings stretch to three years just doesn’t feel like a stable situation. For starters, how the hell do you qualify the answer to the Micawber question – am I spending less than I earn? I could do this as a logical and arithmetical exercise given the time before I could sensibly draw my pension, but if you have no income then the gut feel is always

    ‘spend as little as possible, this sucker’s going down, play for time’

    It made me over-cautious in spending, particularly in the early days. Unlike the salaryman, there’s no easy way to qualify a good rate of spending with no income. You have to take everything with you once you leave work – and your savings need to address not only your running costs but also the risk of the unknown unknowns. Those risks are much higher at the start of the journey than at the end, so it is rational to minimise spending at the start of any period of living off fossil savings 1. Playing for time sounds okay and sort of fail-safe, but time is also a fossil resource – they ain’t making any more of it.

    Once I have an income the answer to Wilkins Micawber is easy – as long as my spending minus my dividend income is less than my pension income then old Wilkins will be happy 2. I had no mental model of living without a steady income because all my adult life I had had one. Unlike most UK personal finance folk, my retirement was an unceremonious scrabble for the exit rather than a carefully planned strategy.

    But it worked in the end – I can see my way to getting access to my savings. It was overly pessimistic to assume I would have zero income across the intercession between finishing work and drawing a pension, although I do appreciate the changes that made it possible to swap savings for an income boost, and hope they aren’t rolled back by the new Government in May. The changes in the workplace that turned what had been an interesting career for the most part into a gamified paint-by-numbers miasma of mockery, metrics and mendacious quarterly ‘evidence’ for the performance management system is also providing new routes to market and ways of microselling niche content that offer occasional opportunities for a more creative Ermine following my interests. I don’t chase work, but I don’t turn down sales if I’ve already done the work 😉

    In the Economist’s The Future of Work series there is an interesting throwaway line about the looming future of work

    The on-demand economy is unlikely to be a happy experience for people who value stability more than flexibility: middle-aged professionals with children to educate and mortgages to pay.

    though it will be great for those who haven’t picked up financial commitments like mortgages, children, dogs, tastes for fine living and debt. Provided they have talent, that is. Indeed the drumbeat of the changing world of work is getting louder, and it favours the opportunist and the unattached/uncommitted. It makes it easier for a retired Ermine to turn recordings into dollars where previously they would have been accumulated as reels of tape, but it seems an increasingly rough ride for many. Which is presumably why we Brits thrashed seven bells out of our credit cards in November. To the tune of £1.25bn. The Ermine has a confession to make – I was part of the problem that month. In my defence I bought productive assets and breathing space with the money, and I have half of it back as cash. No consumer goods were bought with it, but I fear that is not the case for a lot of that £1.25bn.

    So I’m looking for opportunities in 2015. Maybe this is the year that the Euro blows, and those oil prices may offer opportunities for buying oil firms and service companies at lower prices. I can’t see the world living without conventional oil for a good time yet. I’m not doing shale, but although Vlad’s always got a really sourpuss look on his face these days he’s in charge of a lot of real fossil fuels. Dude, you need to lighten up.

    Vlad on the horn, irreverently swiped from UTMT

    Vlad on the horn giving some poor blighter the Third Degree, irreverently swiped from UTMT

    2014 shares review

    Looking back, overall 2014 wasn’t that bad for me, the Ermine annual unit value 3 is up over 15% (the FTSE100 total return is up 0.72% in 2014 despite all the bitching that it lost in SP terms). This is despite clocking up two definite cock-ups in retrospect – following my old mate Warren Buffett into Tesco and jumping the gun on the deeply troubled Vladimir Putin’s operation. However, I am saved by the power of diversification – TSCO can go down the pan and I’d still easily be in positive territory for the year. I am mulling over whether I should short the rouble to the tune of that HRUB holding.

    Before I slap myself on the back too much, any Brit sat on their backside with a decent exposure in GBP to the S&P500 via an index fund would have had a better ride this year at 20%, they would have got the USD forex boost as well. Although I have deliberately avoided the US market (their TR was 29% in 2013 which I thought was outrageous and setting up for a fall) the Americans have served me better outside my ISA when I exchanged a load of The Firm’s shares for a load of Vanguard FTSE Dev World ex UK which is 50% US. They also did better than I did in my ISA this year 😉 So you pretty much only needed to have a pulse and be in the market with a bit of US exposure to do okay, indeed the surprise in the case of the ISA is how I survived my anti-American bias. Don’t get me wrong, I’d love to have more exposure to the dynamism of American capitalism. I just don’t want to pay the currently exorbitant prices of getting it!

    Looking back, it was the years when I didn’t do so well that the seeds for better performance was laid. 2011 wasn’t a great performance on my unit price, a 2% fall. But some of what I bought then did the heavy lifting in 2013 and 2014. I’ve also started to see very high levels of volatility – they aren’t proportionally particularly outlandish but the absolute levels of the changes wrought get larger as time goes by, because the capital base is rising. The salaryman measures things against the yardstick of my erstwhile annual salary, and as capital appreciation and a little inflation pushes the capital base the volatility increases to a very significant part of that annual salary. Put it like this, the difference between the high-water mark this year and the low-water mark is a sum that would have seriously pissed me off to lose as a worker bee. That sort of rudeness is just what the stock market does, and it’s why it flames out most private investors (and yes, I could yet be one of them in future – nothing is guaranteed). I have to use the intellect override this  – I didn’t earn or have the high-water mark and the sun will rise again from the low point. Such is the conundrum of investing – you always have to fight some part of yourself in the endless battle between fear and greed. The only imperfect defence against the myriad of cognitive biases is to inform, to understand more, but also to know thyself.

    I’m gradually losing the HYP yield fight as my yield falls as a percentage of the total capital – the annual return is shifting in the direction of capgain rather than dividend income. Some of this is because I am deliberately diversifying away from the UK as the total stake gets larger, which drops my yield (the UK is a relatively high-dividend market), and some of the index funds are accumulation funds so they are total deadweight from a yield point of view.

    But then jolly good downturns are the time to build one’s HYP, whereas frothy markets pumped up with QE are the time to either diversify or sell your own unwrapped shares back to yourself in an ISA wrapper to bloodlet some capital gains allowance. Every dynamic system has its systole and diastole, and it’s better to roll with the cycle of opportunities than fight it.

    Notes:

    1. cash savings are non-renewable, unlike a share portfolio in drawdown over decades, but the stock market is unsuited to hold savings for a non-earning period of two or three years because of its high volatility
    2. There are cases imaginable where this wouldn’t hold, but they probably don’t apply to me
    3. unitisation is a way of tracking your ISA performance that works with the fact that most of us drip money into an ISA year on year,  which terribly complicates other ways of doing that. It is explained in this Motley Fool post. I had to repeat the exercise pretending to only unitise as if I had stayed in cash because I didn’t believe the result at first. The arithmetical result is quite counter-intuitive, compared to simply taking the ISA provider’s total market value divided by book cost after you have run for a few years
     
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