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
     
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