personal finance: early retirement
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The heady aspirations of the middle class wannabees over at the Torygraph often tickle my fancy. Last week with was the numpties who wanted to become BTL landlords and have some impecunious other suckers pay for their three babies, this time let’s hear it from Rik Thomas who earns £55k and wonders if he can pay for private schooling for his one year-old son and get to retire at 50?
Deconstructing this folly quite interesting. Although ambitious it wouldn’t have been totally unreasonable for his father’s generation. Lots and lots of things are so much better now than they were a generation ago, but unfortunately for Rik it is increasing inequality that is turning this into a farrago. Some of the goods and services that people associate with the middle class are goods priced on perceived value, and while Rik’s salary is twice the average national household income and probably does put him in the middle class, he has been foolish with the purchase of one and his ambition of the another will cost him more of his lifetime salary than it did of his father.
Can Rik pay for private schooling and retire at 50? No. Maybe the Ermine is being a sourpuss here because I didn’t get to retire by 50, but really. Just. No. Not quite the wrong city but definitely the wrong ballpark in the wrong part of town. This fellow is saving £100 a month against school fees of about £8,000 p.a. He wants to pay for private primary school, indeed, so the problem is urgent, I believe children go to primary school at 5 in this country. I didn’t realise that private primary schools exist, but there we go, how the other half lives, eh. Anyway. Oxford degree or not the problem is clear and it’s in the arithmetic – his savings rate is way too low. Okay, maybe his good lady wife (warms the cockles of the cynical Ermine’s heart that there are two people involved in this grand ambition) will return to work when the sprog is parked in the primary school for most of the working day and may be able to make up the deficit, but whatever. Must. Do. Better. – and sharpish.
By the time he is 35, he hopes to be earning £100,000. With the oil industry’s current woes, he is unsure if he will get a bonus this year.
The old triumph of hope over experience, eh, somehow the ‘unsure you’ll get a bonus this year’ doesn’t necessarily bode well for mahoosive future pay raises but I have to agree with him and that Mark Carney fellow that the current oil price doldrums will probably look different in seven years’ time, so let’s take this at face value. I do note, however, that project management is eminently offshoreable – The Firm has been outing project managers for years. He’s 27, so time is on his side, his son should be off his hands and making his own way in the world by the time dad is 50, though observation shows that this whole moving out and making your own way in the world seems to be an early 30s thing rather than the early twenties thing that it was in days of yore.
Let’s zoom out and take a look at the bigger picture.
Fee paying schools are a Veblen Good
In days of yore, bank managers and doctors , accountants and engineers sent their children to public school, because there was not such a disparity of incomes. Nowadays most of us have more Stuff, better heating and better cars than our forebears had in the 1950s and 60s, but there are some goods that are priced on perceived value rather than the marginal cost of production. I would classify public schools as Veblen goods, along with designer handbags, luxury cars, jewellery etc. You buy these for the message they give to other people. In the limiting case an oligarch doesn’t need a yacht, other than to make himself feel better than other people who don’t have one.
Only 7% of Britons go to public schools 1. The promulgators of independent schools dress it all up with ethos and values and cobblers like that. However, the fact that 93% of Britons get dragged up in State schools and the country is still in the top twenty of GDP per capita shows that this is not a need. It is in the top three of Maslow’s hierarchy
and you do it to be part of the group of Well Off People. There are practical advantages, of course – public schools teach their pupils how to be leaders of men much better than State schools, so as a result the well-off but dim will have a good place in society. But a large part of the spending on public schools is to show that you can. It performs the same role as the iridescent feathers of the peacock’s tail, an inefficiency you carry to show that you have the wealth to spare.
I have personal experience of this. I went to a State grammar school, which chose to become independent in my last year because otherwise it would have been destroyed by the wreckers of the Labour Government in ’76. Let’s hear it from Anthony Crosland.
“If it’s the last thing I do, I’m going to destroy every fucking grammar school in England. And Wales and Northern Ireland”
I must go and piss on his grave sometime. He caused my parents a lot of stress, because they couldn’t afford to pay and hadn’t expected to. As it was the ILEA grandfathered existing pupils and paid the fees in the last year (my sixth form).
Grammar school worked for me. I was the son of a blue collar worker and a SAHM, and I benefited from upwards mobility. At a guess working in industrial research and design was a middle class career. I was eventually able to see the argument that several teachers repeatedly put to me, that by skimming the able the grammar schools impaired the ability of the secondary moderns and early comprehensives to achieve balance, because they were teaching the less able. Aspirations are lowered and people learn to labour. So the grammar schools had to go. Their existence was inequitable to some extent.
Because my parents weren’t rich enough to do independent schooling, in a comprehensive system my end of the boat would have gone down, but overall the common weal would probably have improved. It’s easier to say that now that I have benefited from this and don’t have skin in the game. It took me until my late forties to finally surrender and accept the intellectual premise because I found its logic probably passes the balance of probabilities.
My personal experience of mixed-ability schooling is limited to primary school, and I very distinctly remember being in class where those who could read had to sit beside those who couldn’t and help them read. It was tedious, excruciating and hard work, and it wasted my own time at school. I had normally finished the school books for reading in about a quarter of the time allocated, largely because I didn’t have to vocalise as I read. In that year I realised the Ermine was never going to be a teacher, because I was unable to understand or to empathise how people could not pick up the rudimentary meaning and grammar of English. And as for this reading out loud lark, WTF was up with that? Seriously, don’t ever do that to people. Speech is about five to ten times slower than visual reading, if you teach people to read out loud and then only understand by listening to themselves you condemn them to a lifetime of sub-normal reading speed, because it’s hard to unlearn.
I was taught to read by my mother before I went to primary school – English was not her first language. So while I accept that mixed ability schooling is probably overall for the best, as somebody who would (and had) lost out in it I’m never going to be an enthusiastic fan, it definitely falls into “the needs of the many outweigh the needs of the few” territory, and that sucks if you’re one of the few. But I can understand that State schooling has to aim for the greatest good given the limited resources 2.
Parents never like to think their children are stupid or even below average, though it must be happening 50% of the time. Independent schooling addresses this in two ways. One is it throws more resources at the problem. A stupid child with excellent teaching can probably be brought up to the level of a mildly above average child with average teaching. That’s the easy part. The second way is that independent schools are far, far better at teaching their pupils to be leaders of men. Presumably they don’t go round telling people everybody is of the same worth and ability, which seems to be a given in State schools despite depressing evidence to the contrary in terms of ability. The Ermine only learned to address crowds of a couple of hundred people in the second half of my working life, and I learned elements of command presence by having to take decisions in public leading people because I had specific skills for the job. I was never taught this, and had to research how to carry people with me by watching others do it, by reading some military descriptions and with Google.
My ability to do this is still a pale reflection of the typical public school alumnus. They were taught command presence. 3. I was taught subjects at school, but not how to lead people. I don’t find it that surprising that those who went to public school are much more likely to be in positions of leadership across the country, as evidenced in this Government report. And summarised by John Major in 2013
“In every single sphere of British influence, the upper echelons of power in 2013 are held overwhelmingly by the privately educated or the affluent middle class,”
I can see why parents like public schools. It softens that 50:50 chance of having to face up to having a stupid child, and you can still get them ahead of the 93% rabble, because leadership is a well-rewarded occupation. You don’t need to be bright to have command presence. The other area where public schools probably do well is where a child has an unusually unbalanced set of strengths and weaknesses. State schooling has to be one size fits all, once Crosland destroyed the grammar schools that specialised in academically biased pupils. We don’t want to pay the taxes that would ensure no child is left behind – it has to be good enough, not excellent, since we can’t afford excellence.
I am not saying people who went to independent schools are dimwits – probably on average the intake is a little above average, purely on the slight heritability of ability combined with cultural factors. But independent schools can probably make more of the academically challenged than State schools, which must be comforting for parents who want the very best for their child regardless of their natural ability compared with the 93% lumpenproletariat 😉
The trouble with Veblen goods is they have to be dear to be exclusive
And this is where Rik is SOL. He went to public school, so he thinks of this as the norm, but 7% isn’t a norm. The whole point of public schooling is to get ahead of the 93%. If we take a butcher’s hook at the Independent Schools Council’s report we can see that the cumulative rise in pupils in independent schools since 1996 is 8% (roughly when Rik was at his public school from 1993 to 2006). Since 7% of children now go to public school, my grammar skool edukayshun lets me estimate about 6.5% of pupils went to public school in his day, since the ISC report indicates the cumulative change in total pupil numbers is very small. However, with increasing inequality all those richer people are driving up the price of public schooling, and as a Veblen good they don’t just make more public schooling to meet demand. They’ll make a bit more to soak up the demand profitably, but the 0.1% is getting richer faster than the Riks of this world.
Britain has only so much space for dimwitted leaders – we couldn’t have a 50% independent school population without some of the advantages going away. If we assume that half the intake of an independent school is below average, we can probably find space in the leadership structure of Britain for that 3.5%, whereas finding leadership positions for 25% of school leavers is going to be tough. And as conspicuous consumption, it has to be exclusive even if there weren’t technical reasons why it had to be. Imagine a world where all of us wore Manolo Blahniks, drove Rolls Royce SUVs and had Lear jets. The cognoscenti would have to go and find something else to make themselves feel special.
Public school is like that. It is a status symbol, it does have quality and does buy you favours and particularly for dimwitted rich kids 4 it keeps them in the style they were accustomed t because leadership is not widely taught.
I owe it to Prospect magazine for the official definition of these rich dimwits. They are the ‘second bananas’ identified in The Fall of the Sloane Rangers and they owe me a new keyboard. Apparently in the past according to the Torygraph
Public schoolboys married girls in pearls and settled down to an upper middle class life in the bosom of the Establishment. Diana, Princess of Wales was their poster girl.
Girls in pearls? WTF is this they speak of? Why was I as a student living in a Knightsbridge basement wannabe photojournalist shooting gritty Tri-X black and white pictures of the soup kitchens under Charing Cross railway arches and being accosted by jumpy coppers where I could have been using Kodachrome on girls in pearls…
Anyway, Prospect supports the thesis of Rik’s dad having it easier than Rik, although the Sloane Rangers were the London cream of the second bananas. To wit, the ineffectual toffs used to be the 5%. They are being nuked by New Money
Most of the old Sloane groups were originally somewhere in the top 5 per cent—it’s difficult to quantify a stance—and some of them at the ragged lower edge of the 1 per cent, where the household income threshold is more than £3,000 a week now.
“The Sloane population of the City was winnowed out—now they were competing with other types and other breeds from other places”
The combination of 80s Tory government and home-grown New Money—much of it smart, tough and well-educated—looked at first to most old Sloanes (instinctive Tories) like just what the doctor ordered. But they set about destroying the fixed points of the Sloane world—particularly the Old City at Big Bang (1986) and after. And then New Money started cherry-picking the trophies that Sloanes valued. The attractive London houses in SW3, 1, 7, 10, 6 and 5 (in that order), the prettiest rectories and miniature statelies in the best counties, the best university places. Big Bang reshaped the City and set the foundations for 21st-century financial London. There was a storm of acquisitions before and after 1986 in which a roll-call of familiar Old City names like Rowe and Pitman disappeared. Then their buyers were gulped down by still bigger fish. The familiar merchant wankers of a thousand Sloane jokes—the delicious histories, the panelled rooms and word-is-my-bondism—were replaced by global investment banks with soaring atrial offices in Broadgate and, later, Canary Wharf. The new players were American, French, German, Swiss and Japanese banks. The top bananas were toughs and technocrats from absolutely everywhere—people who didn’t know or care about subtle semantic class indicators or the significance of milk-in-first and who didn’t care if their suits looked a bit Charlie. People who didn’t know the Sloanes’ dads. The new bosses wanted “top talent,” wherever it came from.
I fear the obsidian Ermine heart fails to bleed…
But while Rik’s dad could afford to do this public school stuff, Rik can’t. He needs to choose now – public school, or early retirement. He can do one or the other, not both. And if he wants public school, he needs to suck in his gut and start saving, because he has 15 years of laying out £10k p.a. plus starting in four years time. Yes, his wife and lodgers may make up some of the shortfall, but public school gets dearer at secondary school.
The best laid plans get sucker-punched by lifestyle inflation
Now Rik will be doing better than I did, and he lives in Aberdeen rather than the Great Wen. But he’s already collected airs and graces at 27. Living three people in a five-bedroom house, FFS. At 27 I was renting a house with four other guys to save money because rent is throwing money away. I had yet to discover how much money you can throw away buying a house at the wrong time! At least Rik is figuring to rent out a room for £6k p.a. Call me an antisocial git but living in a house owned by the bank with strangers is not my idea of living the middle class dream even if it does have five bedrooms and Italian hand-made tiles in the kitchen, but each to their own. Exactly how well it works for a lodger with a one-year-old in the household beats me. I’m assuming that Rik’s desire for early retirement will make him circumspect about adding extra mouths to his household – the late Cynthia Oti’s secret for a secure financial future was to
“never take financial responsibility for something that eats.”
which may be taking it a little bit far, though I recently heard reports of one lady friend whose children are sort of off her hands declaring
“I’m not surprised people get themselves into money trouble, they accumulate accessories like dogs, children and stuff without thinking about how much it all costs”
so maybe Cynthia was onto something 🙂 The five-bedroom house of course says Rik is Mr Big and worth something, but he only needs three bedrooms and all the rest will continually bleed him, needing heating, decorating, repairing etc. Let’s hope that North Sea Oil will confound the Hubbert peak and still be bringing in shitloads of money at least until he can downsize.
Either way, the problem with retiring early is that of course Rik can lob his salary over about 43k into his SIPP and that’s all very sensible, but that kinda clips his net income to £32k (corresponding to gross of about 43k, anything over goes to his SIPP). Of that he wants to spray £8,000 on school fees in the near future leaving him with £24k. Computing everything in today’s terms and anticipating that equity gains will at least compensate for inflation, if he wants to retire at 50 then he needs to have enough in an ISA to run him from 50 to 58, at £25,000 p.a which my trusty calculator makes £200k. He can run this capital into the ground because he will have a decent SIPP income for afterwards, and he has 23 years to do this starting tomorrow. He also owes £200 k on his house. Let’s say he saves into an ISA £10k p.a. and his mortgage costs him £4,000 pa @ 2%. Let’s ignore the tedious concept that you are supposed to pay down the capital on a mortgage, this family now needs to run two adults and a child in the style public school people like to live on – on £10,000 a year 5. TFS has an example of what that looks like and it probably suffices to say that this is easier in theory than in practice. Now the Ermine household could do that, but I am almost twice Rik’s age, have no mortgage or public school spending. Your mid twenties to forties are the worst time for calls on your income, and this goes in spades if you have children.
Early retirement is doing different – and to do different you have to be different and live different
One of the observations I made at The Firm was that those who cleared off in their early fifties and retired were the child-free. As long as they had managed to avoid the D word parents were on their way about five years later if they worked at it. Everybody was retired at 60, because that was the normal retirement age.
The original fellow who gave me all the sage advice to save into AVCs is still working for The Firm, despite being well over 50 and his younger self declaiming “you’re stupid if you dont’ save into AVCs and retire by 45″. Why is that then? Well, his wife and kids took issue with the grand plan – basically they wanted to have this nice middle class lifestyle and that doesn’t go along with dropping your salary even to the 40% tax threshold. Whoops. Nice plan, Stan. They preferred daddy in the office behind a screen where he belonged 6 so they could could have it all because they were worth it. Early retirement fail. If you want to retire early, you have to live differently to your peer group. In particular you have to spend less!
Earning more doesn’t help most people, because as a rule to earn more you have to push yourself more until you reach CEO level. At board level to earn more you simply have a word with your mates on the non-exec remuneration board to loot the real owners of the firm more and award yourself a pay rise, but for grunts you normally have to do more or eat more stress by doing unpleasant shit. So you get to earn more, but then you are in the circle of more spendy people and you may be more pissed off with work so you need to spend more to make yourself feel better. So while earning more seems the obvious way to go it only works for some people. Less than 1% I would guess 😉 If earning more were the answer, footballers would never go bankrupt.
The fellow who taught the younger Ermine all about tax-advantaged pension savings was right you’re stupid if you dont’ save into [pension savings like SIPPS] AVCs – but not right for himself. His words gave me hope that there was a way out of there and the plan was put into action with extreme prejudice. It’s not a barrel of laughs, I can tell you, driving one’s salary down to a whisker of the minimum wage threshold and saving into pension AVCs using salary sacrifice. And then trying to save into an ISA. Because if you save so hard you can’t do shit because you have no bloody money left. When that shit is fast and furious desperate holidays because you’re so worth it cube slave, two weeks of respite in return for 48 of humdrum existence then one can do without it when the win is the rest of your life on vacation. Gets more challenging as you drive out of wanton consumerism and then start moving down Maslow’s hierarchy. It’s the in-between bit that suckers First World cubicle slaves. They want the trappings of their peers that cost money, but then they are trapped by the trappings.
Rik is gonna run into the same sort of problem that my colleague at the Firm ran into. His family are going to want holidays in Tuscany and somewhere exotic. They are going to want kitchens with handmade Italian tiles, a butler sink and matching luggage. They will probably want something German on the driveway. How did the ermine get round that?
I went on fewer holidays. I have less house than my colleagues 7. I drove my cars into the ground – two of my last four cars I took to the scrapyard personally. I spent less than I earned. But make no mistake – my colleagues had more holidays, Italian handmade tiles and all sorts of other goods and chattels to show for it. On the other hand, this week one day I got to go out and look at this in the Suffolk sunshine
Yesterday I went up to a recording studio in Norfolk to be a judge in a sound competition. While my former colleagues were looking a Microsoft Excel on their screens, or filling in their objectives. You pays your money and you takes your choice. I don’t have fancy tiles in the kitchen and haven’t been on a plane since 2007, whereas some of them go on five city-breaks a year.
I don’t think Rik has jumped to this. To live different you have to do different. Not only that, there’s a second problem in town.
Increasing inequality means you must be richer than your parents were to give you children the same class experience your parents gave you
It’s those Veblen goods again. The trouble is there is one asset class that’s in the needs category that is typically the one single biggest part of most Britons’ net worth, provided that we overlook the inconvenient truth that they usually have it on borrowed money. Until 1979 Britain had a workable housing market where renting was a perfectly reasonable option, but since ownership has been promoted over renting. Even if the ownership is not for occupation. I found it brave of the Guardian to tackle this emotive issue and remind us that owning your home wasn’t widespread for an awful long time and isn’t the natural order of things. Indeed, home ownership is increasingly ill suited to modern working patterns where you may need to move to follow work. Most of the people at my grammar school were in rented accommodation, but in contrast to Generation Rent they had better security of tenure – many of these families were in council houses.
More of Rik’s lifetime earnings will be consumed by housing than his parents’ earnings were. Should he go the public school education route, more of his lifetime earnings will be consumed by that too, relative to his parents. He is very unlikely to be able to retire early if he wants to indulge in such conspicuous consumption, although to him it will look like the normal spending of his peers. That is because most people spend as much as they earn, if they are lucky. To retire earlier than the norm, Rik must spend less than the norm. With his five-bedroom house and his public school aspirations, he is not on the right path. Something has to give. Pick any two of the three, Rik. Peer-group middle class lifestyle, school fees, early retirement. You’re just not rich enough to do all of them.
- for any confused logical Americans, public schools a.k.a. independent schools in England are the sort your pay money for, as opposed to State schools that are funded from general taxation ↩
- I would now counter that we should focus State schooling on teaching the basics of the three Rs and then target the brightest because our economy will have few jobs for those of average or even slightly above average ability. The quid pro quo for that is that taxation needs to be enough on the winners so that a universal income can be paid, and also that adult education in the Victorian sense of bettering oneself and general education should be free and promoted via MOOCs and free libraries. The whole point of State education has changed through my working life but this does not seem to be acknowledged. It taught the thee Rs so you would have life skills and subjects so you would be a cog in the industrial machine. The latter is becoming redundant for many future non-employees, and in a world with Google general learning is much easier to be had for free. ↩
- I have never been a paying independent school pupil. I offer this Guardian article into the stylistic differences between aims, and personal observation shows me that people who have been to public school are more at ease in leadership positions and generally giving direction ↩
- clever rich kids would do okay in State schools as long as their parents taught them values ↩
- £32k less £10k ISA less £8k public schoolery less £4000 IO mortgage ↩
- I don’t know enough about his domestic circumstances to know how much his wife added to the household economy though from his talk I figured he happened to be the larger part of it ↩
- but it is mortgage-free, which is rare amongst my colleagues ↩