19 Aug 2016, 7:40pm
personal finance
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  • Telegraph to wannabe FI/RE new parents – you must be kidding!

    The Telegraph’s Money Makeover is a rich seam of entertainment for a grizzled mustelid observing the triumph of hope over experience in the human condition. It seems to be an endless tribute to wannabe buy-to-letters wanting to retire on a woefully small portfolio, thirty-somethings with a tenuous understanding of just how much money you need to have to retire before midlife and the oddball doctor with a massive salary, none of which ever seemed to stick to the sides. I could generalise many of the tribulations as “if you are asking whether Buy-to-Let will solve all your problems, the fact you are asking the question tells you the answer is no”. As a respite from this folly, this week we have a paragon of financial rectitude who is debt-free by 37, but there’s still no pot of gold at the end of his rainbow.

    Consider this plangent photo of domestic bliss and unachievable dreams, a comely couple and two preschool rugrats with their associated plastic paraphernalia.

    with two young sons, JM wants to retire as soon as possible to spend more time at home.

    with two young sons, JM wants to retire as soon as possible to spend more time at home.

    Our man has done an awful lot of things right in the search for early retirement. He appears debt-free in the true sense – paid down his mortgage on a Cambridge semi at £300k, which is a very respectable achievement at 37 1. But he’s done two things wrong for his dreams of early retirement, and they’re in the foreground of the picture.

    I’m not saying that having children means you can’t retire early, but JM has a fairly pedestrian job for early retirement ambitions, and kids will seriously hamper his ability to reduce his outgoings, which is the other route to early retirement – being able to sustainably reduce your spend. Which is pretty much what the Torygraph had to say to him. To wit:

    JM is doing well in retirement provision but the challenge for him will be getting enough funds to enable him to retire early and provide for his family.

    followed by the coup-de-grace

    I would sound a note of caution, as one parent to another: children tend to get more expensive as they get older. 

    The other lot aren’t that much more encouraging

    Mr Massey’s primary goal of retiring early to spend more time with his family is unrealistic given his current financial planning route.

    and

    should concentrate the bulk of his pension savings into shares-based investments as, realistically, retirement is at least 18 years away.

    A quick tappety tap on the Ermine abacus tells me that 37+18=55. As for spending more time with the fruit of his loins, in 18 years time they will have just come of age. He’s not gonna do it before then  unless he does something very different.  Having children is going to be a big project for anybody- if we say JM is exceptionally frugal and gets his two for the £230,000 they say it costs to raise one child, then clearly in 20 years time his pension pot will be down that much 2, or at a 4% SWR down about £9000 p.a.. That’s not the sort of thing that early retirement dreams are made of. Of course some people with children  can retire early. But you’ll usually find they were in a different class of earnings to JM – The Escape Artist for instance, worked in the City. He probably earned a little bit more than JM, who doesn’t even pay higher-rate tax, which makes paying a fixed sum into a SIPP much less painful than for basic rate taxpayers.

    There are other minor aspects of JM’s carry-on which could make it less of a stretch. Let us take this oxymoronic statement

    He takes risks where he understands them and has £17,000 in a stocks and shares Isa invested in Greggs, BP, Poundland and Tesco – companies he is “familiar with”.

    Mr Massey is satisfied with his investments so far, although Tesco has delivered some losses.

    He said: “Everyone always goes to Tesco – I thought how could the shares fall? Well, they did.”

    JM, you got frickin’ soaked on Tesco. I’m not particularly having a larf, so did I. I didn’t buy them from a careful consideration of the company, but figured if I paid less than Warren Buffet I would be okay. Turns out this was one of the few occasions when WB didn’t know what he was doing. So I got soaked too. I didn’t understand the risk, and nor did you. The big difference between us, bud, is that Tesco is less than 1% of my portfolio, whereas it’s probably more than a fifth of yours. I also realised within three years of starting along the high yield portfolio route that the global imbalance 3 was probably hazardous to my long-term wealth and started to shore it up all round with diversifying index funds, focusing on ex-UK to specifically fight that bias. So go do yourself a favour and listen to Lars Krojer and sharpen up your act. Once my contributory investing career is over 4 I may choose to listen to Lars, so save myself a hunk of time I could be spending on more interesting things to do.

    So, JM, you had your two precious little bundles of joy because of all the warm feeling, extra meaning and richness that they add to your life. Good things are worth paying for, and life is full of choices. That particular choice means you won’t get to put your feet up at 55. For God’s sake don’t suddenly decide that your special snowflakes need private education, else you’ll be retiring about never on that salary. Now of course you could go out and get a much better paid job working for The Man, but pushing 40 is leaving it a little bit late to do that. Colour me a heartless bastard but “trust and grant manager at a charity” sounds like a) you’re milking it b) there aren’t that many opportunities for progression and most of them will be dead men’s shoes, the charity sector is notorious for crap pay 5 and c) you are just one re-org or restructuring away from redundancy. So better hope nothing goes wrong in the next 18 years, eh?

    There are things you could do to make yourself better off in retirement. But you ain’t getting to retire early. Paying your mortgage off was a grand achievement and hats off to you, but paradoxically it was probably a bad move for retiring early. I cocked this up too. At historically low interest rates, you could have carried that sucker for longer and pumped more of your salary in pensions, getting a 20-32% lift and getting longer for it to appreciate, while paying 3% on the money. The 20% uplift plus the ~4% real return on equities make that a win even if you get to  put your 25% pension commencement lump sum into clearing the mortgage in 20 years. Think of it as tax-free mortgage saving. Of course mortgage rates will go up over two decades but you will also be paying it off slowly so you’ll take less of a hit, and inflation will erode the principal anyway.

    So listen to the drunk telling the traveller how to get to the city with your unrealistic dreams of early retirement.

    If you want to get to there, you don’t start from here.

    I am curious that none of the advisers asked this fellow whether his question was wrong. It often pays in life to try and make sure you ask the right question, because once you have framed that you’ve eliminated some of the options. Surely if he wanted to spend more time with his family, perhaps the question should be ‘ Can I afford to go part-time for 10 years and see my family grow up’ rather than “Can I retire early”. He still won’t get to retire early, but perhaps he gets something else of value. His wife has clearly jumped to this option, and by reducing the £700 a month childcare bill he would reduce the financial hit and get to see more of his children rather than more of the office.

    Notes:

    1. a cynical Ermine wonders exactly how he has managed to pay off £300,000 on a household income of £77k within’ say, 10 years. One assumes the untimely demise of a rich aunt may be a factor
    2. a DINK couple usually spends more on other things, so the difference may be less
    3. that imbalance is less bad for me because many of the FTSE100 firms I have in my HYP make their money partly overseas. Greggs and Poundland seem pretty domestic, looks like JM invests in what he sees on the High Street. From what I see on the High Street I would actively run miles from any firms with a High Street presence, the Internet is eating their lunch. Tesco is in fact my only such firm
    4. I am reasonably convinced by Lars’ argument you can’t long-term sector pick and beat the market, though I am less convinced that if you only have a few years to get into the market that valuation/when you get into it is irrelevant. I happened to be very lucky in starting in 2009, though of course the effects of the GFC on my job was the reason why I started then.
    5. until you get to the executive levels where anything goes

    “a cynical Ermine wonders exactly how he has managed to pay off £300,000 on a household income of £77k within’ say, 10 years. One assumes the untimely demise of a rich aunt may be a factor”

    Because the house and thus mortgage was not £300k to begin with. Same reason I’m now down to 60% LTV despite not having paid off 40% 😉

    Cambridge does seem to have suffered shocking HPI that supports this hypothesis – they list ~84% across 10 years. Although flattening a £150k loan that early is still a respectable achievement, but possibly doesn’t need untimely deaths in the family

    My interest was piqued when I read the intro: 37 and debt free. Me too! Then I reach the part about being mortgage-free with a £300k house (and kids). That said, I wonder which will prove the bigger expense when all is said and done.

    Good point raising alternative scenarios like part time work. He could also trade places with his partner now and then (though a year or more out of work can be brutal to the finances/career when all is averaged out).

    hehe – my bet in on the kids being dearer. But hats off to him, at least he has the mortgage out of the way. Those childcare costs look crippling. They’re worse than any mortgage I ever paid, though perhaps not in real terms. It’s tough going to work to pay taxes and other people to sort your kids, but then we all arranged house prices and things to be such that you need two full time incomes to afford a middle class lifestyle so that’s the way it goes.

    Part time has got to be the way to go for these guys – that largely sidesteps the decaying of skills issue, although it does thin out the projects on the CV. She’s got it, it’s time he did!

    It really has become a minefield now in the UK to have kids, there seem to be no winners one way or another. In a sweeping generalisation, if you can’t afford them but have them anyway, benefits are being savaged and you will do them no favours growing up poor. The odds of the austerity/inequality cult being reversed are unenviable for those who want others to pay.

    Then if you’re middle class, you are flirting with joining the poor because if you become single or divorce the maths are against you, while even if a couple for the duration of the ‘raising’ life-stage, either you pay savage child care, or one partner drops out of earning for a damaging few years. As such, the lower middle class risks forever dropping out of the cappuccino class, commensurate with the number of mini-thems they feel completes them.

    Finally, even the miniscule % of the population who rule us all, tend to pack heirs off to a succession of expensive institutions – until they’re young adults capable of paying back the country when they get power by inflicting a generation of austerity – with the ‘leadership skills’, [lack of empathy] they learned by being deprived of any affection in the character-formative years.

    It’s unsurprising therefore that birthrates are falling below the level of replacement in most of the ‘developed’ world, as modern life is actually hostile to it. That makes for an interesting question: ”Who will look after us when we’re all old & helpless once the gastarbeiter have been kicked out?”

    ……so, any prospective parents have a Hobson’s choice now, vis-a-vis the gamble with hardship & would do well to first ask themselves the question:-

    ”Do I feel lucky?”

    I think Jacob ERE made a similar point that children are a cost centre in the modern world whereas they were economically valuable in the past in more straitened times 😉 That’s not necessarily a problem – after all it’s perfectly reasonable that people pay for elective choices in life.

    The gastarbeiter problem disturbs me too – my mother lives in sheltered accommodation and everyone doing the grunt work is Eastern European, you need to rise two ranks to find Brits. Now she can probably afford to pay more when push comes to shove, but many of the other residents can’t. Still, although I don’t think she was, the old were generally Brexiteers so I guess they thought that sovereignty was a price worth paying…

    “austerity”: very droll.

    Anyway, our hero may well work short enough hours, and have a short enough commute, that he gets to see the nippers in the evening and at weekends when he isn’t himself exhausted. Lucky him.

    Once they turn twelve they won’t want to see much of him anyway.

    if things are so hunky-dory for him, why is he dreaming of early retirement 😉 The once they turn twelve issue is surely an argument to chase the part-time angle and let RE go hang!

    Yes: he should soon consider working during school term, for school hours. Then his wife can work full time, and all will be well.

    As for ER, maybe the job has decent terms but is extraordinarily tedious. Something like most legal jobs, for instance. Zzzzzzzzzzzzzz

    20 Aug 2016, 12:31pm
    by SpreadsheetMan

    reply

    Excellent post Ermine!

    The Cambridge property market has been ballistic in the last 15 years, so that is easy to explain.

    I think your suggestion about part-time is spot-on, although he’s going to need to think hard about remaining employable (your point c is the killer). Cambridge has a very strong job market though, so the tide is running in the right direction.

    Mrs Ermine disputed my aspersions on his employability, it appears the third sector is much bigger than I’d appreciated, which is good news on the hazard of redundancy issue. So with the Cambridge job market and a paid off house I think part-time has got to be the obvious win for him. It would be a bit rough if there were no upside to paying the mortgage off so early in life!

    20 Aug 2016, 1:06pm
    by Neverland

    reply

    I start from the point of us not having kids so I can’t say I’m an expert..

    …but I don’t think kids are inherently that expensive if you already have a house big enough for them all the extra expenses you will have is some food, some clothes and some ancillaries for school plus you accept that some things like foreign holidays are just having to be jettisoned for nearly two decades..

    …wherechildren get expensive is if you use your kids for competitive consumption, e.g. music lessons, tutoring, foreign holidays, Go Ape! with private education as the apex of competitive consumption

    competitive consumption – you’ve got it there. The trouble is kids seem to be the most emotive strings for the marketers to tug on, and easily make puppets of the greatest frugalistas.;)

    There is the issue of one party’s earnings getting KO’d and/or the childcare costs eating into their earning power. That £700pm/£8400 p.a. means they have to earn an extra £12kp.a before tax/NI to pay for it although there seems to be some childcare tax scam to forestall £1000 of that

    20 Aug 2016, 2:37pm
    by Red Baron

    reply

    Accepting the fact early retirement is not an option,why not kick start the savings by cashing in the house, moving 30 miles east towards the land of the Ermine and get the same house for £200,000 and accept the commute being worth £100,000 in the world tracker.

    Each to his own. I spent a whole career arranging that under no circs would I have a lengthy commute. I preferred a short commute by bike if poss.

    Bold and good for FI/RE – but from what I’ve seen of Cambridge traffic that commute will pretty much put paid to seeing his kids in the evenings!

    Having said that, I’m also surprised none of the advisers pointed him in the direction of considering a bog-standard partial repayment mortgage to cost him roughly what his current non-work pension savings do. Then take the liberated capital and whack £40k straight into his SIPP for a couple or three years, getting a lift of 10k a year plus ~20 year’s worth of growth. He’ll still be repaying, so higher interest rates in the distant future are less of a hit. Or use a 10 year mortgage. He needs to sweat that asset.

    Paying off a mortgage feels good, but it really should be aimed for discharge at 55 with your pension commencement lump sum if you feel you have a stable job. I discharged mine nearly ten years ago. Everything I have learned since then indicates to me that was a mistake, I should have saved enough as cash to cover the repayments until I was 55 should i lose my job, and lobbed the rest into a SIPP while I was working.

    We (my wife and I ) were mortgage and debt free in our late 30s and we have only one child. Even so – and with her continuing to work full time- it still took us another 20 years before we were FI and in a position to retire early.
    I mitigated the extra time somewhat with a non management job that cut my trips away from home down substantially. But ERE was not in the cards for us, No matter, We’ve had a dozen years already to enjoy ourselves.
    And when we paid off our mortgage the interest rates were north of 15% – a no-brainer,

    21 Aug 2016, 11:54am
    by London Rob

    reply

    Hi Ermine,
    I am glad it wasnt just me who read that and thought “What?!” – the house price growth explains some of it and credit to them for saving hard, but still!
    We are a long way from being mortgage free, but as you say you need to sweat the asset, so rather than overpaying the mortgage, I am filling my other half’s ISA as much as I can and taking an income from that to increase my monthly income, which then goes into either my ISA, cash savings, off the mortgage or more into her ISA – the reason I take it out of her ISA and not let it accumulate is risk reduction – just in case we split (unlikely after nearly 10 years but you never know!).

    Cheers,
    London Rob

    I agree that paying off the mortgage early is terribly tax inefficient, however, there is an emotional aspect to it. I had to halve mine before I could give it a rest for a bit. Although merely thinking of the tax rate I paid on some of the pounds that I used to overpay the mortgage (while at the same time not using up the full pension allowance in those years) makes me break out in hives, I still think that it was worth it.
    Perhaps I would have taken a different tack had I not seen the mayhem in the City in September 08 form the inside, but man, that period was traumatic, and the few years that followed were downright ugly at times. Having a mortgage seemed like a bad idea, full stop.
    There’s also another thing. Torygraph’s JM is more than 20 years away from getting his mitts on his pension and the 25% tax free lump sum, that is, IF the tax free lump sum perk is still there in 20 years’ time. Personally, I don’t think interest rates will rise significantly in that time, for various reasons, but if they do, shares will go on sale. And if/ when that happens our mortgage free JM will be well placed to take advantage of that event with the money he would have otherwise spent on mortgage payments. So it’s not all lost for him.
    The kids though are a different matter entirely.

    With you on the issues of carrying a mortgage – I kissed goodbye to about £20,000 of opportunity cost when I paid mine off because I heard the bell toll for my career after the financial crash, and I was nowhere near the finance industry 😉

    However, JM’s narrative was pretty steady-as-she-goes, and he needs to get a hold of some more resources to retire early, it’s the old risk/reward tradeoff

    I have a lot in common with these people – in my late 30s, two pre school age kids, living in Cambridge…. so I hope my situation isn’t as bad as you make out.

    At their salaries of £42,500 and £25,000 they’ll be getting over £48,000 net each year, after taking off the maximum tax free £243 per month each for childcare vouchers. Free childcare hours are rising from 15 per week now to 30 per week in 2017, so I don’t see how they will ever pay as much as £700 pcm, or certainly not for very long if they do. So there are some pretty substantial savings to be made out of that income, given they have no mortgage or rent to pay. I wonder how much they’re spending? The inside of their house looks a bit more luxurious than mine. I’m not sure buying brand new fancy interior furnishings is the smartest thing to be doing with two young boys around.

    With annual spending of up to £22,000 for example they are already covered from pensionable age, as they have a DB pension of £6,000, plus state pensions are another £16,000. They also have accumulated savings of £78,000, which means if they start investing this a bit more sensibly then they have 4 years of capital to eat into before retirement age. It really then comes down to how much they can save between now and then to determine how many years before 60 they are able to retire. Spending £22,000 each year means they can save a minimum of £26,000 each year, which implies they only need to work for less than 50% of the remaining years between now and reaching that point. And that’s without the benefit of any tax uplift for pension contributions, and without any investment growth either. So unless I’ve missed something disastrous in my maths, that does imply they can retire by around 50 years old I think.

    I can’t say how much the cost of children rises as they get older – our spending has fallen dramatically so far since our DINKY life came to an end, due mainly to the lack of overseas trips, eating out and so on. It’s helped that we try to buy everything second hand apart from safety equipment. I hope as our kids get older we can teach them the value of not having everything you want – we shall see!

    I totally agree that I’d rather work and commute less now so I can be around while they’re young, even if if means I’ll be working longer in total. I even toyed with the idea of becoming a teacher to solve the school holidays conundrum!

    I hope I didn’t say JM’s situation is bad – after all, if he reframes his question there’s a serious risk he might be able to achieve his goal of seeing more of his children grow up 😉

    But I do think early retirement is unrealistic, I’ve hazard a guess he needs a salary of at least one and a half times what he earns to get there.

    I am child-free, but observation of friends and colleagues shows that after the first rush of new-baby purchases there is a suckout in spending that lulls them into a low anticipation of the lifecycle costs. It’s when their children enter secondary school that the rumblings of higher costs seem to come with a vengeance. Which is sort of the track the IFA Philippa Gee described.

    I’m certainly not saying he’s in deep shit, I am surprised none of the IFAs queried his assumptions though!

    You nailed it in the last paragraph for me. With a paid off mortgage I bet they could easily get by (if not live like kings) with two part time salaries. I know we could! However our nipper is only 6 months and as you say they do get more expensive as they get older, however I still think (hope!) a lot of that is optional. Certainly no public school for TFS Jr that’s for sure 🙂

    So what if he goes back to work full time and ends up working till traditional retirement age? From the experience of others such as Jim McG it’s not such a bad thing going back to work at that age in any case. See the kids growing up from ages 0-12ish, that’s when they want to hang out with you most.

    Cheers!

    It would seem the obvious thing to me – I am really surprised JM was asking about early retirement where he should perhaps have asked the more general question “How should I deploy my finances to secure the greatest quality of life, given the choices I have made to date”

    But I guess that wouldn’t have made such a good Telegraph article (or blog post)

    hehe – public school does seem to be the graveyard of aspirational parental projections of materialism, the competitive consumption Neverland picked up.

    I’d argue it’s a misallocation of resources – given £15,000 x (18-5) =~ 200,000 to allocate to a child, is it necessarily the optimal use of that money to pay for private education to set them up for a developed world in 20 years time when only the most exceptional will be employable at all?

    As an example of the opportunity cost, at a 4% SWR that amount of money would purchase an lifetime increase in their income of ~10,000p.a. tax-free,

    Alternatively, a half of it would eliminate their requirements to save for a pension. £7.5k p.a compounded @ 4.5% real terms for 13 years takes them to £135k at 18, left alone and compounded for another 37 years takes them to £680k in today’s money at 55.

    Giving the the other half of £135k at 18 would seem a good way of setting them off on a good start in life while leaving room for individual talent to shine, and being a in a decent position better than most of their peers should globalisation, robotics and automation really come to mean a 90% unemployment rate and a basic universal income to keep the rabble from rioting in 20 years’ time

    26 Aug 2016, 7:00pm
    by John of Hampton

    reply

    Given your well earned reputation for spotting financial non sequiters, I am a bit surprised that you haven’t challenged the figure of £230000 claimed to be needed to raise a child. It is worth looking at what contributes to this figure according to the buffoons who dreamed it up: Amounts such as £16000 for holidays over the first 21 years; £14000 for driving lessons and the first car; £74000 for education. Well, it is all rubbish. I am the father of 4 children, took early retirement and currently live handsomely; partly because my children did not cost me anything like £230000 each to raise. Yes, I made them slum it in state schools; but two are now graduates (one from Oxford) and the other two chose (and I mean chose) not to go to university. So education came out of my taxes. I did not buy any of them a car. Family holidays had to happen in high season (of course), but we always had two weeks away, sometimes abroad, and always at less than £1000 for all six of us. My wife was a stay-at-home mum, and I earned a modest salary in the scientific Civil Service, then at a university. Like anything, child-rearing requires a bit of imagination and creativity, then the costs can be kept down, and the whole experience can be a pleasure. It really does not have to be the financial disaster that is being claimed.

    I wouldn’t claim intimate knowledge of the current the cost of children as one of my areas of expertise 😉

    Having said that :

    the holidays costs are probably OK, one has to have something to cheer the way through one’s working life. Fair enough on the driving lessons, tough to say on the education.

    You’re not comparing like with like. You are comparing the cost of having children a generation ago with the cost of having them now, and it seems that the opportunity cost is much, much higher now.

    I bought a house as a single man on a industrial research professional salary a generation ago. That can’t really be done now, and this is the same problem that makes the opportunity cost of children so much higher – cheap credit has raised house prices so much that you need both salaries to afford housing, be it rent or mortgage. You had the option of having a SAHM, this appears much harder to do now.

    Compared to having one partner looking after the children or not looking after children, the difference in the effective value of that partner’s salary is the cost of the childcare to compensate for the lost function of looking after the children while they aren’t there.

    The solutions that were open to you are much less open to people now, although accepted it doesn’t have to be quite as bad as the article. But I really don’t see JM retiring early before the children come of age, without doing something very differently from his peers, which isn’t writ large across his lifestyle so far, with the possible exception of the mortgage. 25-30 years ago, maybe. He may be able to swing a more congenial lifestyle balance than his peers, but retire early – probably not.

    You might enjoy this article:

    http://www.thisismoney.co.uk/femail/article-3759081/Why-families-earning-50-000-broke-end-month-figures-say-couldn-t-pay-unexpected-bill-500-four-explain-money-goes.html

    It’s not about early retirement, more just about getting by each month. Maybe I’m being unsympathetic but I could look at every family in the article and immediately point out where they’re overspending.

    The first couple in particular are spending every month: £1180 on bills (not including mortgage), £975 on childcare, £500 on groceries, £90 on gym membership, and £600 on car costs. Then they wonder why they’re overspending each month?

    Still, it does highlight how much children cost, especially in their early years. Not just in terms of childcare, clothing, food etc but also in terms of how much time you have to take out of work (maternity/paternity leave, part-time work, working from home, etc), how that affects your career progression, your flexibility at work, the way others at work perceive you…

    I still plan to have children myself but I’ll go into it with eyes open.

    The trouble with the Daily Mail numbskulls is they aren’t really middle class – 50k is a shade under twice the average earnings, so with two earners they’re average. Two out of the four then go and have three children. There’s nothing wrong in that but if they want to do something out of the average on an average wage they will find themselves short.

    I think Neverland had a point in that children seem to be able to cost as much as you want to spend, so if people get into the competitive consumption mode – school fees etc they are stuffed.

    Also what you value in life will change if you have children. It’s where this Telegraph fellow went wrong. He probably doesn’t want early retirement, he wants more time with his children right now. He can probably do that, if he asks the right question.

     

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